The Hong Kong stock market faces short-term downward pressure! Institutions: There is a discrepancy in current market expectations

Market Trend Review

Affected by overseas geopolitical disturbances and a cooling of domestic policy expectations, the Hong Kong stock market further declined last week, with the Hang Seng Index dropping 1.9% on Friday alone. In terms of indices, MSCI China, Hang Seng China Enterprises, and the Hang Seng Index fell by 1.8%, 1.3%, and 1.0%, respectively, while the Hang Seng Tech Index dropped by 1.9%. Across sectors, all sectors declined, with consumer discretionary (-3.6%), real estate (-3.2%), insurance (-3.0%), and transportation (-2.8%) leading the declines, while information technology remained flat compared to last week.

Chart: Last week, the MSCI China Index fell by 1.8%, with consumer discretionary, real estate, and insurance leading the decline.

Market Outlook

Following a significant drop of over 5% in the Hang Seng Index last week, the market further corrected this week, with a sell-off occurring on Friday due to multiple external disturbances. The A-share CSI 300 Index fell over 3% in a single day, while the Hong Kong Hang Seng Index dropped nearly 1.9%. It has now fallen below the daily support level (19,500), approaching the weekly and monthly support levels (18,900-19,200), effectively erasing all gains since "924" and returning to the levels seen at the beginning of the significant rise on September 25. Meanwhile, the outflow of both active and passive funds from overseas has further expanded this week, with active funds flowing out $540 million, an increase of nearly 60% compared to last week's outflow of $340 million, and passive funds flowing out $1.57 billion, nearly double last week's outflow of $810 million. After this week's correction, the current short-selling transaction ratio in the Hong Kong stock market has risen to 17.5%, with a 5-day short-selling ratio of 16.7%, returning to early September levels; at the same time, the 14-day Relative Strength Index (RSI) has fallen to 38.1, approaching oversold territory.

Chart: The risk premium of the Hang Seng Index has recently risen to around 7.7%, with the highest risk premium reaching 7.8% during the escalation of trade tensions in 2018.

Chart: The short-selling transaction ratio in the Hong Kong stock market has recently risen to 17.5%.

Chart: The 14-day RSI of the Hang Seng Index is approaching oversold levels.

As we mentioned last week, external disturbances have increased in the short term, and we recommend maintaining caution, as further volatility cannot be ruled out (《 [What is the outlook after the correction?](http://mp.weixin.qq.com/s?__biz=MzUxMzkwMjY1MA==&mid=2247508289&idx=1&sn=8b659488cfa2b056beb454ed9edc0674&chksm=f94cf014ce3b7902a8630af167d08f153f19dc197facfab457b5689073c5113552970ebecefe&scene =21#wechat_redirect)”). In fact, the recent market trends have largely validated our judgment on the market: At the peak of the last round of market performance in early October, we indicated that the short-term market had priced in expectations quite fully, and if it reached the corresponding Hang Seng Index level of 22,500 at the beginning of 2023 (September 29th, “Market Space Under the New Round of Policies”); in “Outlook for the Hong Kong Stock Market in 2025: Overcast but No Rain” we suggested that under the baseline scenario, we believe the Hong Kong stock market has not completely escaped the oscillation pattern, “the rebound is intermittent, and the structure is the main line.” Gradually laying out on the left side during the downturn and moderately taking profits and shifting focus on the structure during the exuberance on the right side seems to be a tried-and-true strategy.

In the short term, external pressures and geopolitical disturbances seem to be the main reasons for the market's "sudden" decline. Some geopolitical tensions and the U.S. implementing related investment bans have intensified market concerns about external environmental uncertainties; at the same time, the response to external pressures in recent domestic meetings has cooled some investors' expectations for future policies. However, fundamentally, the reason why these “excuse-finding” attributions can amplify emotions is essentially due to the market itself being in a certain “weak equilibrium” between expectations and policy fulfillment. Specifically, there are currently three “expectation gaps” in the market, which we have repeatedly emphasized in “Outlook for the Hong Kong Stock Market in 2025: Overcast but No Rain” that the Hong Kong stock market has not completely escaped the oscillation pattern The fundamental reason for "the rebound is intermittent, and the structure is the main line."

