Recent fluctuations in the Hong Kong stock market reflect not only external volatility but also profit-taking behavior among some investors. However, this divergence in expectations presents an investment opportunity for Hong Kong stocks. The U.S. government shutdown is nearing a turning point, and external liquidity expectations have room for upward revision. Multiple positive factors and expectation gaps are expected to be gradually recognized by the market, potentially opening up upside after consolidation.

In terms of allocation, a return to the barbell strategy is recommended—combining offensive positions (AI-related sectors, non-ferrous metals) with defensive holdings (dividend plays and distressed turnarounds).

**Fundamentals & Policy**: Macroeconomic growth continues to slow marginally, but the robust expansion of the new economy, particularly in tech (31.7% H1 earnings growth), provides strong support for equities. On the policy front, signs of easing U.S.-China tensions, including agreements on temporary measures across multiple areas, validate the "rivalry without rupture" outlook. Post the Fourth Plenum, the 15th Five-Year Plan exceeded expectations, with incremental support expected in tech innovation, domestic demand expansion, and macro-control. The central bank’s resumption of treasury bond transactions will enhance monetary policy effectiveness, collectively boosting confidence.

**Liquidity & Valuation**: Foreign and southbound capital inflows remain steady. The Fed cut rates as expected in October, with an additional 25bps reduction anticipated in December, followed by three more cuts in 2024 (totaling 75bps annually). The Fed’s tapering of balance sheet reduction by December will ease liquidity pressures, potentially attracting more overseas funds to Hong Kong stocks. Southbound inflows are resilient, driven by long-term institutional investors and household savings reallocation.

With fundamentals, policy, and liquidity aligning favorably—and Hong Kong stocks trading at historically low valuations—these factors form the core drivers for a rebound.

**Allocation Strategy**: - **Offensive (Tech/Non-ferrous Metals)**: - **AI Chain**: High-growth potential; focus on internet platforms, humanoid robotics, autonomous driving, and power sectors. - **Non-ferrous Metals**: Short-term correction, but supported by a weaker USD, low rates, and liquidity. Gold benefits from central bank demand and safe-haven flows; base metals like copper and aluminum are also noteworthy.

- **Defensive (Dividends/Distressed Turnarounds)**: - **Distressed Turnarounds**: Consumer staples, after four years of challenges, show early signs of supply-demand inflection. Valuations remain in the bottom 30% historically, with industry leaders poised for market share and margin expansion. - **High-Dividend Plays**: The Hang Seng High Dividend Yield Index offers a stable 6% yield. Growing demand from southbound "fixed-income+" products and insurance capital underpins sustained interest.

**Risks**: 1) Fed monetary policy shifts; 2) Sharp liquidity fluctuations; 3) Black swan events.