Zhang Yidong: The historical rare adjustment amplitude of Hong Kong stocks, expected to bottom up in 2024, core assets become a new main line of high winning rate investment

Key Points:

1. The Hong Kong stock market has been adjusting for many years, with both the duration and magnitude of the adjustment being historically rare. Its risk premium is significantly higher than overseas stock markets. Compared to similar stocks in the US market, Hong Kong stocks are significantly undervalued.

2. With improved liquidity and a stabilizing economy, the Hong Kong stock market is expected to bottom out in 2024, transitioning from a bear market in recent years to a bull market gradually.

3. Since the beginning of 2024, the scope of high-win-rate investments has shifted from high dividend assets to industry leaders with strong profit recovery capabilities. Good companies are experiencing a "Davis double-click" moment, becoming the new main theme of high-win-rate investments in the Hong Kong stock market.

Recently, Zhang Yidong, the global chief strategy analyst at CICC, expressed his views on the Hong Kong stock market in his latest research report.

With many years of experience in the securities industry, Zhang Yidong has won numerous awards in the field of sell-side strategy research, including the first place in various awards such as New Fortune, Crystal Ball, and Golden Bull. He is also the top strategist in both A-shares and Hong Kong stocks.

Zhang Yidong believes that the Hong Kong stock market has experienced the "coldest winter of confidence," and high-win-rate assets may lead the "spring return of the Hong Kong stock market." To adhere to high-win-rate investments, one must return to the essence of investment - making money from "good companies and good stock prices."

He believes that the valuations of industry leaders have been fully adjusted, and the scope of high-win-rate investments is shifting from high dividend assets to industry leaders.

This is similar to the views of Zhang Xia, both of whom focus on industry leaders with strong profit recovery capabilities. Zhang Xia believes that in the high-quality growth stage, one should choose industry leaders, buy the best companies, and the core assets with 10% to 15% ROE or a collection of China's best listed companies may be the best type of assets currently.

Below is a summary of the investment homework representative (WeChat ID: touzizuoyeben) for everyone to share:

Hong Kong stocks have been adjusting for many years, with a high risk premium

The Hong Kong stock market has been adjusting for many years, with both the duration and magnitude of the adjustment being historically rare.

Since 2021, the adjustment of the Hong Kong stock market has lasted for over 700 days, with the deepest pullback reaching 51.87%. The pullback time has exceeded all previous adjustments since 1998, and the pullback magnitude has surpassed the bursting of the 2000 Internet bubble, approaching the 1998 Asian financial crisis and the 2018 financial crisis.

After continuous adjustments, the valuation of the Hong Kong stock market already reflects a very high risk premium.

As of March 20, 2024, the risk premium of the Hang Seng Index relative to the 10-year Chinese government bond yield is 9.48%, near the high point since 2008. The risk premium of the Hang Seng Index relative to the 10-year US government bond yield is 7.50% In comparison to other major global stock markets, as of March 20, 2024, the risk premium of the US stock market is even negative, with Japan's risk premium at only 2.76% and Europe's stock market at only 4.34%.

Moreover, compared to the valuation of representative stocks in the Hong Kong stock market and similar stocks in the US stock market, Hong Kong stocks are significantly discounted.

Core assets become the new main theme of high-win-rate investment in Hong Kong stocks

Since the beginning of 2024, the scope of high-win-rate investment has shifted from high dividend yield assets to leading companies in various industries with strong earnings recovery capabilities. After a prolonged period of deep adjustment in the Hong Kong stock market, the valuations of the most competitive industry leaders have all been fully adjusted.

Since the beginning of 2024, with the stabilization of the economy, good companies have successively experienced a shift from "fundamental data not as bad as previously expected" to "fundamental data continues to improve," marking a "Davis double-click" moment. This has become the new main theme of high-win-rate investment in Hong Kong stocks, leading to a money-making effect and contributing to the phase-wise enhancement of the attractiveness of Hong Kong stocks.

Hong Kong stocks are expected to rise from the bottom in 2024

Although 2024 still faces uncertainties such as the US presidential election, the improvement in the funding environment and fundamental conditions is the dominant variable in the short to medium term for Hong Kong stocks.

In terms of funding, the local funding environment in Hong Kong is expected to improve in 2024, benefiting from the peak and subsequent decline in US bond yields.

Furthermore, mainland Chinese funds will continue to increase their allocation to Hong Kong stocks in 2024. With the low interest rate environment in the mainland, the cost-effectiveness of high-win-rate assets in Hong Kong stocks becomes more prominent.

On the fundamental side, as the Chinese economy stabilizes and expectations improve, the positive tone of mainland economic policies in 2024 compared to 2023 is noteworthy. High-quality development, moderate improvement in nominal GDP, and profit recovery of high-win-rate assets are facilitated.

In an environment of improved liquidity and economic stability, Hong Kong stocks are expected to rise from the bottom in 2024, gradually transitioning from the bear market of the past few years to a bull market.

Adhering to high-win-rate investment, returning to the essence of investment - making money from "good companies and good stock prices"

1. Investment strategy for high dividend yield assets: Transition from a pure bond strategy in 2023 to a convertible bond strategy in 2024

With the stabilization of the economy, high dividend yield assets should focus on earnings with upward elasticity, with a dividend yield of 3% or better than 5%.

First, focus on targets with earnings elasticity that can increase dividends, such as factors like price increases and positive free cash flow.

Second, focus on cyclical phoenixes with a certain margin of safety, controllable downside risks, fully reflected valuations, and actively protected shareholder interests.

Third, pay attention to opportunities for further increasing the dividend payout ratio of high dividend yield assets. The China Securities Regulatory Commission guides listed companies to increase investor returns through dividends, and state-owned enterprise reforms promote the increase in dividend payout ratios of central state-owned listed companies.

1. Select core assets in segmented sectors: Benefiting from economic stabilization, industry leaders that shine with a bit of sunshine

First, select technology stocks with improving performance, starting from short cover opportunities. Currently, the technology industry in the Hong Kong stock market has a relatively large proportion of short selling in trading volume and is in a high percentile range over the past year Second, seize the opportunity of "Roll King" going global, focusing on copper, power tools, household appliances, furniture related to the demand of the US economy, as well as opportunities related to the "Belt and Road" initiative.

Third, select leading companies in consumer goods and manufacturing industries. In segmented industries where the Chinese competitive landscape is improving, industry leaders benefit more from economic stabilization and high-quality development. Select textile and apparel, education, food and beverage, property management, hotels, high-end equipment, new energy, etc.

Zhang Yidong's professional certificate number: S0190510110012

Source: Investment Homework Pro

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