► "Expectation difference" one: The market's previous positive expectations for domestic stimulus. It is undeniable that we can clearly see the change in policy stance at the end of September, which has become an indisputable fact, leading to a significant rise in early October. However, amidst such optimistic expectations, whether there will be larger-scale policy efforts to provide new support becomes the key factor affecting the market trend going forward. In our article "Hong Kong Stock Market Outlook 2025: Cloudy with No Rain," we pointed out that the root of all problems, such as declining demand, low inflation, and weak credit leading to poor profitability, is credit contraction. The most effective way to solve this problem is through fiscal intervention, but whether through indirect debt relief or direct demand stimulation, a considerable scale is necessary. We estimate that an additional fiscal expenditure of 7-8 trillion yuan would help address the contraction issue, but the "real constraints" of high leverage, interest rates, and exchange rates mean that incremental stimulus will occur, but overly high expectations are unrealistic. From recent incremental policies, the new limit of 60 billion yuan in local government debt over three years corresponds to 20 billion yuan per year. If the subsequent central economic work conference raises the general public budget target, it may bring additional increments (we estimate that a 1 percentage point increase in the deficit rate corresponds to about 1.3 trillion yuan), but there is still a certain distance from the aforementioned scale, further illustrating this point.

Chart: The exchange rate is an important hedging channel for tariffs. During the China-U.S. trade friction in 2018-2019, the RMB depreciated against the USD by more than 11% at one point.

At the same time, the continuous repair of the fundamentals also requires more incremental policy support. Although the stabilization growth policies after the policy shift at the end of September have driven marginal improvements in economic and financial data in October, high-frequency data in November indicates that recent economic activity may weaken again: 1) In terms of production, the operating rates of blast furnaces and rebar have weakened compared to last week; 2) In terms of prices, the prices of pork and fresh vegetables have weakened on a month-on-month basis, and the South China Industrial Products Index, rebar prices, and copper prices have all declined to varying degrees compared to last week; 3) In the real estate sector, the transaction area of commercial housing in 30 large and medium-sized cities has shown a continuous month-on-month decline over the past two weeks.

► "Expectation difference" two: A simple reference to the experience of the last round of tariff responses. We previously pointed out that when the market analyzes the impact of Trump's governance approach, a major reference is still his first term from 2017 to 2021. For example, his business experience may make some policies appear tough at first, but in reality, there is room for negotiation Even a tough statement itself is a negotiation tactic. However, we are concerned that, in a certain sense, the current policy thinking and macro environment are significantly different from the last round. If this is indeed the case, the market may underestimate its impact (《Trump's Policies and the Path Simulation of Transactions》). First, from the perspective of governance thinking and political environment, 1) Stronger control over political resources: This round, Trump has absolute control over the three resources of the party, Congress, and public opinion (“Republican Party wins all,” the popular vote has exceeded the Democratic Party for the first time since 2004), which can better align with his proposals; 2) Last term: The lack of a re-election demand and pursuit of future political legacy may make his governance thinking different from the first term; 3) Core team and the proposals of the younger generation in the Republican Party: Whether it is Vice President Vance or the recently nominated cabinet candidates, their political proposals are highly consistent with Trump and the Republican agenda, even more hardline, so it cannot be ruled out that this will affect the policy direction of this term and for a longer period in the future.

In addition, the current differences compared to 2018 also make the impact non-negligible: 1) Higher trade dependence, current domestic demand is weak, and external demand's support for GDP growth has significantly increased. In the first three quarters of this year, China's net exports contributed 23.8% to GDP year-on-year, with the contribution of the trade surplus with the U.S. reaching as high as 37% from January to October. 2) Limited currency hedging means, in 2018 China could absorb the impact of tariffs through currency depreciation, but the current internal and external environment may limit this; 3) Changes in the new round of trade policies, unlike in 2018, which focused more on tariffs and trade deficits, the current supply chain and transshipment trade have become the focus due to Biden's continuous restructuring and attention over the past four years. Just as Biden “inherited” Trump's 25% tariffs, Trump may continue Biden's policies on the supply chain this time.

