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since the launch of the policy package on september 24, hong kong stocks have risen significantly, and multiple indicators indicate that investor sentiment in hong kong stocks is very hot. foreign capital has also shown a significant trend of increasing allocations to the hong kong stock market, with a cumulative inflow of hk$60.6 billion in just half a month since september 16. despite experiencing a round of rapid rise, the current valuation level of hong kong stocks is still in a relatively high cost-effective position regardless of the global market or historical conditions. in particular, the current valuation of the growth and large financial sectors is at a lower historical level. we judge that although the fastest rising stage driven by short squeeze trading may have passed, with the gradual implementation of policies and investor sentiment still "excited", hong kong stocks have reached a staged peak, and its valuation recovery is expected to continue. to early november. in november, we also warned about the possible periodic disturbances caused by the results of the us election and the disclosure of the third quarterly report of hong kong stocks. in terms of industry configuration, it is recommended to focus on two main lines: 1) the non-bank financial sector that benefits from monetary easing, real estate and the continued implementation of policies to boost capital markets, especially insurance and the hong kong stock exchange with strong beta attributes; 2) valuation repair is expected continuing consumer and technology-related industries include: internet, biotechnology, education and training, and consumer electronics.

after the sharp rise, have hong kong stocks reached a staged peak?

catalyzed by the federal reserve's interest rate cuts and domestic policy combinations, from the beginning of the year to october 4, the state-owned enterprise index, hang seng technology, and hang seng index rose by 41.4%, 38.9%, and 33.4% respectively, leading the world's major markets. at present, the erp of the hang seng index has fallen back to 6.6%, and the overall short-selling ratio of hong kong stocks has also dropped to 11.8%, both of which are below one standard deviation of the historical average. however, the dividend yield of the hang seng index is still above the historical average of 3.4%, indicating that the margin of safety is still there. in addition, since september 24, the average daily trading volume of hong kong stocks has reached hk$345 billion, exceeding the historical high in early february 2021. therefore, we judge that although the fastest rising stage driven by short squeeze trading may have passed, with the gradual implementation of policies and investor sentiment still "excited", it is difficult to say that hong kong stocks have reached a staged peak. in addition, we believe that the decline in hong kong stocks on october 3 may be related to investors’ rebalancing of hong kong stocks and a-share assets. since the start of this round of valuation restoration of hong kong stocks in early august, the hang seng index and hang seng technology have increased by as much as 36.6% and 56.4% respectively, much higher than the 20.2% and 16.4% increases of the a-share csi 300 and the shanghai composite index. due to the t+2 trading settlement system of hong kong stocks, october 3 is also the last trading day to take profits on hong kong stock positions for investors who plan to increase their a-share positions after the national day holiday and need additional funds.

how much foreign capital has returned? what are you buying?

since september 16, foreign capital has continued to flow into the hong kong stock market. from september 16 to october 2, the net inflows of southbound connect/foreign intermediaries/hong kong intermediaries/domestic intermediaries respectively calculated by wind data were hk$186/606/-258/-55.9 billion; while foreign capital flowed into the hong kong stock market significantly, , chinese capital in hong kong showed an obvious selling trend. the recent overall increase direction of foreign investment and southbound investment is similar, but the selection of subdivided sectors is slightly different. among them, growth sectors with greater valuation flexibility are favored by southbound and foreign capital, including the internet, internet medical care, new energy, automobiles, software, semiconductors, etc. among them, in addition to growth sectors such as the internet, consumption (including education, games, tobacco, consumer electronics, etc.), medicine (cxo, medical services), foreign capital also shows a trend of flowing into procyclical sectors, including metals, banks, building materials, property management, etc. ; southbound funds increased their holdings in diversified finance (hong kong stock exchange), insurance (ping an of china), chemical industry, construction, biotechnology and other sectors. comparing the similarities and differences in sector allocation during the current round and the period of foreign capital inflow at the end of 2022, both rounds of foreign capital inflow cycles showed a tendency to allocate procyclical sectors, such as petroleum and petrochemicals, metals, building materials, etc.; however, the direction of foreign capital inflow at the end of 2022 was more towards consumer medicine. such as social services, textiles and clothing, biotechnology, etc.; while the current round of foreign investment allocation direction is mainly towards low-valuation, high-flexibility growth sectors, such as the internet, new energy, etc.; in addition, this round of foreign investment is more inclined to allocate benefits from policies supported by banks and home furnishing sectors related to the real estate industry chain.

