Optimism prevails! Can the Hong Kong stock market rebound continue?

Last Friday, overseas Chinese-funded stock markets rebounded significantly driven by positive progress on the US debt ceiling issue and market expectations for stronger positive policies domestically. After the market clearly entered the oversold zone and risk premiums were already high, short-covering trades may have been the main driver of the market's rapid rebound.

Such a strong rebound has eased the pessimistic sentiment that has been looming in the market recently and once again verified CICC's previous judgment that the market has downside protection and has received effective support near the Hang Seng Index's 18,000 point level.

However, the question that needs to be answered now is how sustainable this round of rebound will be.

On the one hand, CICC believes that the market has good downside protection at this level. Although the urgency of introducing a new round of large-scale stimulus measures at the domestic policy level is not very high in the short term, the combination of policy expectations continuing their past practice of preventing downside risks and the high probability that the Fed's monetary policy will not further accelerate tightening is still sufficient to provide downside protection for the market.

In addition, after the previous sharp decline, the Hong Kong stock market has already shown obvious oversold signs in multiple dimensions such as the RSI oversold indicator and the proportion of short-selling transactions. At the same time, the overall market such as the Hang Seng Index has already fallen below book value (less than 1x P/B), and HSI state-owned enterprises have fallen below 0.9x P/B, all of which indicate that the market has incorporated a lot of pessimistic expectations. Therefore, the risk-return ratio of the current level of the market is indeed attractive.

On the other hand, CICC also believes that the premise for the market to open up greater upside space is still more positive growth prospects, which is also the main driving force for attracting overseas capital inflows. Although the extremely low valuation level is sufficient to provide downside protection for the market, it is difficult to open up the market's upside space. If the market wants to completely get rid of the range-bound trend since March, a more optimistic economic growth outlook is still an essential condition. The improvement of the economic growth outlook depends on the opening of the credit expansion cycle.

In other words, if new driving forces for the market emerge (it is expected that relaxation of real estate policies and government leverage may be key measures), the market's upside space is expected to be greater, thereby attracting overseas capital inflows and RMB appreciation (which also explains why the market was so sensitive to policy expectations last Friday). Otherwise, the market may continue its range-bound pattern.Under this background, CICC suggests investors:

1) Trading volatility, that is, buying on dips when the market is oversold, and taking profits when the expectation is relatively sufficient;

2) Trading structural opportunities, adopting a "dumbbell-shaped" strategy (state-owned enterprises with potential to increase dividend ratios + growth sectors such as the Internet and technology; the healthcare sector may benefit from the greater flexibility after the Fed's easing shift).