Zhang Yidong: The Hong Kong stock market has once again reached the time of "crying while sowing seeds."

Investment Highlights

• Market Outlook: The Hong Kong stock market has reached a good time for "crying while sowing seeds" and positioning at low points.

——After late January, the suppression of the Chinese stock market by overseas factors is expected to usher in a turning point. By then, the short-term impact of Trump's inauguration, the rise in long-term U.S. Treasury yields, and the strengthening of the dollar will come to an end as negative factors are exhausted. In contrast, China's policy easing may strengthen, enhancing the attractiveness of allocating Chinese assets. Subsequent attention should be paid to changes in U.S. inflation expectations and the impact of the policy combination after Trump's inauguration on January 20.

1. After January 20, the "Trump trade" may peak and decline, and the momentum of the high dollar index may slow down, which is conducive to further easing of Chinese monetary policy. Recently, the RMB has depreciated against the dollar, but overall it has shown strong resilience.

2. After mid-January, there is an opportunity for a phased decline in long-term U.S. Treasury yields. First, pay attention to the impact after the U.S. federal debt reaches its ceiling. Second, monitor changes in inflation expectations and whether the Federal Reserve will release relatively dovish signals at the interest rate meeting on January 29. Third, if expectations for the Federal Reserve to end balance sheet reduction continue to strengthen in the first half of the year, it will also be conducive to a phased decline in U.S. Treasury yields.

3. If Trump increases tariffs on China after taking office, market expectations for further easing of Chinese policies will also strengthen. On January 13, People's Bank of China Governor Pan Gongsheng stated at the opening ceremony of the Asian Financial Forum that by 2025, macroeconomic policy will be strengthened for counter-cyclical adjustments to correct the trajectory of economic growth and operation, maintaining the stability of economic growth.

——The risk premium of Hong Kong stocks relative to the risk-free rate in mainland China is at a historical high, highlighting the attractiveness of Hong Kong stocks for domestic capital allocation. The risk premium of the Hang Seng Index, calculated based on the yield of China's 10-year government bonds, remains at an extremely high level of around 10%. However, the risk premium calculated based on the yield of U.S. 10-year government bonds is at a relatively low historical level. In the context of high overseas interest rates, the attractiveness of Hong Kong stocks to foreign capital is far less than that to domestic capital.

——The "annual report season" is approaching, focusing on fundamental changes and revaluation opportunities brought by increased dividend ratios. 1) By 2025, high-quality companies in China will continue to increase dividends, having the objective conditions to do so. The Chinese economy has been in a transition period between old and new driving forces in recent years, with the growth rate of listed companies' capital expenditures slowing down, and the ratio of free cash flow to operating cash flow of listed companies has shown significant improvement compared to the past since 2017. 2) From February to April, Hong Kong stocks and A-shares will successively enter the annual report disclosure period, and increasing dividends and buybacks may become one of the catalysts for the market. Regulatory policies in 2025 will continue to support the improvement of the quality of Chinese listed companies, further guiding them to strengthen dividends and buybacks to reward shareholders.

• Investment Strategy: Crying while sowing seeds, positioning against the trend, allocating with dividend assets as the base, and trading with high-quality growth stocks.

——The adjustments at the end of the year have released risks, and the Hong Kong stock market is expected to rebound again with subsequent positive economic policies around the Spring Festival. The main incremental funds for the Hong Kong stock market in 2025 may come from wealth reallocation in the low-interest-rate environment in the mainland With the release of overseas pressure, the monetary and fiscal policies in mainland China will further strengthen in the first quarter, and the risk appetite of domestic investors will recover, thereby driving the Hong Kong stock market to welcome a spring rally. On January 13, the People's Bank of China Governor Pan Gongsheng emphasized "continuing to fully support the construction of Hong Kong as an international financial center" and "supporting the healthy development of the capital markets in mainland China and Hong Kong."

——Counter-cyclical layout, it is recommended to actively allocate with dividend assets as the base. The dividend yield advantage of Hong Kong stock dividend assets is significant. As of January 14, 2025, the dividend yield of the Hang Seng High Dividend Yield Index is 7.93%, far exceeding the 10-year yield of China Government Bonds. Investment strategy: First, continue to allocate stable central state-owned enterprises with high dividend yields; the dividend assets of central and state-owned enterprises are still worth being the base allocation for Hong Kong stocks in 2025. Second, selectively choose dividend assets with potential for future dividend rate increases, focusing on leading companies in consumption, energy, and certain manufacturing sectors that currently have a high proportion of undistributed profits to net assets and a low proportion of dividends to free cash flow.

