The market can be more optimistic now! Hong Kong stocks are expected to rise in September, where is the rationale?

After experiencing a volatile correction in August, the Hong Kong stock market finally saw its first major surge in September, stimulated by the new policies in the Chinese real estate sector!

According to CITIC Securities, policy expectations have become the dominant factor influencing the performance of the Hong Kong stock market since the third quarter. In mid-August, the slower-than-expected progress in policy implementation led to a decline in the Hong Kong stock market. However, since August 25, the concentrated introduction of a series of policies has once again boosted market confidence.

Does this mean that there is hope for the Hong Kong stock market in September?

The above-mentioned securities firms believe that looking ahead, the stabilization or reversal of the renminbi exchange rate and the gradual manifestation of the lagging effects of monetary tightening on US economic activities, combined with the gradual introduction of domestic growth-stabilizing policies and the phased improvement of Sino-US relations, will become the driving forces for the upward trend of the Hong Kong stock market in September. Furthermore, the lagging effects of US monetary tightening are expected to further increase the relative allocation value of Hong Kong stocks!

CITIC believes that the current outlook for the Hong Kong stock market can be more optimistic, and it recommends that investors focus on two main themes:

1. Industries that benefit from the concentrated implementation of the policy "combination punch," including the real estate industry chain, finance, and consumer sectors;

2. Growth sectors that are expected to benefit from the return of foreign capital to the Chinese market, including internet leaders, new energy vehicles, and oversold biotechnology.

Focus One: Stabilization or Reversal of the Renminbi Exchange Rate and the Pessimistic Expectations of Foreign Capital

Due to factors such as the continuous monetary tightening by the Federal Reserve, geopolitical frictions, and the slower-than-expected domestic economic recovery, the renminbi exchange rate since the Spring Festival has raised concerns among some investors about the continuous outflow of foreign capital from Chinese assets.

From the perspective of the US dollar itself, CITIC believes that the rebound of the US dollar index since mid-July has already fully reflected the strong economic growth in the United States in the third quarter and the expectation of continued monetary tightening by the Federal Reserve in the future.

Considering the recent exchange rate stabilization operations by the People's Bank of China, the expectation of renminbi appreciation, and the assumption that the US dollar may weaken, it is expected that global funds may reverse the recent trend of continuous outflow from renminbi assets.

Looking back at the stages of the renminbi-to-dollar exchange rate rebound since 2015, the interval between the turning point of the exchange rate and the temporary inflow of foreign capital did not exceed one month. According to CITIC's calculations of custodial funds, the proportion of foreign capital holdings in August also fell sharply by 0.6 percentage points to 75.5%. Growth sectors such as the internet, internet healthcare, biotechnology, and pharmaceuticals all experienced significant reductions in foreign capital holdings during the period of significant outflow in August.

Considering that the foreign capital holdings in these sectors are still relatively high, CITIC believes that these growth sectors are more likely to benefit from the return of foreign capital after the stabilization of the renminbi exchange rate.

Focus Two: The Gradual Manifestation of the Lagging Effects of US Monetary Tightening on the Economy

Looking back at the three complete interest rate hike cycles in the United States since 1999, the lagging interval for the inflection point of the unemployment rate to turn upward after the initial rate hike was 11 to 50 months; for the inflection point of the manufacturing PMI to turn downward, it was 5 to 21 months, while for the inflection point of the services PMI, it was 6 to 22 months. Finally, the lagging interval for the consumer confidence index to reach a temporary high point and start declining was 6 to 27 months.However, the longest lag in the above intervals occurred during the monetary tightening period after the US subprime mortgage crisis, showing a clear "long and variable" characteristic. The latest round of interest rate hikes by the Federal Reserve has lasted for 17 months, with the turning points of manufacturing PMI and service PMI occurring in the second and fifth months after the initial rate hike, respectively. However, the turning points of consumer confidence and unemployment rate have not yet clearly emerged.

CITIC Securities believes that the prolonged lag of monetary policy after the subprime mortgage crisis is mainly due to the excessive liquidity in the financial system caused by quantitative easing after 2008, which significantly prolongs the lag in suppressing real economic activities.

In addition, the nearly $6.6 trillion fiscal support injected by the US government to cope with the pandemic has further increased the total amount of social savings, prolonging the time lag of monetary tightening in suppressing consumer spending.

However, looking ahead, as US residents gradually deplete their excess savings and the Federal Reserve continues to shrink its balance sheet, CITIC Securities believes that the lagged effects of monetary tightening on US economic activity will gradually become apparent, especially considering that student loan repayments will resume in October this year.