Huatai Securities Hong Kong Stock Strategy: Focus on Cycles and Consumption Rebound Opportunities During the Holiday

Hong Kong stocks fluctuated upward then downward last week. On one hand, driven by the global “re-inflation” trade and upgrades in domestic AI applications, resource sectors such as non-ferrous metals, domestic computing power chains, and some software saw rebounds. On the other hand, concerns over changes in the AI landscape between listed and unlisted companies, as well as intensified competition among e-commerce giants, suppressed the performance of heavyweight stocks. Market volatility remains high. This week coincides with the Spring Festival holiday, and the main factors influencing the market may include U.S. stocks, consumer activity during the holiday, and AI developments. In the short term, U.S. stocks may continue to show divergence and high-low segmentation around the AI theme, with a neutral impact on market risk appetite; however, new progress has been made in domestic high-frequency consumer data and AI models. Overall, we recommend balanced allocation, with a short-term focus on semiconductor hardware benefiting directly from AI progress, thematic consumer alpha, and electrical equipment (newly added).

Core Views

Fundamentals: Continued recovery of pharmaceutical sector outlook, gradual improvement in inflation

In terms of analyst expectations, on a total basis, Bloomberg consensus forecasts for profit and revenue over the next 12 months have been revised upward by 0.7% and downward by 0.2% over the past four weeks, with slight upward revisions of 0.1% each in the past week. Structurally, sectors with the largest upward revisions in profit expectations over the past four weeks and week include non-ferrous metals (8.0%/2.6%), non-bank financials (1.3%/0.6%), and pharmaceuticals (1.7%/0.6%). Sectors with the largest upward revisions in revenue expectations over the same periods include paper and packaging (0.2%/0.1%) and construction (1.5%/0.1%), indicating structural differentiation in profit and revenue improvements. Semiconductor stocks, which outperformed last week, saw profit expectations downward revised by 1.9% and revenue by 0.4% over the past week, mainly concentrated in wafer foundry segments, while the outlook for medical equipment and services remains optimistic. Macro data shows inflation accelerated in January, and financial data indicates ample remaining liquidity.

Funding Environment: Continued foreign capital inflows, short-selling funds temporarily paused

Regarding foreign investment, as of Wednesday, based on EPFR data, net foreign inflows into Hong Kong stocks reached $1.89 billion, remaining stable (vs. net inflow of $1.88 billion the previous week). Active foreign funds maintained a net inflow of $380 million, while passive foreign funds net inflow was $1.50 billion. Southbound capital saw net inflows of HKD 27.8 billion last week, down from HKD 56 billion the previous week. Top net inflows were in media, banking, computing, pharmaceuticals, and electronics sectors; outflows were prominent in communications, non-bank financials, and new energy sectors. Short-selling data shows the latest Hong Kong stock short position/trading ratio at 2.24%/12.7%, with a slight decrease of 0.01% and an increase of 0.7 percentage points respectively. There were no new IPOs in Hong Kong this week.

Market Sentiment: Indicators fluctuate but remain in optimistic range

As of Friday, the Hong Kong stock sentiment index stood at 63.7, remaining in the optimistic zone. Key factors include a slight decline in volume-price related metrics such as turnover, Hang Seng Volatility Index, and RSI, with the Hang Seng Index’s premium/discount dropping from 47 to around 26 amid holiday risk aversion. Meanwhile, sentiment indicators for southbound funds—net inflow, buying strength, and A-H premium scores—further improved (from 63/56/68 to 75/78/80), returning to greed levels. Overall, the indicators show little change, suggesting that in the context of low clarity of main themes, investors remain cautious ahead of the holiday. Since the strategy was launched in September, the out-of-sample pure long strategy has achieved an annualized excess return of 9.8%, and the long-short strategy 19.8%, demonstrating good timing effectiveness.

Allocation: Focus on semiconductor hardware such as storage, thematic consumer alpha, and newly added electrical equipment

In the short term, three key areas are recommended. First, storage and other semiconductor hardware. Reports from overseas industry leaders, January sales data from Taiwanese companies, and South Korea’s export data for the first 10 days of February all confirm the continuation of the super cycle, with storage leaders in Hong Kong stocks showing higher correlation with overseas giants. Second, improving outlooks in thematic consumer sectors. Food and beverage benefit from platform subsidies, with potential catalysts from holiday consumption; innovative drug sector outlooks continue upward revisions, with industry trends ongoing, offering alpha opportunities. Third, electrical equipment. The mid-term logic of rising demand for upgrades in domestic and international power systems remains unchanged, with continued upward revisions in sector outlooks. The inclusion of CATL into the Hang Seng Index is a short-term catalyst for passive capital inflows. In the medium term, the global re-inflation trade continues, with domestic PPI year-over-year growth improving, favoring resource stocks, insurance, and Hong Kong local stocks.

Risk Warning: Geopolitical tensions and policy measures falling short of expectations.

(Source: Huatai Securities)