After A-shares broke through the 3,800-point level, upward momentum has significantly weakened, leaving the market divided on whether to continue rising or enter a correction phase.

However, during this critical period, international investment banks remain firmly bullish.

Goldman Sachs stated that a "major driving force" behind China's stock market rally remains retail investors with substantial savings. Investor sentiment has significantly improved, and Chinese stocks still have room for further gains.

JPMorgan also noted that from July 2025 to the end of next year, approximately 2.5 trillion yuan in additional savings could flow into Chinese stocks, potentially driving share prices up by more than 20%.

Recently, Goldman Sachs' strategist team raised their year-end target for the CSI 300 Index.

As previously mentioned, this A-share rally is far from over. The current phase hasn't concluded yet, and after some adjustment, continued index advancement is highly probable. However, after September, the index rebound will enter a deeper phase where the best performers have already risen, and the market will face tougher challenges. Two important market changes will become more evident:

First, single-direction rallies will become rare, with wave-like upward movements becoming the norm.

Second, sector rotation will be very pronounced, with previously high-performing stocks entering correction phases while previously undervalued stocks may experience catch-up rallies.

Hong Kong stocks have clearly underperformed A-shares over the past two months, yet Hong Kong stocks are not inferior to A-shares in terms of listed company quality or valuations.

The Federal Reserve's first rate cut this year in September is already a foregone conclusion. The Fed acts like the main valve for the world's largest water source. Rate cuts are equivalent to opening this main valve slightly, making water more abundant and cheaper. Compared to A-shares, Hong Kong stocks are more like a completely open pool directly connected to the ocean (global markets), with thick, large pipes and no obstructions.

Additionally, the Hong Kong dollar operates under a linked exchange rate system with the US dollar. When the US cuts rates, Hong Kong dollar rates follow suit, reducing exchange rate volatility risks and providing greater confidence for international investors.

Therefore, Fed rate cuts are extremely positive for Hong Kong stocks, as capital flows directly in, causing the water level (stock market) to rise rapidly. This is particularly beneficial for innovation-driven pharmaceutical companies that rely heavily on financing, as it directly reduces their financing costs and stimulates research and development activities.

This year, innovative drug concepts have performed exceptionally well. For instance, the Hang Seng HK Connect Innovation Drug Select Index tracked by the HK Connect Innovation Drug ETF (520880) surged 115.29% as of September 1st. Despite this performance, "Hong Kong innovative drug" valuations remain in reasonable territory, with a PE ratio of 38x, positioned only at the 40th percentile, suggesting further upside potential.

The logic is straightforward. Based on innovative drug companies' first-half "report cards," commercialization of innovative drugs has shown clear effectiveness. Some leading innovative drug companies have reached the breakeven point, and the industry is gradually entering a performance-supported phase. In popular technology tracks such as ADC, bispecific antibodies, and cell therapy, companies have established competitive advantages.

Notably, on September 8th, revisions to the Hang Seng HK Connect Innovation Drug Select Index methodology officially took effect. This index now excludes companies with primary businesses in CXO (pharmaceutical outsourcing), becoming a 100% pure innovative drug index.

After removing pharmaceutical outsourcing service providers, all newly introduced constituent stocks are innovative drug R&D companies, offering higher purity and more accurately reflecting the innovative drug industry, bringing greater opportunities for the HK Connect Innovation Drug ETF (520880).

Although market trading volumes have significantly expanded this year, retail investors with substantial savings will continue to be a major driving force for future market movements. As ETFs become increasingly popular, more investors are entering the market through ETFs, not only avoiding individual stock risks but also lowering entry barriers (such as for STAR Market and Hong Kong stocks), providing opportunities to participate in Hong Kong stocks and STAR Market through ETFs.

As of September 8th, southbound capital has accumulated a net inflow of 1.0288 trillion Hong Kong dollars this year, significantly exceeding last year's full-year net inflow. Although Hong Kong stocks have underperformed A-shares over the past two months, astute investors have already positioned themselves ahead of time. Since entering September, market style has shown signs of rotating toward Hong Kong stocks, with Hong Kong stocks beginning to outperform A-shares, filling investors with anticipation:

This year has seen Hong Kong stock rallies followed by A-share rallies, so will we now see another rotation back to Hong Kong stock rallies? Time will tell.

Note: This article represents only personal views. Short-term fluctuations do not predict future performance. Any mention of individual stocks or funds does not constitute investment advice. Investment requires caution!

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