after the sharp rise, how cost-effective is the hong kong stock market?

from a horizontal perspective, the current valuation of the hang seng index is still relatively low among major global markets. coupled with the 2024e eps growth forecast (7.1%) that is close to the mid-range level, the hong kong stock market's price/performance ratio is still significant. however, from a vertical perspective, the dynamic valuations of the hang seng index and the hang seng composite index have been restored to the historical average level, while the dynamic price-to-earnings ratio of the state-owned enterprise index has even reached 92% of the historical quintile. hang seng technology still has a lot of room for valuation restoration. , the current dynamic price-to-earnings ratio of 18.6 times is only 24.1% of history. from an industry perspective, although all industries have experienced valuation repairs during the surge, the current valuations of the growth and large financial sectors and public utilities are still at historically low levels. in addition, it is still necessary to note that the current fundamental confidence in the hong kong stock market has not yet turned. based on the current market expectations (bloomberg consensus expectations, the same below) compared with the performance expectations when the 24h1 financial report began to be disclosed, the revenue growth rates of the major hong kong stock indexes in 24y have been revised downwards. , while the profit growth expectations of the market value weighted index have been revised upward due to cost reduction and efficiency improvement of large enterprises; however, the performance growth expectations for 25y have all been revised downwards, and the current 25y performance growth expectations of the major indexes are not as good as the expectations for 24y , showing that the market’s confidence in the fundamentals of hong kong stocks is still under pressure. from an industry perspective, only information technology has good performance expectations to support it.

how long can this round of rising hong kong stocks last?

since 2022, the hong kong stock market has experienced three rounds of significant rebounds after reversing pessimistic expectations. in the first half of 2022, multiple risk factors such as global geopolitical tensions, tightening of overseas monetary policies, tightening of domestic industry supervision, and uncertainty in the real estate market were intertwined. the hong kong stock market still showed two rounds of strong rebounds. in the second half of 2022, hong kong stocks ushered in an important turning point after experiencing risk shocks. many positive changes in the market environment significantly improved investor confidence and promoted a sharp rebound in hong kong stocks. overall, there are differences between the market environment in the first half of 2022 and the current macro background facing hong kong stocks, but the rebound trend of this round of hong kong stocks has something in common with the significant rise in november 2022. in view of the fact that a series of domestic monetary policies, real estate control measures and capital market boosting strategies are gradually being implemented, we judge that the current rebound trend of the hong kong stock market is expected to continue. however, we still need to be alert to the potential disruptions to the hong kong stock market caused by the linkage effect of the hong kong and us stock markets during the u.s. election cycle. in addition, the current market expectations for the full-year performance of hong kong stocks may be too optimistic. therefore, if the third-quarter reports of heavyweight hong kong stocks fail to meet market expectations starting from mid-november, market concerns about the fundamentals of hong kong stocks may resurface.

what direction should hong kong stocks be allocated currently?

looking to the future, against the background of the gradual implementation of policies and still expectations for fiscal policy, we judge that the valuation recovery in the hong kong stock market since early august this year is expected to continue until early november, and the growth style is expected to continue to outperform the dividend strategy. we recommend paying attention to the two main threads: 1) benefiting from monetary easing, real estate and the continued implementation of policies to boost capital marketsnon-bank financial sector, especially insurance with strong beta attributes; 2) consumer and technology-related industries where valuation repair is expected to continue, including:internet(fundamentals are expected to bottom out, and repurchases will increase),biotechnology(overseas interest rates are falling, downstream demand has bottomed out, and dividend rates have reached historical highs),education and training(policy adjustment, low valuation + performance gradually realized, investor confidence rebounded),consumer electronics(the economy is improving, domestic trade-ins are replacing old ones with new ones, and the united states is restocking).