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core points

the hong kong stock market cycle is currently showing a structural upward trend. the profit cycle recovery of the information technology and consumer discretionary sectors is independent of domestic fundamentals and widens the gap with other sectors; valuations continue to bottom out; liquidity has entered a higher level in the cycle. we believe that the technology and internet sectors of hong kong stocks are approaching the best time for the three-cycle superposition and deserve special attention. in addition, the dividend sector still provides value for money. the follow-up focus will be on the risk of recession in the u.s., the profit recovery of the science and technology sector and the sustainability of the valuation increase brought about by the wave of dividend buybacks, as well as the hints of the domestic pmi trend on the cyclical position of hong kong stocks.

summary

what is the progress and structure of the current hong kong stock profit cycle repair process?

the overall profit growth rate of hong kong stocks has improved to a certain extent, mainly driven by the information technology sector and the consumer discretionary industry. the high profit growth rate of the consumer discretionary industry sector is due to the continued rebound after the epidemic. there is a clear gap between the high profit growth rate and revenue growth rate of the information technology sector and hang seng technology, indicating that the repair of this sector is non-expansionary. the profit growth rate of other sectors is obviously affected by domestic fundamentals and has not yet been restored.

where has the hong kong stock valuation cycle gone?

compared with the length and amplitude of various valuation cycles of hong kong stocks in the past 20 years, the duration of this downward valuation cycle has been longer and the decline has been larger. in addition to the current valuations under the pe method and pb method that provide sufficient safety margins, the ah premium and dividend safety margin are still relatively high.

are there any factors that require extra attention in the hong kong stock market liquidity cycle?

historical experience shows that although the federal reserve has started an interest rate cut cycle, if the u.s. economy experiences a recession or the risk of recession is greater, foreign capital will not flow to asia-pacific stock markets. this is mainly due to the volatile asia-pacific market climate and its heavy reliance on foreign capital's risk appetite.

what to watch next for the hong kong stock market cycle?

based on the repair progress and structure of the three major cycles of the hong kong stock market, we believe that the technology and internet sector of the hong kong stock market has significantly recovered in terms of profitability, benefited from the wave of dividend buybacks in terms of valuation, and benefited from the favor of foreign capital in terms of liquidity, so it deserves the most attention. at the same time, the subsequent judgments of the three major cycles each have their own focus. for the liquidity cycle, we need to be vigilant about the subsequent cooling of employment in the united states; for the profit cycle, we should pay attention to changes in domestic fundamentals, and pay separate attention to the profitability of the science and technology sector; in terms of valuation, continue to pay attention to the valuation and the benefits of high dividends safety margin.

risk warning:geopolitical risks, the degree of tightening by the overseas federal reserve exceeding expectations, and the implementation of domestic economic recovery or stabilizing growth policies are less effective than expected.

1

introduction

attention to hong kong stocks has heated up again, and the long-term trading logic deserves attention.based on the benefits of the substantial easing of overseas liquidity, capital transactions are highly enthusiastic. since the federal reserve announced a 50 basis point interest rate cut on september 19, hong kong stocks have risen rapidly. as of september 25, the hang seng index rose by 8.32% in five trading days, and the hang seng technology index rose by a cumulative 10.97%. however, the market has recently focused more on short-term trading logic and less on long-term allocation logic. in fact, the three core logics currently affecting the long-term performance of hong kong stocks - profit cycle, valuation cycle and liquidity cycle are all worth noting.

after reviewing the hong kong stock market cycle over the past few decades, we believe that the current hong kong stock market profit cycle has shown some structural improvement, with valuations hovering at the cycle low and liquidity entering a higher level in the cycle. two of the three major factors are currently more favorable. looking back at the past periods when the three major factors were jointly favorable, the second half of 2020 to the first half of 2021 was the most typical. during this period, hong kong stocks, especially hang seng technology, rose strongly for nearly a year. such an opportunity is rare for the hong kong stock market as a whole, but opportunities have emerged structurally. this report aims to answer the following questions: what is the progress and structure of the repair of the current profit cycle of hong kong stocks? where has the valuation cycle gone? are there any factors that require additional attention during the liquidity cycle? what to watch next for the hong kong stock market cycle?

