How can Hong Kong stocks break the current situation?
Hong Kong stocks have rebounded after two weeks of decline, but the market is still in a volatile pattern. To break the current situation, strong support from fiscal policy or buying opportunities arising from market pullbacks is needed. In the short term, the possibility of fiscal stimulus is limited, and attention should be paid to policy developments after Trump's inauguration. Domestic economic data has improved, but sustainability remains to be observed. It is recommended that investors adopt flexible operational strategies in a volatile market and focus on structural opportunities
Abstract
After two consecutive weeks of decline, the Hong Kong stock market rebounded, but this does not mean that the space has opened up. We believe that looking at it over a longer period, the market has not yet escaped the oscillation pattern, and a larger space will open up: 1) either relying on "massive" fiscal efforts to solve the credit contraction problem, or 2) the market pullback provides better buying points and greater rebound space, that is, "opportunities arising from declines." We believe thatthe possibility of the former materializing in the short term is limited, and at least it may require waiting until after Trump takes office to see the specific progress and extent of tariff policies.** Last week's recovery was, to some extent, due to the alleviation of pressures on both the numerator and denominator that the market had previously faced.
On the numerator side, domestic economic and financial data have marginally improved due to policy support, but the sustainability remains to be observed. Overall economic volume and price are diverging; exports are bright but mainly benefit from a rush to export to the U.S., while consumption resilience mainly relies on stimulus measures such as the two new initiatives. Further policy efforts are still necessary. We estimate that to resolve the accumulated output gap and credit contraction issues, a "one-time" (not accumulated over many years) and "new" (not existing expenditures under the same category) general deficit of 7-8 trillion yuan may be needed. However, under realistic constraints, there will be incremental stimulus, but overly high expectations may not be realistic. The same goes for monetary policy; the rapid decline in government bond yields and the retreat of expectations for Federal Reserve rate cuts may delay further monetary easing.
On the denominator side, the U.S. December CPI was lower than expected, pushing U.S. bond yields down from high levels. If there are more data like this, the possibility of a rate cut in March cannot be ruled out. However, from the external environment, the more important factor is the policy progress after Trump officially takes office next Monday (January 20). For the domestic market, the main disturbance is the rhythm and intensity of tariffs on China, which will also affect market expectations for policies. In addition, on January 13, President Pan proposed to increase the proportion of foreign reserves allocated to assets in Hong Kong. Considering the relatively sluggish liquidity in the Hong Kong stock market, if foreign reserves increase their allocation in the Hong Kong stock market, it will at least have a positive effect on sentiment and liquidity.
In terms of allocation, we recommend that investors adopt an operational strategy for oscillating and structural markets, that is, to actively intervene during downturns but to take moderate profits during exuberance, while focusing on structure rather than the overall index.
Main Text
Market Performance Review
Affected by the decline in U.S. bond yields and better-than-expected policy and economic data, the Hong Kong stock market rebounded after two consecutive weeks of decline, with the Hang Seng Index returning to around 19,500 points. At the index level, the Hang Seng Tech rose by 5.1%, MSCI China, Hang Seng China Enterprises, and the Hang Seng Index rose by 3.2%, 3.1%, and 2.7%, respectively, outperforming the CSI 300 (+2.1%). All sectors saw gains, with real estate (+5.4%), diversified finance (+4.8%), and consumer discretionary (+4.3%) leading the way, while utilities (+0.8%), banks (+1.5%), and energy (+1.6%) lagged behindChart: Last week, the MSCI China Index rose by 3.2%, with real estate, diversified finance, and consumer discretionary sectors leading the gains.
