Shenwan Hongyuan Group Co.,Ltd. has released a research report stating that the main reason Hong Kong stocks saw "value clearly outperform growth" in 2026 was the double hit to both earnings and valuations in the technology sector. Looking ahead to 2027, the prevailing wind of global trading themes may shift, and Hong Kong stocks have room for mean reversion: pressure on the liquidity "drainage side" (refinancing and share reductions) is expected to ease, the low base effect formed by downward earnings revisions in technology growth stocks will be concentrated in the first half of 2027, and over the past decade Hong Kong stocks have never experienced two consecutive years of valuation compression.

Structurally, upward earnings expectation revisions are concentrated in financials, resource commodities, and hardware industries, among which raw materials, non-bank financials, and semiconductor sectors have yet to see their share prices catch up with earnings upgrades; the current Hang Seng Tech ERP once climbed to a level close to that of April 2025, market sentiment is already quite pessimistic, and if existing short positions loosen, this could become the first round of capital inflow driving a market reversal. Based on ERP model calculations, under a neutral scenario the Hang Seng Index's potential return in 2027 is approximately 14.62%; under an optimistic scenario the return could reach 33.24%; under a pessimistic scenario it would be -7.28%. The main views of Shenwan Hongyuan Group Co.,Ltd. are as follows:

Against the backdrop of a receding US dollar tide, the positioning of Hong Kong's financial market is expected to undergo a systematic restructuring. Intercepted by the "three gates" of long-term damage to the US dollar's creditworthiness, tariffs driving a wedge into the global dollar circulation, and the systematic contraction of Asia-Pacific PE long-term capital, the dollar liquidity that Hong Kong's financial market has long relied upon is on a trend of receding, and the currency structure of participants in Hong Kong's financial market is bound to undergo major changes. The offsetting force lies in the deep participation of the renminbi: the renminbi's international payment share has now reached 6-7%, but its share in reserves and bond denomination is only 1-2%. The bottleneck of "able to spend but unable to invest" is being broken through multiple channels including dim sum bonds, RMB trading counters, government bond futures derivatives, and mutual market access, with offshore and onshore renminbi jointly reshaping the Hong Kong market. In addition, the Hong Kong stock market can also play an important role in mainland Chinese capital's long-term pursuit of high-yield assets: on one hand, the cost-effectiveness of Hong Kong dividend assets remains outstanding, the long-term allocation of onshore renminbi has not ended, and there is room for convergence in the price gap of small-cap dividend stocks; on the other hand, the asset pool of the Hong Kong stock market is becoming increasingly rich against the backdrop of various listing system reforms and efforts to attract foreign companies to list and be included in Stock Connect. As a market that can simultaneously reach international and mainland capital, Hong Kong stocks' dual hub value of "bringing in and going out" is expected to continue strengthening, with the issuance of cross-market ETFs and their inclusion in Stock Connect being the latest manifestation of this value.

The overall liquidity environment of the Hong Kong stock market in 2027 is expected to be better than this year. On the "drainage side" of capital demand, the "drainage effect" of IPOs is more of a short-term subscription capital disturbance; the important driver behind trading volume nearly doubling in 2025-2026 compared to 2021 is precisely the trading contribution of newly listed companies, and new stocks and old stocks are not a zero-sum game. Historically, an increase in lock-up expiry scale alone has almost no systematic impact on broad-based indices, with pressure mainly manifesting at the individual stock level. The real suppressing factors are refinancing and share reductions — refinancing once approached historical highs this year, the combination of "large-scale refinancing plus small-percentage equity dilution" puts the greatest pressure on the market, and the rise in substantive share reductions by major shareholders is an important factor behind the tightening of Hong Kong's liquidity environment this year. On the "supply side" of capital provision, although the overall buyback scale this year has not returned to historical highs, the number of companies conducting buybacks this year has hit a record high, with broader participation than in 2024, and historically the timing significance of the number of buyback companies indicator is notably superior to buyback amounts. Overall, since July 2026 the "buyback-financing-share reduction" differential has clearly converged, shareholder return scale during the year still slightly leads market financing, and the overall capital supply-demand structure remains superior to the two cycles of 2017-2018 and 2020-2021. As the IPO break-issue rate has recently risen somewhat, it is expected that the overall financing scale of Hong Kong stocks in 2027 may decline, and combined with lock-up expiries peaking in January 2027 and then falling back, pressure on the drainage side is expected to ease.

Regarding incremental capital: southbound capital saw net inflows of around HK$400 billion during the year, and the annual trading proportion declined for the first time since the launch of Stock Connect. Although public fund allocation to Hong Kong stocks passively rebounded to 10.8% in the third quarter, it remains at a low level, and institutional investors participating in Hong Kong technology growth sectors through ETFs also significantly reduced positions during 2026. The recent return of overseas capital has mainly been short-term tactical capital such as ETFs, while medium- and long-term capital has not yet turned bullish. It is worth noting that the current short-selling trading proportion and outstanding short positions are both at historical highs, and if a reversal occurs subsequently, short squeeze trading is expected to become an important source of capital driving the market higher.

Fundamentals and valuations are expected to recover in tandem. On the earnings side, this year the Hang Seng Index EPS remained relatively stable while Hang Seng Tech EPS continued to be significantly revised downward — initially mainly due to involutionary competition eroding profits, and currently shifting to the erosion of net profits from elevated Capex under the AI hardware investment wave. The resulting low base effect will significantly boost the year-on-year earnings growth rate of Hong Kong stocks in 2027 (especially in the first half), and the earnings elasticity of Hang Seng Tech is expected to be far higher than that of the Hang Seng Index. Going forward, the key focus will be on internet platform capital expenditure and domestic demand improvement. On the valuation side, the Hang Seng Index valuation metrics that appear to have high historical percentiles on the surface cannot represent the true historical valuation percentile of the overall Hong Kong stock market, because the systematic repricing of the high-dividend sectors with higher weights in the Hang Seng Index since 2023 has actually lowered the central fluctuation level of the index ERP — if this repricing is restored, the current theoretical Hang Seng Index ERP is approximately 7.4%, so it would be one-sided to assert that Hong Kong stocks overall are "not undervalued" based solely on broad-based valuations. Looking at the Hang Seng Tech Index alone, its valuation and earnings have undergone synchronous sharp downward revisions, and the ERP recently even approached the high level of April 2025, highlighting valuation cost-effectiveness. This year's valuation compression has been a universal phenomenon across large-, mid-, and small-cap stocks, indicating that the suppression comes more from beta-level risk appetite and liquidity. Moreover, over the past decade Hong Kong stocks have not experienced two consecutive years of valuation compression; in the years following the three valuation-compression years of 2018, 2021, and 2023 (2019, 2022, and 2024), valuation recoveries all occurred. Based on ERP model calculations, under a neutral scenario the Hang Seng Index's potential return in 2027 is approximately 14.62%; under an optimistic scenario the return could reach 33.24%; under a pessimistic scenario it would be -7.28%.

Risk warnings: Domestic macroeconomic conditions weaker than expected, with the real estate and consumer markets remaining persistently weak; the trend of industry involution continuing, affecting the operations and profitability of related weighted companies and thereby dragging down overall market performance; risks from overseas financial markets such as AI investment spreading to Hong Kong stocks; geopolitical risks causing a rapid rise in global risk-aversion sentiment, with large fluctuations in some financial asset prices transmitting to other financial markets and causing liquidity crises; intensified renminbi exchange rate volatility, and new restrictive policies introduced by foreign countries on investment, reducing overseas investors' willingness to allocate.