2

what is the progress and structure of the current hong kong stock profit cycle repair process?

the overall profit cycle of hong kong stocks is greatly affected by domestic fundamentals, and the degree of repair is relatively small.in the latest reporting period, the hang seng index's profit growth rate was 6.43%, rising for four consecutive reporting periods. the profit growth rate in the previous period was -2.09%; the latest revenue growth rate was -0.11%, slightly better than the previous period. judging from the data, the overall profitability of hong kong stocks has recovered to a certain extent recently, but the extent of the recovery is not significant, and the revenue growth rate has not yet improved. comparing the profit and revenue growth cycle of the hang seng index with the cyclical changes in domestic economic fundamentals over the past fifteen years, we found that the cyclical fluctuations of hong kong stocks are basically consistent with the cyclical fluctuations of domestic economic fundamentals: in the first half of 2012, the profit growth of the hang seng index the rapid decline followed the decline of core economic indicators such as the manufacturing pmi and the year-on-year growth rate of real estate sales area, and then turned to the upward trend. in the second half of 2014, it went downward together with the pmi. in 2016, it turned upward together with the pmi, and again in the second half of 2017. the downward cycle started simultaneously, and then continued to resonate during the epidemic and subsequent recovery. it can be judged from this that changes in the overall profit cycle of hong kong stocks are driven by changes in domestic fundamentals. therefore, given that the current domestic economy has yet to show signs of prosperity, it is difficult for the overall profit growth rate of hong kong stocks to be significantly restored.

at present, the information technology industry and the consumer discretionary industry have the most eye-catching profit growth rates, and the profit recovery of science and technology stocks is mainly characterized by non-expansionary recovery. breaking down the current changes in profit growth of hong kong stocks by sector, we found that the profit growth of the hang seng information technology industry index and the hang seng consumer discretionary industry in the latest reporting period were far ahead of other sectors, at 28.79% and 28.72% respectively. the hang seng technology index, which also represents hong kong technology and internet stocks, has performed better than the hang seng information technology industry index in terms of profit growth. as of the first half of this year, hang seng technology's profit growth rate has been rising for several consecutive reporting periods, and the recovery has been obvious. the profit growth rate of this period is as high as 38.32%. compared with profit growth, the revenue growth of the hang seng information technology industry index and the hang seng technology index both performed poorly. the latest reporting period data were -0.38% and 3.91% respectively. this difference gives a hint that the logic of hong kong science and technology network's current round of profit restoration is not expansionary repair, but related to the business structure adjustment and improvement of operating efficiency of various science and technology network companies.

hang seng's consumer discretionary industry's profit growth rate recovery and revenue growth rate recovery performance are relatively synchronized. there was a sharp rebound in the second half of 2023 and continued positive growth in the first half of 2024, mainly due to the continued recovery after the epidemic. in addition to non-consumer necessities and information technology industries, the sectors in the hong kong stock market that saw an increase in current profit growth include the energy industry, telecommunications industry and industrial products industry.

3

where has the hong kong stock valuation cycle gone?