——Engage in swing trading with high-performing growth stocks, sow seeds when the market is pessimistic and harvest when the market is optimistic. It is again the time to sow seeds amidst tears; investment strategy: based on obtaining a margin of safety, selectively choose high-performing growth stocks with upward elasticity. Currently, the leading stocks in Hong Kong's consumption and manufacturing sectors have dividend yields exceeding 5% and are actively repurchasing shares. Following the implementation of proactive policies in mainland China in 2025, sectors such as technology growth (AI industry chain, semiconductors, autonomous driving, robotics, etc.), consumption (trendy toys, cultural luxury, emotional consumption, restaurant chains, travel chains, food and beverages), internet, and overseas industry chains are expected to undergo revaluation.

Report Body

I. Market Outlook: It is currently a good time for "sowing seeds amidst tears" and buying on dips in the Hong Kong stock market.

(A) In mid to late January, overseas factors that have suppressed the Chinese stock market are expected to see a turnaround.

After late January, the impact of Trump's inauguration, the short-term shock of long-term U.S. Treasury yields and a strong dollar will come to an end as negative factors are exhausted. Conversely, China's policy easing may strengthen, enhancing the attractiveness of Chinese assets. Future attention should be paid to changes in U.S. inflation expectations and the impact of policy combinations after Trump's inauguration on January 20. Due to previously pessimistic expectations, the actual situation may turn out to be better than expected, as evidenced by the latest U.S. CPI.

1. After January 20, the "Trump trade" may peak and decline, and the momentum of the strong dollar index may slow down, which is conducive to further easing of Chinese monetary policy. Since the 2024 U.S. election, expectations for the implementation of Trump's 2.0 policies have been fully reflected, significantly driving long-term U.S. Treasury yields and the strength of the dollar. Recently, the RMB has depreciated against the dollar, but overall it has shown strong resilience.

1. After mid-January 2025, there may be an opportunity for a phased decline in long-term U.S. Treasury yields

• First, focus on the impact after the U.S. federal debt reaches its ceiling, which may further confirm a soft landing for the U.S. economy in the first half of the year, rather than the "no landing" scenario previously anticipated by the market. According to Treasury Secretary Janet Yellen's estimate, the U.S. federal debt is expected to hit the statutory limit in mid-January 2025. Since 2011, the average time from reaching to resolving the debt ceiling issue has been about 109 days. If it affects the annual appropriations bill for the fiscal year 2025, which cannot be signed before April 30, the federal government will be unable to issue new U.S. Treasury bonds and expand fiscal policy, and can only maintain operations through "extraordinary measures" or by using the government's cash account (TGA).

Secondly, pay attention to changes in inflation expectations and whether the Federal Reserve will release relatively dovish signals at the interest rate meeting on January 29. The core CPI in the U.S. for December, released on January 15, showed a year-on-year growth rate decline, ending a nearly stagnant progress in core CPI year-on-year decline since August 2024. Among them, the month-on-month growth rate of super core service inflation was only 0.2%, significantly lower than the previous four months. If inflation can further slow down, it will leave more room for action for the Federal Reserve, especially after Trump officially takes office, the Federal Reserve may continue to update its assessment of the effects of Trump's 2.0 series of policies.

Third, if expectations for the Federal Reserve to end balance sheet reduction continue to strengthen in the first half of the year, it will also be conducive to a phased decline in U.S. Treasury yields. According to the minutes of the December Federal Open Market Committee meeting, major Wall Street banks believe that the Federal Reserve's action to reduce the size of its balance sheet will end in June 2025.