Source: FactSet, CICC Research Department
Market Outlook
Since the beginning of the year, the Hong Kong stock market has experienced two consecutive weeks of pullback, with the Hang Seng Index approaching 19,000 points at one point, and the RSI dropping to 32.1 at the beginning of the week, nearing oversold territory. We indicated last week that 19,000 points is a key support level for the Hang Seng Index on daily, weekly, and monthly charts, and it is likely to hold (《Reasons and Outlook for the Year-End Pullback》). However, this level of rebound does not necessarily mean that the space for growth has opened up. We believe that, in the long run, the market has not escaped the oscillating pattern, and greater space will open up: 1) either through "massive" fiscal efforts to address the current credit contraction issue facing the economy (《2025 Outlook: Cloudy with No Rain》), or 2) the market's pullback providing better buying opportunities and greater rebound space, i.e., "opportunities arising from declines."
Chart: On January 13, the market approached oversold territory, and the Hang Seng Index subsequently rebounded slightly.
Source: Bloomberg, CICC Research Department
At present, we believe that the likelihood of the former being realized in the short term remains limited, and at least we may need to wait for Trump to take office to assess the specific progress and extent of tariff policies. Therefore, we still recommend that investors adopt an oscillating and structural market operation strategy, that is, to actively intervene during downturns, but to take profits moderately during exuberant times, while focusing on structure rather than the overall index.
Last week's recovery was also partly due to the alleviation of pressures on both the numerator and denominator that the market had previously faced, which also caused the China-U.S. interest rate spread to narrow from a high of 310bp to below 300bp. Historically, when the China-U.S. interest rate spread widens (U.S. Treasury yields rise and Chinese bond yields fall), the market usually faces pressure (《 New Highs in U.S. Treasuries and New Lows in Chinese Bonds》,"What is the market declining at the beginning of the year?". Conversely, the recent convergence of the China-U.S. interest rate spread and the decline in U.S. Treasury yields will also support market stabilization, with Hong Kong stocks being more affected by overseas liquidity, thus outperforming A-shares. Specifically, ► On the numerator side, domestic economic and financial data show marginal improvement supported by policies, but sustainability remains to be observed. On one hand, the overall economic volume and price are diverging, with the actual GDP growth in Q4 2024 expected to be 5.4% year-on-year, exceeding the market expectation of 5.1%, supporting the full-year actual GDP growth to reach 5%, achieving the initial target, but the nominal GDP only grows by 4.2% year-on-year. On the other hand, while exports are strong, they mainly benefit from export surges to the U.S., and consumption resilience relies mainly on stimulus measures such as the two new policies: 1) Exports are strong but may have some front-loading, with December exports growing by 10.7% year-on-year, higher than November's 6.7% and the market expectation of 7.5%, with exports to the U.S. rising by 15.6% year-on-year, and the freight index for the U.S. East Coast significantly increasing; 2) Consumption resilience is supported by the two new policies, with December retail sales growing by 3.7% year-on-year, better than November's 3.0%, with home appliances contributing significantly with a 39.3% year-on-year growth; 3) Production growth year-on-year is also high, reflecting policy support, with December's industrial added value and service production index slightly rebounding to 6.2% and 6.5%, respectively, with midstream performance better than upstream supported by consumption and exports; 4) New home sales are stable, but attention is needed on follow-up measures after the policy effects wane, with December's commercial housing sales area declining by 0.5% year-on-year (vs. November +3.2%), and sales revenue growing by 2.4% year-on-year (vs. November +1%), with high-frequency data showing a narrowing year-on-year growth in sales area for both new and second-hand homes, and listing prices for second-hand homes in cities like Shanghai and Guangzhou declining, indicating that the policy effects may be gradually diminishing.
