Source: Huatai Ruisi. Core View

We have consistently cautioned that the scale and duration of this round of Hong Kong stock rebound may be relatively limited ("Continue to Maintain Flexibility in Hong Kong Stock Positions," September 20, 2026). Last week, after experiencing a brief rebound, the market almost returned to levels seen before the September FOMC meeting. The divergence in resilience between US and Hong Kong stocks during this short-lived rally stemmed primarily from differences in liquidity gaps and the strength of fundamental support. Currently, Hong Kong stocks face liquidity pressure from foreign capital outflows and a relatively high volume of lock-up expirations. Last Friday, with the Stock Connect not yet open, market turnover briefly fell to HKD 100 billion, roughly 60% of the prior 20-day average, comparable to the contraction seen during the Chinese New Year and Labor Day holidays when southbound trading was closed (59%-63%). Short-term liquidity may remain tight. On the fundamental front, structural data such as services consumption during the extended holiday warrants close attention, but overall it is unlikely to alter the relatively lackluster trend in earnings data. Although historical experience suggests Hong Kong stocks are prone to short-term rebounds during extended holidays, the market has not accumulated sufficient short positions to create high payout odds, making ultra-short-term speculative opportunities less cost-effective. In terms of sector allocation, dividend plays remain the base position. Exposure to banks and coal should be controlled due to their narrowing dividend yield advantage relative to A-shares and the difficulty of further increasing payout ratios. Attention should be directed toward oil and gas and other more cost-effective areas. Leading innovative drug and CXO companies have already recovered during the trading around the US rate hike landing; they can continue to be held but with limited beta elasticity, requiring careful stock selection and well-defined take-profit levels. Essential consumer staples such as beverages and dairy products are already on the right side of the fundamental bottom but lack catalysts, so patience is warranted.

Fundamentals: Auto Sector Shows Leading Marginal Improvement, Consumption Decline Narrows

As of September 25, the FactSet consensus earnings estimate for non-financial Hong Kong stocks in 2026 (referred to as earnings expectations) was +0.2% over the past four weeks, remaining flat, and -0.1% over the past week; the proportion of upward revisions over the past four weeks was 52%. At the sector level, internet stocks turned from rising to falling (+0.8% over four weeks, -0.2% over one week), though the upward revision ratio remained at 59%; high-dividend stocks also turned from rising to falling (+0.2% over four weeks, -0.3% over one week); the upward revision momentum for innovative drugs moderated (roughly flat over four weeks, -0.2% over one week), while the breadth of upward revisions rose to 70%; the decline in consumption narrowed (-0.6% over four weeks, -0.3% over one week), with an upward revision ratio of 57%, with drags concentrated in heavyweight individual stocks. At the industry level, downward revisions for autos converged (-7.0% over four weeks, -0.6% over one week), with the pace of downgrades slowing in the most recent week, primarily driven by heavyweight stocks; utilities turned from declining to rising (roughly flat over four weeks, +0.6% over one week).

Fund Flows: Southbound Positioning Before the Holiday Followed by Channel Closure, Foreign Capital Turns to Net Outflow

1) Foreign capital: As of Wednesday, overall foreign capital under the EPFR measure turned to a net outflow of USD 0.01 billion from Hong Kong stocks (compared to a net inflow of USD 0.71 billion the previous week), of which active foreign capital saw a net outflow of USD 0.07 billion, marking the third consecutive week of outflows, while passive foreign capital net inflows slowed to USD 0.06 billion. 2) Short selling: The latest weekly average short-selling ratio for Hong Kong stocks rose by 2.2 percentage points to 16.2%, reaching a stage high. 3) Southbound: Last week saw net inflows of approximately HKD 23.2 billion (compared to approximately HKD 12.0 billion the previous week), marking the fifth consecutive week of net inflows and a significant acceleration, with a single-day inflow of approximately HKD 12.7 billion on Tuesday; non-bank financials, real estate, media, and banks led inflows, while electronics, pharmaceuticals, and non-ferrous metals led outflows.

Market Sentiment: Sentiment Falls Back to Neutral Level

The latest reading of the Hong Kong stock sentiment index was 49.2, down from 55.5 last week, falling below the neutral level of 50 for the first time in eight weeks. In terms of attribution, the AH premium (falling to 48) and the put-call ratio (down 11 to 39) were the main drags, while RSI and the gold-implied exchange rate also weakened; southbound net inflow/buying intensity rose against the trend to 80/100, with net buying intensity hitting a perfect score for four consecutive days. The significant divergence between fund flow and price indicators reflects the coexistence of mainland capital positioning ahead of the holiday and weakening market prices. The sentiment index timing strategy has generated approximately 13 percentage points/29 percentage points in long-only/long-short excess returns over the past year.

Allocation: Fundamentals Racing Against Discount Rates, Both Dividend and Innovative Drug Plays Require Downward Stock Selection

From a medium-term perspective, the valuation repair space for Hong Kong stocks may still be constrained by the aggregate global liquidity. Therefore, we continue to recommend dividend plays as the base position, but exposure to sectors with narrowing dividend yield advantages relative to A-shares and difficulty in raising payout ratios, such as banks and coal, should be controlled, while increasing allocation to more cost-effective directions such as oil and gas. From a short-term perspective, leading innovative drug and CXO companies have recovered somewhat during the trading around the landing of the US rate hike; they can continue to be held but with limited beta elasticity, requiring stock selection and well-defined take-profit levels. Essential consumer staples such as beverages and dairy products, previously highlighted, have entered the right side of the fundamental bottom but lack catalysts, so patience is warranted.

Risk Warnings: Geopolitical Fluctuations, Policy Intensity Below Expectations

Charts

Market Performance

Valuation Comparison

Hong Kong Stock Earnings

Hong Kong Stock Fund Flows and Market Sentiment

Buybacks, Secondary Offerings, IPOs, and Lock-Up Expirations

Risk Warnings

Geopolitical Fluctuation Risk: Geopolitical conflicts may suppress risk appetite, leading to foreign capital outflows and a sharp rise in market volatility, causing market trends to differ from our views.

Policy Intensity Below Expectations Risk: If subsequent market overheating leads to a weakening of relevant supportive policies, it may reverse the current upward valuation trend or compress trading activity, causing market trends to differ from our views.

Article source: Yi Hua, Researcher, SAC No. S0570520100005, SFC No. AMH263; Li Yujie, Researcher, SAC No. S0570525050001, SFC No. BRG962; Sun Hanwen, Researcher, SAC No. S0570524040002, SFC No. BVB302; Luan Di, Contact, SAC No. S0570124120013