Chart: 10-year U.S. Treasury yield rises to 4.4%, USD/CNY rises to 7.25

► “Expectation gap” three: Expectations of a loosening of the alliance strategy of the Biden administration after Trump takes office. Previously, Biden's handling of geopolitical situations, ally relations, and even friend-shoring in supply chain restructuring reflected an alliance strategy more defined by ideology. Thus, one interpretation in the market is that expectations of Trump breaking the ally relationships established during Biden's term may lead to a loosening of the previous alliance strategy. However, whether Trump's thinking in his second term will change, especially regarding the key hawkish personnel in his team responsible for foreign policy, and whether this change in situation will be less than expected, also needs attention.

Looking ahead, we suggest paying attention to several key nodes for verification of the above expectations: 1) December Central Economic Work Conference, regarding next year's fiscal budget and deficit rate arrangements; 2) January 20th, after Trump officially takes office, “100-day new policy,” to observe the priority of his different policy agendas; 3) Address to a Joint Session of Congress between February and April: The new president typically outlines their legislative agenda and national priorities to the U.S. Congress in February; 4) The budget proposal for fiscal year 2026 will be released between February and April, which may provide more key details about infrastructure, tax cuts, and other bills (《 Path Simulation of Trump’s Policies and Deals》).

From an allocation perspective, we believe the market will continue to be dominated by fluctuations and structural trends. In the short term, caution remains the priority, but greater volatility may bring more supportive stimuli and provide opportunities for re-entry, with 19,000 points being a key support level. Under the assumption of an overall fluctuating pattern, “gradually positioning on the left side during downturns and moderately taking profits on the right side during exuberance” seems to be an effective strategy. In terms of sectors, we recommend focusing on three categories: First, sectors that have cleared their supply and policy cycles, which would benefit more if there is marginal demand improvement, such as parts of consumer services like the internet, home appliances, textiles and apparel, and electronics. Second, sectors supported by policies, such as home appliances and automobiles under trade-in programs, as well as trends in self-reliant technology fields like computers and semiconductors; third, stable returns, such as high dividends from state-owned enterprises.

Specifically, the main logic supporting our views and the changes to watch this week include:

1) Trump nominates Lutnick as Secretary of Commerce and Bessent as Secretary of the Treasury. On November 19, Trump nominated Howard Lutnick, head of his transition team, as Secretary of the Treasury, “directly responsible for the affairs of the Office of the United States Trade Representative (USTR),” leading the U.S. tariff and trade agenda. Lutnick supports the Republican vision of bringing manufacturing jobs back to the U.S. On November 22, Trump nominated Scott Bessent as Secretary of the Treasury. Bessent supports traditional views of the Treasury, including the importance of a strong dollar as the world’s reserve currency; he also advocates for deficit reduction, calling for spending cuts and adjustments to existing taxes.

2) Hang Seng Index Company announces the inclusion of Kuaishou Technology and New Oriental Education into the Hang Seng Index constituents, and Midea into the Hang Seng Tech Index constituents. On November 22, the Hang Seng Index Company announced that as of the quarterly review results of the Hang Seng Index series on September 30, 2024, all changes will be implemented after the market closes on December 6 (Friday) and will take effect on December 9 (Monday). Among them, Kuaishou Technology and New Oriental Education Technology Group will be included in the Hong Kong Hang Seng Index constituents, while New World Development Company Limited will be removed Midea Company will be included in the Hang Seng Tech Index, while Weibo will be removed.

3) The Governor of Texas announces a ban on state agencies from making any new investments in China with state government funds and funds. On November 22, Texas Governor Greg Abbott sent a letter to state government agencies, prohibiting Texas investment institutions from making any new investments in China. For existing investments in China, he requested divestment at the earliest feasible time, stating that this move is based on considerations of financial and security risks.

4) Outflows of overseas active and passive funds have expanded, while southbound funds have accelerated inflows. Specifically, data from EPFR shows that as of November 20, outflows from overseas active funds in the Chinese stock market expanded to USD 540 million (compared to USD 340 million in the previous week), while outflows from overseas passive funds reached USD 1.57 billion (compared to USD 810 million in the previous week). Meanwhile, southbound fund inflows slowed to HKD 28.33 billion last week, narrowing from HKD 35.7 billion in the previous week.

Chart: Overseas active and passive foreign capital are both accelerating outflows.

Source: Kevin Strategy Research