China Galaxy Securities: Hong Kong Stock Market Under Geopolitical Conflicts and High Oil Prices - Seizing Three Investment Themes

CITIC Securities APP learned that China Galaxy Securities issued a research report stating that looking ahead, if the US and Iran become embroiled in a long-term quagmire conflict, the Hong Kong stock market will undergo a three-stage evolution: “short-term emotional shock → medium-term fundamentals transmission → long-term structural differentiation.” Macroeconomically, it faces a severe combination of “low growth, high interest rates, and sticky inflation,” but the valuation discount advantage, high dividend characteristics, and support from southbound funds give Hong Kong stocks relative resilience among non-US assets. The investment strategy should focus on three main lines: cyclical sectors; financial sectors and consumer discretionary sectors at valuation lows; and technology sectors (with independent controllable core technologies).

China Galaxy Securities’ main points are as follows:

This week’s Hong Kong stock market performance: (1) From March 16 to March 20, all three major indices declined: Hang Seng Index down 0.74%, Hang Seng Tech Index down 2.12%, and Hang Seng China Enterprises Index down 1.12%. (2) Three sectors rose, eight sectors declined. Among them, industrials rose 2.54%, financials rose 1.71%, energy rose 0.96%; materials fell 10.09%, communication services fell 3.7%, and information technology fell 3.19%. Looking at secondary industries, electrical equipment, automobiles and parts, banks, durable consumer goods, and industrial trade and composites led gains, while non-ferrous metals, media, steel, defense and military, and chemicals saw the largest declines.

This week’s Hong Kong stock liquidity: (1) The average daily turnover on HKEX was HKD 284.505 billion, down HKD 8.921 billion from last week. (2) Southbound funds had a net outflow of HKD 6.329 billion this week, a decrease of HKD 58.769 billion compared to last week’s net inflow. (3) As of March 18, over the past seven days, among Chinese stocks listed in Hong Kong, global active foreign funds had a net outflow of USD 128 million, and global passive foreign funds had a net outflow of USD 204 million, representing increases of USD 331 million and USD 400 million respectively compared to last week’s net inflows.

Hong Kong stock valuation and risk appetite: (1) As of March 20, 2026, the PE and PB ratios of the Hang Seng Index were 12.38x and 1.27x, respectively, at the 81st and 63rd percentiles since 2010. (2) The 10-year US Treasury yield rose 11 basis points to 4.39% from last Friday; the risk premium of the Hong Kong Hang Seng Index was 3.69%, at -1.82 standard deviations of the 3-year rolling mean, placing it at the 2nd percentile since 2010. The 10-year Chinese government bond yield increased 2 basis points to 1.83%; the risk premium of the Hang Seng Index was 6.25%, at -1.73 standard deviations of the mean (3-year rolling), at the 37th percentile since 2010. (3) The Hang Seng Shanghai-Shenzhen-Hong Kong Stock Connect A-share premium index decreased 2.36 points to 119.81, at the 16.60th percentile since 2014.

Investment outlook: Looking ahead, if the US and Iran become embroiled in a long-term quagmire conflict, the Hong Kong stock market will experience a three-phase evolution: “short-term emotional shock → medium-term fundamentals transmission → long-term structural differentiation.” Macroeconomically, it faces a tough combination of “low growth, high interest rates, and sticky inflation,” but the valuation discount, high dividend features, and support from southbound funds give Hong Kong stocks relative resilience among non-US assets.

The investment strategy should focus on three main lines: (1) Cyclical sectors. The global manufacturing recovery combined with AI capital expenditure expansion is reshaping the supply-demand landscape of cyclical sectors. In strategic resources, focus on traditional energy such as crude oil, natural gas, coal, precious metals like gold, and key metals related to military and hard technology. Additionally, chemicals with cost transmission capabilities and agriculture with improving prosperity are worth close attention. (2) Financial sectors and consumer discretionary sectors at valuation lows. Financial stocks are currently at historic lows, offering ample safety margins. Once the situation eases, they will have high resilience. Consumer discretionary sectors with leading growth and profitability are core beneficiaries of consumption recovery and are among the most defensive growth sectors amid geopolitical disturbances. (3) Technology sectors (with independent controllable core technologies). By 2026, the core investment theme in Hong Kong tech will revolve around AI, with domestic large models emerging, reasoning capabilities improving, commercialization accelerating, and open-source projects like OpenClaw potentially advancing AI from “dialogue interaction” to “autonomous execution.” Currently, global capital favors upstream tech hardware, and the trend of “hardening” HALO trading is expected to continue into the first half of the year. Focus on hard tech sectors with industry trends and independent controllability, especially semiconductor equipment, electronics, and communications, which show strong anti-dip properties amid increasing external uncertainties.

Risk warnings: Risks include domestic policy efforts and effects falling short of expectations; overseas interest rate cuts being less than expected; and market sentiment instability.