Following nearly half a year of adjustments, the Hong Kong stock market has experienced a rebound since July 8th. The Hang Seng Index has firmly established itself above the key 24,000-point level, while the Hang Seng Tech Index recorded its second-largest single-day gain since 2026. The technology sector, including AI industry chains, semiconductors, and cloud computing, has consistently led the gains. Industry experts believe the rebound was triggered in July by a confluence of factors, including a significant policy signal from the central bank to increase foreign reserve allocations to Hong Kong assets, sustained inflows of foreign capital, and the pressure from high short positions leading to covering.
Looking back at the first half of the year, the performance of Hong Kong's major market indices was lackluster, with a pronounced "K-shaped divergence" in market trends. Institutions widely note that current Hong Kong stock valuations remain at historically low levels, and signs of a bottoming in corporate earnings expectations are emerging. Multiple themes, including the AI industry chain, resource commodities, the overseas expansion of innovative drugs, and the reshaping of global supply chains, are expected to form the main drivers for earnings recovery, suggesting the valuation repair in Hong Kong stocks may continue.
Hang Seng Index Returns Above 24,000 Points, Tech Sector Leads Broad Rally
On July 9th, the Hong Kong market consolidated following the previous day's strong gains. By the close, the Hang Seng Index edged down 0.70% but remained above 24,000 points, while the Hang Seng Tech Index inched up 0.01%. Notably, Hong Kong-listed chip stocks advanced in the afternoon session, with Smart-Core Holdings surging 27%, Gigadevice rising 21%, Montage Technology gaining 19%, and Semiconductor Manufacturing International Corporation climbing over 10%.
The rebound on July 8th marked a long-awaited upturn for the market after nearly six months of adjustment. The three core indices closed higher collectively. The Hang Seng Index jumped 2.99% to close at 24,199.46 points, gaining 702.57 points intraday and reclaiming the 24,000-point milestone. The Hang Seng Tech Index performed particularly strongly, closing at 4,731.02 points with a gain of 4.97%, marking its second-largest single-day closing gain since 2026. Market activity surged significantly, with the total turnover for Hong Kong stocks reaching HK$3,758.35 billion for the day.
From a sector perspective, the technology sector in Hong Kong has recently exhibited a pattern of "broad-based gains with leadership." Over the two trading days of July 8th and 9th, major internet heavyweight Alibaba Group Holding Ltd (9988.HK) closed up 12.56%; Xiaomi Corp (1810.HK) rose 7.39%, while Baidu Inc (9888.HK) and Tencent Holdings Ltd (0700.HK) both gained over 3%, and JD.com Inc (9618.HK) advanced over 2%. The AI industry chain was particularly prominent, with large-model concept stocks collectively surging; Zhipu AI soared 32.81% over the two days, and SenseTime Group Inc (0020.HK) rose nearly 3%. The semiconductor sector also strengthened, and the cloud computing segment led gains, with Kingdee International Software Group Company Ltd (0268.HK) up 8.57% and Kingsoft Cloud Holdings Ltd (3896.HK) rising 14.02%.
It is noteworthy that southbound capital has shown a clear trend of returning in July. Data shows that in the first six trading days of July, cumulative net purchases by southbound funds exceeded HK$47.6 billion, far surpassing the HK$27.1 billion for the entire month of June. For the year, southbound funds recorded only a slight net sell-off of HK$3.5 billion in May, with net purchases exceeding HK$20 billion in all other months.
Concurrently, after experiencing sustained net outflows in the first half of the year, Hong Kong stock ETFs have also shown clear signals of capital returning since early July, with significant inflows into ETFs tracking sectors like the Hang Seng Tech Index and innovative drugs. Data indicates that four Hong Kong stock ETFs, including the ChinaAMC Hang Seng Internet & Technology ETF, E Fund Hang Seng Hong Kong Stock Connect Innovative Drug ETF, E Fund Hang Seng Tech ETF, and ChinaAMC Hang Seng Tech ETF, saw their combined assets under management grow by over 1 billion yuan in the most recent week.
Pressure from K-Shaped Divergence in First Half, Multiple Tailwinds Converge in July
Reviewing the first half, the overall performance of the Hong Kong stock market was weak. Data shows the Hang Seng Index and Hang Seng Tech Index fell 10.73% and 18.92%, respectively, cumulatively in the first half. Sector-wise, the market exhibited a "K-shaped divergence": industry indices for semiconductors/chips and electronic components rose over 50% in the first half; while traditional internet and consumer sectors remained under pressure, with industry indices for internet technology, non-ferrous metals, and culture & entertainment falling over 30%.