1. If Trump increases tariffs on China after taking office, market expectations for China's policy easing will also strengthen. On January 13, People's Bank of China Governor Pan Gongsheng stated in his speech at the opening ceremony of the Asian Financial Forum that in 2025, macroeconomic policy counter-cyclical adjustments will be strengthened to correct the trajectory of economic growth and operation, maintaining the stability of economic growth. A comprehensive use of various monetary policy tools such as interest rates and reserve requirements will be employed to maintain ample liquidity and a loose social financing environment. Boosting consumption will be prioritized as the first key task for this year's economic work (2) The risk premium of Hong Kong stocks relative to the risk-free rate in mainland China is at a historical high, highlighting the attractiveness of Hong Kong stocks for capital allocation from within China

The static PB of the Hang Seng Index is less than 1 time, and the static PE valuation is only 8.9 times. For mainland capital, especially insurance funds, the risk premium of Hong Kong stocks calculated using the risk-free return rate of around 1.6% for China's 10-year government bonds is still at a historical high, highlighting the attractiveness of Hong Kong stocks for Chinese capital. Therefore, in 2025, under the low interest rate environment in mainland China, it is recommended to pay more attention to the allocation value of Hong Kong dividend assets dominated by domestic capital.

However, for overseas funds such as those from Europe and the United States, the risk premium of Hong Kong stocks calculated using the risk-free return rate of the U.S. 10-year government bond is at a relatively low historical level. This means that in the high interest rate environment overseas, the attractiveness of Hong Kong stocks to foreign capital is far less than that to domestic capital.

(3) The "annual report season" is approaching, focusing on fundamental changes and the revaluation opportunities brought by the increase in dividend ratios

In 2025, high-quality Chinese companies will continue to increase dividends, having the objective conditions to do so. The Chinese economy has been in a transition period of old and new driving forces in recent years, with the growth rate of capital expenditure by listed companies slowing down, and the ratio of free cash flow to operating cash flow of listed companies has shown significant improvement compared to the past since 2017.

From February to April, Hong Kong stocks and A-shares will successively enter the annual report disclosure period, and increasing dividends and buybacks may become one of the catalysts for the market. In 2025, regulatory policies will continue to support the quality improvement of Chinese listed companies, further guiding them to strengthen dividends and buybacks to reward shareholders. Policies will further link dividends to major shareholder reductions and implement ST warnings for companies that have the ability to pay dividends but have not done so for a long time or have a low dividend ratio.

• Comparing the dividend ratios of major global stock indices, there is still room for improvement in the dividend ratio of Chinese listed companies. We define the dividend ratio of the index as the dividend per share/non-recurring profit per share. In 2023, the dividend ratio of the CSI 300 Index was 29%, the CSI A500 was 24%, and the Hang Seng Index was 31%. In comparison, Japan was 33%, the U.S. S&P 500 Index was 34%, Germany's DAX was 37%, while the UK and Europe Stoxx 600 were 38% and 39%, respectively, and France's CAC40 was 41%.
• The policy combination to boost the stock market in 2024 significantly enhanced the shareholder returns of Chinese equity assets. In 2024, the amount of dividends and buybacks in A-shares significantly exceeded the amounts from IPOs, refinancing, and shareholder reductions. As of January 8, 2025, the Hong Kong stock market had announced dividend amounts and buyback amounts of HKD 906.86 billion and HKD 265.75 billion, respectively, with the buyback amount far exceeding the HKD 126.92 billion in 2023

II. Investment Strategy: Crying while sowing seeds, layout against the trend, with dividend assets as the base allocation, and using high-quality growth for swing trading

(1) The adjustments at the end of the year have released fundamental risks, and the Hong Kong stock market is expected to rebound again around the Spring Festival with subsequent positive economic policies.

The main incremental funds for the Hong Kong stock market in 2025 may come from wealth reallocation in the mainland under a low interest rate environment. With the release of overseas pressures, monetary and fiscal policies in the mainland will further strengthen in the first quarter, and the risk appetite of domestic investors will recover, thus driving the Hong Kong stock market to welcome a spring rally. On January 13, the central bank governor Pan Gongsheng emphasized "continuing to fully support the construction of Hong Kong as an international financial center" and "supporting the healthy development of capital markets in the mainland and Hong Kong."

After the adjustments at the end of the year, both the fundamental and sentiment risks of the Hong Kong stock market have been fully released. 1) The PE and PB of the Hang Seng Index are both below the levels of September 24, 2024, indicating that the current market valuation almost does not reflect the potential improvement in fundamentals brought about by the domestic policy shift. Most of the PE percentiles of the Hang Seng Composite Index by industry are at historical lows, with the PE of essential consumer, non-essential consumer, financial, and information technology sectors around or even below the 10th percentile since 2014. 2) Market sentiment has significantly declined. After the financial press conference on September 24, 2024, the proportion of short selling transactions dropped sharply to around 10%, and the current proportion of short selling transactions has rebounded to a more neutral level.

