Hong Kong stock policies and sentiments hit rock bottom! Why is the market still able to hold on?

This article is sourced from Zhongjin Company Liu Gang, Zhang Weihan Team

Affected by factors such as the Federal Reserve's hawkish stance, the overseas Chinese capital market continued its weakness last week. However, this situation reversed on Friday, which is related to investors' expectations of further domestic policies, including the widely discussed stabilization fund and the relaxation of the foreign shareholding limit in A-shares. In addition, the progress in Sino-US relations may also provide positive catalysts.

Against this background, the Hang Seng Index regained the 18,000-point level on Friday, once again confirming Zhongjin's judgment that there is a bottom in the market and the Hang Seng Index has reliable support near 18,000 points, which has been repeatedly verified this year.

It is obvious that we are currently at a "policy bottom," not only because more supportive policies are expected to be continuously introduced and promoted, especially optimization measures related to real estate, which are the main focus and truly targeted policies that Zhongjin has been emphasizing to break the current market deadlock. The continuous introduction of policies in the recent period is also consistent with Zhongjin's expectation that there will still be a need for more policies.

Among them, one noteworthy change last week was the relaxation of the local household registration housing purchase restriction policy in Guangzhou. Although this measure is still reserved to some extent, as it does not involve certain core areas, it has more symbolic significance as the first-tier city where changes have occurred.

However, compared with the market's expectation of a comprehensive and transparent approach, Zhongjin still believes that the policies to be introduced may adopt a "gradual" approach, not only to leave room for future policy adjustments, but also to avoid the risk of following the old path too much.

Looking ahead, the market expects whether Beijing, Shanghai, and Shenzhen can follow in the footsteps of Guangzhou and make partial adjustments to the housing purchase restriction. Zhongjin believes that similar measures are crucial for an active real estate market, which can generate expected positive feedback and even help restore short-term growth.

In addition to the "policy bottom," there were also signs of bottoming out in market sentiment last week. For example, the daily turnover of A-shares on Wednesday and Thursday last week was below 580 billion yuan, the lowest level since November last year. The turnover of the main board of the Hong Kong stock market was also sluggish, with three consecutive days from Tuesday to Thursday last week with a turnover below 80 billion Hong Kong dollars, which is significantly lower than the average daily level of around 110 billion Hong Kong dollars since the beginning of the year.

According to CICC, the market typically goes through several stages when it truly emerges from the bottom, namely policy bottom, sentiment bottom, market bottom, fund flow bottom, and profit bottom. Recently, there have been some signals at the policy and sentiment levels that indicate a bottoming out, and the sequence of these signals is consistent with expectations. However, in order to completely reverse the current trend and break through to the upside, more targeted policies need to be implemented. It is recommended that investors closely monitor these targeted measures, such as the optimization of real estate policies in first-tier cities and increased central government spending.

On the external front, the latest stance of the Federal Reserve is more hawkish than the market had imagined, which may have a short-term or sustained impact on market performance. Although the FOMC meeting in September paused interest rate hikes and kept the benchmark interest rate at 5.25-5.5%, which was in line with market expectations, the dot plot showed a slower and later path of rate cuts than the market had expected. The terminal rate for 2024 was raised from 4.6% (implying 4 rate cuts) to 5.1% (implying 2 rate cuts), which is more hawkish than the market had anticipated, with CME rate futures expecting 3-4 rate cuts starting around June to July 2024.

In response, the Federal Reserve significantly raised its economic forecasts for the next two years (GDP was revised up from 1.0% and 1.1% to 2.1% and 1.5% respectively). Against this backdrop, the 10-year U.S. Treasury yield surpassed 4.5% for the first time since 2007, and the U.S. dollar index also broke through 105, suppressing global market sentiment.

In summary, CICC reiterates its previous view that the market has a bottom and a top, and future market performance depends on the implementation of more concrete and effective policy measures. In terms of allocation, the dumbbell structure allocation strategy remains effective in the current environment. Stable cash flow sectors (with high dividend ratios, such as telecommunications, utilities, and energy) have continued to be sought after by the market and fund flows recently, although there may be some profit-taking. However, CICC believes that they still have long-term investment value.

Sectors expected to benefit from improved cash flow (sensitive to economic growth recovery or policy support, such as automobiles, durable consumer goods, technology, and some internet-related sectors) may have more certainty in a weak growth recovery environment. At the same time, investors are advised to pay attention to areas that benefit from policy optimization, such as discretionary consumption and resource sectors with supply constraints.