the length of the current downturn in hong kong stock valuations has been higher than the historical average.we define a cycle as the time span from the lowest point to the highest point of the moving average. since 2007, the hang seng index has entered the seventh cycle and the fourth downward cycle under the pb valuation method. the average number of months a cycle lasts is about 27 months, the longest cycle was 74 months from 2009 to 2016, and the shortest cycle was 11 months. the average decline in the down cycle is -57.83%, the maximum decline is -70.91% from october 2007 to october 2008, and the minimum decline is -39.57%. this round of pb downward cycle has lasted for 43 months. the current lowest point occurred on december 31, 2022, with the largest decline during the cycle -45.65%. under the pe valuation method, the hang seng index has entered the ninth round of cycles and the fifth round of decline cycles. the average number of months a cycle lasts is about 20 months. the longest cycle was 43 months from 2011 to 2015, and the shortest was 9 months. the average decline in the down cycle is -50.33%, with the largest decline being -72.18% from 2007 to 2008, and the smallest decline being -30.4%. this round of pe downward cycle has lasted for 43 months, reaching the longest cycle in history. the current lowest point is on january 22, 2024, and the maximum decline during the cycle is -51.17%. whether from the perspective of the pe valuation method or the pb valuation method, the duration of this downward cycle has significantly exceeded the historical average, and the decline under the pe method has also exceeded the historical average decline.

the valuation of hong kong stocks is still at a cyclical low, and the price/performance ratio is high.the current pe of hong kong stocks is 8.83, and the margin of safety calculated based on the ten-year average is 19.08%, which is at the 10.2% percentile within ten years; pb is 0.88, and the margin of safety is 24.36%, which is at the 6.2% percentile within ten years; the ah premium is 46.78 %, the margin of safety is 5.9%, which is at the 90.5% percentile within ten years. therefore, the valuation of hong kong stocks under the pe method, pb method and ah premium method all show sufficient room for upside. in terms of the safety margin provided by the high dividend yield of hong kong stocks, the ah stocks in the current hang seng high dividend yield index still retain a large safety margin. among them, china national offshore oil corporation, china construction bank and china citic bank have the highest dividend rate safety margins, which are 104.89%, 62.31% and 61.53% respectively. therefore, the safety margin of hong kong stocks with high dividend yields is also relatively sufficient. hong kong stock dividends still have advantages in terms of cost performance. .

4

are there any factors that require extra attention in the hong kong stock market liquidity cycle?

if concerns about a u.s. economic recession are strong, the decline in foreign capital's risk appetite will erase the benefits of the fed's monetary easing on asia-pacific stock markets.the liquidity cycles of most asia-pacific stock markets, including hong kong stocks, are relatively synchronized. observing the stock markets of many asia-pacific countries at the same time can determine the liquidity cycle of asia-pacific stock markets. according to general experience, the liquidity of asia-pacific stock markets has benefited from the easing of overseas monetary policies to varying degrees. however, looking back at the performance of the asia-pacific market under the fed's monetary policy switching in the past thirty years, we find that in the past four rounds of easing cycles, the start of two rounds of easing cycles did not immediately bring an increase in liquidity to the asia-pacific stock market: in january 2001, in response to the internet the economy continued to decline after the bubble burst, and the federal reserve began an interest rate cut cycle. however, recession concerns remained high, asia-pacific stock markets fell, and the high fluctuations in the u.s. dollar index also confirmed that funds did not flow out. in september 2007, the federal reserve made an emergency cut in interest rates during the outbreak of the global financial crisis. at the beginning of the interest rate cut, asia-pacific stock markets fell sharply, and the u.s. dollar index turned into an upward cycle after a brief decline. both cycles were set against the backdrop of a u.s. economic recession or a surge in recession risk. in fact, since the asia-pacific region is mainly responsible for the manufacturing industry, the overall economy fluctuates greatly. therefore, in addition to the extent of the fed's monetary policy easing, the liquidity of the asia-pacific stock market also depends on the risk appetite of foreign investors.we have now entered the latest round of interest rate cuts, and overall overseas liquidity has improved, but we still need to pay attention to the slowdown in the u.s. job market.the recent cooling of the u.s. job market has triggered certain concerns about recession. if future employment data is weaker than expected, it may lead to rising risk aversion and foreign capital outflows from the asia-pacific market.

