Two positive signals have emerged! Attraction of Hong Kong stocks is on the rise.

Source: Dongwu Securities Chen Li

Dongwu Securities stated that there is no need to be too pessimistic about Hong Kong stocks at this stage.

Geopolitical Uncertainty

The Chinese economy is on a slow path to recovery. Even though the market is concerned about the withdrawal of macroeconomic data in April, we believe this is within expectations.

From the perspective of corporate profits, we observe the Bloomberg Hang Seng Index consensus expected EPS (Figure 1), which has been adjusted to a new high in the past year since March this year. From the first quarter report this year, there has also been improvement, such as TENCENT, BIDU-SW's first quarter revenue growth year-on-year increased by 11% and 10%, respectively, both exceeding expectations. However, the Hang Seng Index performance has not yet been priced in. Low valuations and low stock prices make Hong Kong stocks attractive enough.

In contrast, we believe that the US economy and US financial markets will have a significant crisis within two months. We still believe that the poor financial half-year report will have a killing effect on the overall US stock market, because all US financial institutions will face pressure from commercial real estate shrinkage and bond investment losses. This will drag down the overall performance of US stocks. It has been proven that a large amount of funds have also begun to leave the United States.

However, does the outflow of funds from the United States mean that Chinese assets will be chosen? We have to admit that overseas capital still has doubts about entering the Chinese capital market, mainly due to misunderstandings of geopolitical information. This also includes, for example, a lack of clear understanding of China's characteristic valuation system, which affects its action rhythm and so on.

Positive signals that favor Hong Kong stock performance have emerged

1. The spread between Hong Kong dollar Hibor and US dollar Libor has narrowed significantly (Figures 3-4), and the Hong Kong dollar has escaped from the weak exchange range (Figure 5), and the liquidity of the Hong Kong dollar has improved significantly. Referring to the strong rebound of Hong Kong stocks from November 2022 to January 2023, the Hong Kong dollar exchange rate is an important indicator.

1. The Hong Kong stock market will further welcome southbound funds. The Hong Kong Stock Exchange will launch the "Hong Kong Dollar-Renminbi Dual Counter Model" on June 19. On the one hand, it omits the exchange step and reduces the risk of exchange rate fluctuations; on the other hand, it provides convenience for mainland funds to invest in the Hong Kong stock market through legal channels. Especially when the AH stock premium rate is around 140 (Figure 6), Hong Kong stocks are obviously attractive.