Chart: December 2024 export amount increased by 10.7% year-on-year
Source: Wind, CICC Research Department
Chart: Listing prices for second-hand homes in cities like Shanghai and Guangzhou have declined
, while M2 increased by 7.3% year-on-year (vs. November 7.1%). The growth rate of social financing was supported by government leverage, marking its first improvement since July 2024. In December, the stock of social financing increased by 8.0% year-on-year, with new social financing of 2.9 trillion yuan, an increase of 0.9 trillion yuan year-on-year, and new RMB loans of 1.0 trillion yuan, a decrease of 0.2 trillion yuan year-on-year, all better than market expectations. However, specifically, the year-on-year increase of 829 billion yuan in government bonds was the main support for new social financing, while corporate loans were under pressure due to hidden debt replacement, decreasing by 400 billion yuan year-on-year. Residential loans increased by 128 billion yuan year-on-year, with the recovery of the real estate market supporting a year-on-year increase of 154 billion yuan in medium- and long-term loans as the main contribution. However, as the effects of policies gradually recede, the credit demand from the private sector still needs to recover.
Chart: Private sector credit demand still needs recovery
Source: Wind, CICC Research Department
Therefore, it is still necessary for policies to further strengthen and consolidate the current recovery effects. We estimate that to address the accumulated output gap and credit contraction issues, a "one-time" (not accumulated over many years) and "new" (not existing expenditures under the same category) general deficit of 7-8 trillion yuan may be needed. Currently, the known scale under the same caliber is about 3 trillion yuan (if the deficit rate is raised to 4%, it corresponds to about 1 trillion yuan, plus 2 trillion yuan for debt repayment that year) (Reasons and Prospects for the Year-End Adjustment). Therefore, we believe that under multiple "real constraints" such as leverage levels, whether interest rates can decline rapidly, and exchange rates, incremental stimulus will occur, but overly high expectations may not be realistic. The same applies to monetary policy; the recent rapid decline in government bond yields and the retreat of expectations for Federal Reserve rate cuts may delay further monetary easing. The CICC banking team expects the first rate cut to occur in the first quarter [1].
► On the denominator side, the lower-than-expected U.S. CPI in December alleviated market pressure on U.S. Treasury bonds and Federal Reserve rate cuts, driving U.S. Treasury yields down from high levels. This aligns with our previous view in "The Reasons, Impacts, and Outlook for Rising U.S. Treasury Yields" that there are trading opportunities for long positions in U.S. Treasuries. If nothing unexpected happens, the "reflexivity" of rising U.S. Treasury yields will likely lead us to see U.S. economic data weaken again in the near future, further pushing some rate cut expectations backLast week, U.S. retail consumption in December fell short of expectations, and Federal Reserve Governor Christopher Waller stated that the December CPI data was "very good" [2]. If more data like this emerges, the possibility of an interest rate cut in March cannot be ruled out. These changes help alleviate the pressure on the denominator and liquidity of Hong Kong stocks in the short term. However, from the external environment perspective, the more important factor is the policy developments following Trump's official inauguration on Monday (January 20). After the swearing-in ceremony, Trump will deliver an inaugural speech outlining his policy goals and sign a series of executive orders. For the domestic market, the main disturbance is the pace and intensity of tariffs on China, which will also affect market expectations regarding policies. On January 14, Bloomberg reported that the incoming Trump administration is considering a gradual approach to facilitate negotiations and avoid soaring inflation [3], which is also the general consensus in the market. If this is the case, the impact on growth and the market would be relatively controllable, and we estimate that a deficit rate increase of about 0.5-0.7% would be needed to cope. However, if an unexpected maximum tariff of 60% is imposed, the impact could be non-linearly amplified, requiring a deficit rate increase of 1.5-2% to offset the drag on GDP from exports. In this scenario, it would inevitably impact the market, but given the high probability of policy measures to increase hedging efforts, it could also provide better allocation opportunities (《Possible Paths and Impacts of Tariff Policy》). Additionally, on January 13, President Pan mentioned at the Asian Financial Forum the need to increase the asset allocation ratio of foreign reserves in Hong Kong [4], which is also one of the direct catalysts for improving market sentiment. Considering the constraints that foreign reserves can only be allocated overseas [5], and the Hong Kong dollar's peg to the U.S. dollar, this arrangement does have feasibility. However, further details on allocation, such as how much of the $3 trillion in foreign reserves will be allocated to Hong Kong stocks versus offshore bonds, and how to manage volatility, still need to be clarified. In comparison, southbound funds are expected to flow in over $100 billion throughout 2024. Given the relatively sluggish liquidity in Hong Kong stocks, if foreign reserves increase their allocation in the Hong Kong stock market, it will at least have a positive effect on sentiment and liquidity.
Chart: By the end of 2024, China's foreign exchange reserves will reach $3 trillion
Source: Wind, CICC Research Department
Chart: Net inflow of southbound funds exceeds $100 billion in 2024
. At the same time, pay attention to marginal demand improvement supported by policies, combined with sectors that have more thorough industry clearing, such as home appliances and automobiles under the trade-in policy, as well as certain consumer services, home appliances, textile and apparel, and electronics.
Specifically, the main logic supporting our above views and the changes to focus on this week include:
1) December economic data exceeded market expectations but still requires policy support. December's retail sales grew by 3.7% year-on-year, higher than November's 3%. December's industrial added value increased by 6.2% year-on-year, up from November's 5.4%, mainly driven by manufacturing, especially equipment manufacturing. In addition to support from two new policies, there was also an increase driven by exports, with the year-on-year growth rate of export delivery value rising by 1.4 percentage points compared to November. Economic momentum is marginally improving, but the annual GDP deflator's decline has widened compared to the first three quarters, endogenous consumer demand remains weak, and external demand uncertainty is rising, still requiring further policy support. 2) December financial data improved, mainly supported by fiscal efforts. December's monetary growth improved, with M1 declining by 1.4% year-on-year (vs. November -3.7%), and M2 growing by 7.3% year-on-year (vs. November 7.1%). December's stock social financing grew by 8.0% year-on-year, with new social financing of 2.9 trillion yuan, an increase of 0.9 trillion yuan year-on-year, and new RMB loans of 1.0 trillion yuan, a decrease of 0.2 trillion yuan year-on-year, all better than market expectations. Specifically, the year-on-year increase of 829 billion yuan in government bonds is the main support for new social financing, while corporate loans decreased by 400 billion yuan year-on-year, and household loans increased by 128 billion yuan year-on-year, indicating that private sector credit demand still needs to continue recovering. 3) U.S. core CPI cools down, raising expectations for Fed rate cuts. In December 2024, the U.S. CPI rose by 2.89% year-on-year, rebounding for the third consecutive month, reaching a new high since July 2024, slightly below the market expectation of 2.9%. December's core CPI fell to 3.24% year-on-year, the lowest since August 2024, below the market expectation of 3.3%. In terms of components, the rise in CPI was due to energy prices, while the decline in core CPI was more attributable to a decrease in service prices. The U.S. CPI being lower than market expectations helps alleviate the tightening pressure caused by the new highs in U.S. Treasury yields and the dollar4) Outflow of overseas active funds expands, inflow of passive funds slows down, and southbound capital inflow narrows. EPFR data shows that as of January 15, the outflow of overseas active funds from the overseas Chinese stock market expanded to USD 460 million (vs. an outflow of USD 98.66 million in the previous week), marking 14 consecutive weeks of outflow. The inflow of overseas passive funds slowed to USD 70 million (vs. an inflow of USD 360 million in the previous week). Meanwhile, the southbound capital inflow narrowed compared to the previous week, with an average daily inflow of HKD 8.6 billion (vs. an average daily inflow of HKD 9.78 billion in the previous week).
Chart: This week, the outflow of overseas active funds expands, and the southbound capital inflow slows down.
Source: EPFR, Wind, China International Capital Corporation Research Department
Author: Liu Gang (SAC Practicing Certificate No.: S0080512030003) team, Source: Kevin Strategy Research, Original title: "CICC | Hong Kong Stocks: How to Break the Current Situation?", edited by Wall Street Insights
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