5

what to watch next for the hong kong stock market cycle?

overall, the current recovery of hong kong stocks is structural. the most obvious change is that liquidity has officially entered the easing stage, but the risk of a u.s. recession, an important variable in the liquidity cycle, has not yet materialized. secondly, it is reflected in the structural repair of the profit cycle. the information technology sector and the consumer discretionary goods industry are far ahead in the repair rate of profit growth. the information technology sector benefits from its relative independence from economic fundamentals. non-essential consumption rebounds after the epidemic, while the profits of other sectors are greatly affected by domestic fundamentals. there is currently no logical support for profit recovery. in terms of valuation cycle, this round of downward pe valuations and low fluctuations has been the longest period in the past two decades, and it continues to bottom out at this stage.

the technology and internet sectors of hong kong stocks are the most recommended, and the dividend sector still provides value for money. on the one hand, the profit growth rate of the science and technology sector has continued to recover significantly, and there are obvious signs of prosperity. on the other hand, we pointed out in our previous reports "the five most important issues in hong kong stocks" and "how to treat the current hong kong stock market" respectively, hong kong internet stocks have been the first to benefit from improved overseas liquidity because they are particularly favored by foreign capital. at the same time, in recent years, hong kong's leading technology and internet stocks have turned to a business model that focuses on investor returns and started a wave of dividend buybacks, helping to increase valuations. therefore,hong kong's leading science and technology stocks have reached favorable positions in the three major cycles of profitability, valuation and liquidity. they are approaching the best time for the three cycles to overlap and should be paid special attention to.in terms of high dividend stocks in hong kong stocks, the sufficient safety margin of pb, pe and ah premiums plus the safety margin of high dividend rates make hong kong stock dividends still cost-effective.

in the follow-up observation of the hong kong stock market cycle, each of the three major cycles has its own focus. whether the liquidity of hong kong stocks will continue to improve remains to be determined, and the risk of a u.s. economic recession is a core concern. as pointed out above, the u.s. economic recession will lead to a decline in foreign investment risk appetite and an outflow from the asia-pacific market. in recent months, u.s. inflation and employment data have continued to cool, and new non-farm employment has been lower than expected for two consecutive months. in addition, the adjustment of non-farm employment data released by the u.s. bureau of labor statistics on august 21 showed that from april to 2023, the number of new jobs created in the united states during the march 2024 statistical cycle was significantly revised down to 818,000. the downward revision was the largest downward revision since the 2008 financial crisis, further raising concerns about an economic recession. therefore,u.s. employment data in subsequent months will require continued attention.in terms of profit cycles, structurally, technology and internet stocks benefit from industry characteristics, and their profit trends are independent of domestic fundamentals, while other sectors are highly correlated with fundamentals, especially pmi indicators. therefore,focus on the sustainability of the profit recovery of the hong kong technology internet sector and the trend of domestic pmi.in terms of valuation cycles, in addition to the safety margin provided by pe, pb and ah premiums, it is also worth paying attention to whether the wave of dividend buybacks by hong kong internet companies will continue to increase sector valuations as a structural factor.

risk analysis

(1) geopolitical risks. if geo-relationships are not properly managed, it may affect foreign investors’ allocation preferences for hong kong stocks. at the same time, geopolitical hot spots such as the russia-ukraine conflict and the middle east issue may face the risk of deterioration. if a crisis occurs, it may have an adverse impact on the market.

(2) the degree of tightening by the overseas federal reserve exceeded expectations. if the u.s. economy continues to remain resilient, and economic data such as the labor market and retail sales perform well, then the risk of u.s. recession may face a re-evaluation, and the risk of inflation will also face a rebound. the federal reserve will continue to tighten and fight inflation, and global liquidity easing will be less than expected. , the liquidity of hong kong stocks will also be under pressure.

(3) the effect of domestic economic recovery or stabilizing growth policies is not as good as expected. if subsequent domestic real estate sales, investment and other data are difficult to recover, the long-term accumulation of urban investment debt repayment risks is once again highlighted, and the economic recovery is less than expected, then the overall market trend will be under pressure, and overly optimistic pricing expectations will face revision.