HKEX surged nearly 28% this week, Goldman Sachs: This time is not a "feint"

Under the stimulus of policy combinations that exceeded expectations, the Hong Kong stock market has continued to show strong performance, with year-to-date gains surpassing the S&P 500. Following the overall market trend, the Hong Kong Exchanges and Clearing Limited (HKEX) surged by 27.73% this week, reversing the downturn that lasted nearly 5 months.

On September 27th, Goldman Sachs' latest research report pointed out that after briefly reaching a new high at the beginning of 2021, HKEX entered a long period of low stock prices. Currently, due to improvements in the sentiment of the Chinese stock market, the resurgence of HKEX IPO activities, and other factors, the recent rise of HKEX is different from before.

The nearly 30% increase in HKEX this week has not only made it the focus of the market but also reflected unusually active trading activities in the Hong Kong stock market recently. The turnover of the Hang Seng Index has exceeded HKD 400 billion this week, setting a new historical record for the Hong Kong stock market. The Hang Seng Index rose by 21.03% this week, while the Hang Seng TECH Index rose by 20.23%.

Goldman Sachs explained that the reasons for this rise are not just a "flash in the pan" for five main reasons:

(1) The ratio of market capitalization of Chinese listed companies to GDP is currently at a cyclical low, a level never seen before in this downward cycle.

(2) Earlier this year, the real interest rates in the Hong Kong stock market were at a 20-year high, and the Fed rate cuts/HIBOR declines have begun to lower this level. The decrease in real interest rates may have a positive impact on the trading volume of Hong Kong stocks.

(3) The IPO market activity in Hong Kong has started to rebound in the third quarter of this year from the extremely low levels since the peak in 2021.

(4) The business volume of the London Metal Exchange (LME), a subsidiary of HKEX, is increasing, with expenses expected to rise starting from the 2024 fiscal year, driving LME revenue growth by about 30-40%. In the 2021-2022 fiscal year, LME's contribution to the growth of HKEX Group was negative.

(5) Market consensus expectations for earnings per share of HKEX are declining, and the stock's valuation premium relative to the index is now at a mid-cycle level.

Goldman Sachs further explained that the stock price of HKEX is mainly driven by trading volume in the Hong Kong stock market, with this business contributing approximately 40% to revenue. With improvements in sentiment in the Chinese stock market, declining real interest rates, and the resurgence of IPO activities, trading volume in the Hong Kong stock market may further increase.

The bank confirmed a buy rating for HKEX and raised the company's 12-month average target price from HKD 306 to HKD 318, indicating a potential upside of 14% for the stock.

CITIC Securities stated that the Fed rate cuts and the significant boost in market confidence from the domestic policy combinations on September 24 are expected to drive the inflow of foreign capital and local funds back into the Hong Kong stock market. Since August, the bottom characteristics of the Hong Kong stock market have become more apparent, and after nearly two weeks of valuation adjustments, the current valuations of the Hang Seng Composite Index, Hang Seng Index, and Hang Seng TECH Index are still at historical lows Guotai Junan Securities believes that the valuation recovery trend in the Hong Kong stock market since early August is expected to continue until early November, while growth stocks are expected to continue outperforming dividend strategies