Southern Asset Management noted that the Hang Seng Tech Index fell over 8% in June alone, with the Hong Kong Stock Connect Internet Index dropping more than 13%, pushing sector valuations to rare lows not seen in nearly five years. This sharp decline was attributed more to a confluence of external pressures: persistent market disturbances from overseas expectations of the Federal Reserve tightening liquidity; a slower-than-expected recovery pace in domestic consumer spending; and the siphoning of liquidity originally destined for Hong Kong stocks by the intense popularity of the A-share hard-tech theme.
Entering July, market sentiment in Hong Kong has seen a significant reversal. Industry insiders state that the shift in the Hong Kong market is also due to multiple factors resonating.
A strong policy signal has significantly boosted market confidence in Hong Kong's medium- to long-term development. On July 7th, Pan Gongsheng, Governor of the People's Bank of China, stated at the Hong Kong Fixed Income & Currency Summit and Bond Connect Forum that the country's foreign exchange reserves will continue to increase the proportion of asset allocation in Hong Kong, injecting more momentum into the development of Hong Kong's capital markets.
On the liquidity front, against the backdrop of significant pullbacks in highly crowded U.S. memory stocks and Korean equities, a wave of foreign capital is continuously flowing back into the Hong Kong market. Research from CITIC Securities shows, based on calculations using Hong Kong Exchanges and Clearing's central clearing data, that since May 8, 2026, foreign capital has cumulatively flowed into the Hong Kong stock market to the tune of HK$75 billion, reversing the sustained outflow trend seen before May. Simultaneously, the ratio of outstanding short-selling value to total market capitalization in Hong Kong has continued to rise, reaching a historical high of 2.43%. It is anticipated that incremental fund inflows will trigger short-covering and drive the market rebound.
Furthermore, valuations in the historical bottom region provide a solid safety cushion for Hong Kong's rebound. According to China International Capital Corporation (CICC) estimates, the current dynamic P/E ratio for the Hang Seng Index is 9.7 times, at the 18.6th percentile over the past decade; the Hang Seng Tech Index valuation is even lower, with a current dynamic P/E of 15.1 times at the 13.7th historical percentile, already below one standard deviation of its historical average. Valuations for some heavyweight individual stocks have already reached historical bottoms. Taking Tencent Holdings Ltd (0700.HK) as an example, its current dynamic P/E of 11.2 times is the lowest since 2010.
Bottoming Valuations Coupled with Multiple Catalysts, Recovery Window May Extend
Looking ahead for the Hong Kong stock market, industry insiders indicate that despite a round of rebound, current market valuations remain at historical lows. Concurrently, corporate earnings expectations are showing signs of bottoming, with negative factors largely priced in. From a medium- to long-term perspective, the attractiveness of Hong Kong stocks as offshore renminbi assets remains solid. The main themes for earnings recovery include AI applications, resource commodities, the overseas expansion of innovative drugs, and the reshaping of global supply chains.
"Looking back at the starting point of this rebound, early July was a key inflection point. In June, the Hang Seng Tech Index fell over 8% for the month, and the Hong Kong Stock Connect Internet Index dropped over 13%—valuations for the sector were lower than almost any time in the past five years," said Wang Xin, portfolio manager of the Southern Hong Kong Stock Connect Internet ETF at Southern Asset Management. He noted that this valuation compression was not due to deteriorating fundamentals but resulted from multiple external pressures: expectations of overseas liquidity tightening, a slower-than-expected recovery pace in domestic household credit, and the extreme crowding in the A-share AI hardware theme which absorbed the vast majority of market liquidity. Hong Kong internet stocks, as one of the most liquidity-sensitive assets, were severely suppressed in this "siphoning effect." After this rebound, valuation percentiles have recovered somewhat but still reside in a historically low range.
CITIC Securities also stated that recent market performance suggests the painful bottom is likely past. The bottom for corporate earnings expectations is stabilizing: after rapid downward revisions following the annual report season, the bottom-up calculated earnings expectations for the Hang Seng Composite Index are showing signs of bottoming. The earnings growth expectation for 2026 has fluctuated around 10% over the past month, indicating negative expectations have been largely priced in.
"From a long-term perspective, we are optimistic about the attractiveness of Hong Kong stocks as offshore renminbi assets. Hong Kong stocks serve as the offshore pricing window for Chinese assets to global capital, with valuations more deeply influenced by U.S. dollar liquidity, thus possessing greater elasticity when U.S. dollar and U.S. Treasury pressures ease," said China Securities Co., Ltd. (CSC). They added that earnings expectations are the most critical turning variable for Hong Kong stocks transitioning from weakness to strength over the medium to long term. Amid the AI wave, Hong Kong stocks' role in the AI industry chain leans more towards the application side on the earnings front, with limited short-term profit contribution so far, but opportunities exist on the application side. Beyond AI applications, resource commodities benefiting from global supply constraints and emerging market capital expenditure, pharmaceuticals/biotech benefiting from innovative drug出海 and improved R&D efficiency, and manufacturing出海 benefiting from the reshaping of global supply chains will collectively form multiple strands for earnings recovery.