(2) Layout against the trend, it is recommended to actively allocate with dividend assets as the base.

The dividend yield advantage of Hong Kong stock dividend assets is significant. As of January 14, 2025, the dividend yield of the Hang Seng High Dividend Yield Index is 7.93%, with a spread of over 6 percentage points compared to the yield of the 10-year China Government Bond First, continue to allocate stable central state-owned enterprises with high dividend yields. The dividend assets of central state-owned enterprises still deserve to be the core allocation for Hong Kong stocks in 2025. Under the continuous inflow of Hong Kong Stock Connect funds, domestic capital has the dominant and pricing power in high dividend central state-owned enterprise dividend assets.

Second, select dividend assets with potential for future dividend rate increases. Focus on leading companies in consumption, energy, and certain manufacturing sectors that currently have a high proportion of undistributed profits to net assets and a low proportion of dividends to free cash flow. Using the constituent stocks of the Hang Seng High Dividend Yield Index and the Hang Seng Stock Connect High Dividend Index, as well as the constituent stocks of the CSI Dividend Index as samples, the leading companies in consumption, energy, and certain manufacturing sectors currently have a high proportion of undistributed profits to net assets and a low proportion of dividends to free cash flow, indicating potential for future dividend rate increases.

(3) Engage in swing trading with high-performing growth stocks, sow seeds when the market is pessimistic, and reap when the market is optimistic.

Currently, the market is clearly in a pessimistic phase again, and it is recommended to position at low points. Based on obtaining a margin of safety, select high-performing growth stocks with upward elasticity.

Currently, the dividend yield of quality companies in the broad consumption sector and manufacturing in Hong Kong stocks exceeds 5%, and they are actively repurchasing shares. With the implementation of proactive domestic policies in 2025, sectors such as technology growth (AI industry chain, semiconductors, autonomous driving, robotics, etc.), consumption (trendy toys, high-end cultural luxury, emotional consumption, restaurant chains, travel chains, food and beverages), internet, and overseas industry chains are expected to undergo revaluation.

• Emerging growth: 1) Emotional consumption, trendy toys, high-end cultural luxury, etc.; 2) Technology growth: The wave of AI consumption is moving towards applications, and leading companies in the mobile phone industry chain are expected to benefit from the growing demand for AI mobile phones and wearable devices. For self-controllable technology growth, focus on development opportunities in semiconductors, autonomous driving, and robotics
• Internet: Leading companies have high dividend + buyback yields, which, as high-cost performance consumption, especially in service-related consumption, benefit from the implementation of policies to boost domestic demand.
• Food and Beverage: Under the stimulus policies to boost consumption, the demand for dining chains and travel chains is expected to improve marginally, thereby driving the consumption demand for upstream and downstream food and beverages. As valuations are already at historical lows, a fundamental recovery at the bottom may drive a double boost in valuations and performance.
• Social Services: Dining stocks have high dividend yields and benefit from policies to boost domestic demand, especially in service consumption. With the recovery of growth in gambling, dividends are expected to increase.
• Automotive and Advanced Manufacturing: The 2025 policy for replacing old cars and home appliances has been introduced, seamlessly connecting with last year's subsidy policies, and this time the scope of subsidies has been further expanded, with expected stimulating effects still to be anticipated. Monthly retail in H1 2025 is expected to maintain high prosperity year-on-year.
• Overseas Industry Chain: Focus on high-quality leading companies for recovery opportunities after the implementation of tariff policies and alleviation of emotional suppression factors. Taking textiles and apparel as an example: leading textile manufacturing enterprises have basically transferred their production capacity overseas, and high-quality supplier resources are scarce and difficult to replace, with corresponding costs being passed on to brand owners. Currently, high-quality targets have high dividend yields.

Author of this article: Zhang Yidong SAC Practitioner Certificate No.: S0190510110012, Source: Zhang Yidong Strategy World, Original Title: "It's Time to Cry and Sow Again - Hong Kong Stock Investment Strategy"

Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk