Don't underestimate the potential for Hong Kong stocks to rise! Why?

In the past month, the Hong Kong stock market has experienced a significant correction, with a drop of over 12% in August. It wasn't until the end of the month when policies provided some support that there was a rebound.

Entering September, CICC International even exclaimed, "The potential upward elasticity of the Hong Kong stock market should not be underestimated!" Why?

In simple terms: low valuation + policy stimulus + limited short selling = high elasticity!

Firstly, CICC International observed that the current dynamic price-to-earnings ratio of the Hang Seng Index is near two standard deviations below the 10-year historical average, indicating that the current valuation of Hong Kong stocks is at a historical bottom.

Secondly, China has implemented a series of policies to stabilize the market:

1. Recent policies to support the real estate market and local debt resolution plans in China have helped support the economy and market sentiment.

2. The exchange rate of the Renminbi is closely related to the performance of the Hong Kong stock market. The recent stabilization of the exchange rate has also led to an improvement in the Hong Kong stock market.

3. Various measures to activate the capital market in the A-share market are expected to have a positive impact on the Hong Kong stock market.

Thirdly, the current level of share buybacks in the Hong Kong stock market is unprecedented:

The scale of share buybacks in 2023 has reached HKD 66 billion, which is equivalent to the total buyback scale of the past three years (2019, 2020, and 2021) combined. This strong buyback activity undoubtedly sends the most direct signal to investors that the current valuation of Hong Kong stocks is extremely attractive.

Fourthly, a significant source of elasticity in the Hong Kong stock market comes from short covering. When sentiment reverses, not only do active funds buy in, but there is also passive buying from short covering, which increases the upward elasticity of the Hong Kong stock market.

From the perspective of short covering, the current level of short positions in the Hong Kong stock market is relatively low, indicating that there is still significant potential for upward elasticity. Although the proportion of short positions relative to the total market value of Hong Kong stocks has declined significantly, reaching a low level since 2017, the proportion of short positions to trading volume remains at a historical high due to recent trading volume contraction. Moreover, the weak liquidity environment in the Hong Kong stock market will strengthen the potential for short covering.

This means that with extremely low valuations and the implementation of strong policies, the upward elasticity of the market should not be underestimated.