In 2025, the emergence of DeepSeek sparked a revaluation wave for Chinese assets, with Hong Kong stocks standing out as a bright spot. Looking ahead to 2026, despite lingering uncertainties in the external environment, new opportunities are accelerating—AI innovation continues to unfold, global monetary easing persists, and China’s 15th Five-Year Plan kicks off. Under these converging forces, Hong Kong stocks are poised to rise further and reach new heights.

### 1. Ample Upside Potential in Valuations Hong Kong stocks remain undervalued, offering significant room for appreciation. The market rebounded sharply in 2025 amid improved risk appetite and stabilizing earnings expectations. However, valuations—especially in the tech sector—are still attractive. As of October 23, 2025, the Hang Seng Index trades at 11.9x P/E (TTM), in the 84th percentile since 2012, while the Hang Seng Tech Index’s 23.3x P/E sits at just the 32nd percentile. Globally, Hong Kong’s broad-market valuations lag behind major indices like the S&P 500 (95th percentile) and Nasdaq (88th percentile).

Sector-wise, tech, utilities, and real estate in Hong Kong show lower valuation percentiles (55%, 35%, and 33%, respectively) compared to their A-share counterparts (95%, 65%, and 45%). Similarly, versus U.S. peers, Hong Kong’s real estate, utilities, consumer staples, and tech sectors trade at discounts.

The October pullback—triggered by U.S.-China tariff tensions and geopolitical noise—may be nearing its end, with Hang Seng Tech down 8% month-to-date. High-beta sectors like hardware (-11%) and semiconductors (-9%) led the decline, but the correction has enhanced valuation appeal.

### 2. Strong Inflows: Domestic and Foreign Capital Hong Kong’s 2025 rally was fueled by robust liquidity, including stabilizing foreign outflows and surging mainland inflows.

**Foreign Investors**: After years of underweighting, global funds are showing signs of returning. China’s weight in MSCI ACWI remains just 3.3%, far below its ~20% global economic share. Since mid-2025, long-term foreign inflows reached ~HK$70 billion (May-July) and HK$13 billion (September). With Fed rate cuts likely in 2026, foreign buying could accelerate.

**Domestic Investors**: Southbound flows hit a record HK$1.1 trillion in 2025, driven by mutual funds (attracted by internet and consumer stocks) and insurers (seeking high dividends). For 2026, we project another HK$1.5 trillion in southbound inflows, led by: - Active mutual funds: HK$200 billion - Passive ETFs: HK$200 billion - Insurers: HK$400 billion - Private funds: HK$300 billion

### 3. Scarcity Premium: Unique Hong Kong Assets Hong Kong’s market strength hinges on its unique offerings—internet giants, innovative pharma, and new-economy consumer stocks—unavailable or underrepresented in A-shares.

**AI Tech**: Software/services (55% of Hong Kong tech vs. 24% in A-shares) dominate, with Tencent and Alibaba positioned across the AI value chain. **New Consumer**: Unlike A-shares’ traditional staples (70% weight), Hong Kong’s consumer sector is balanced, featuring trendy names like Pop Mart and Mixue. **Biotech**: Innovative drugmakers and CXOs account for 57% of Hong Kong’s healthcare sector (vs. 31% in A-shares), benefiting from global commercialization. **High Dividends**: Hong Kong’s payout ratios and sector diversity outshine A-shares.

Upcoming listings (e.g., CATL, Hengrui) and U.S.-listed returnees will further enrich Hong Kong’s talent pool.

### 4. 2026 Focus: Tech, Biotech, and Brokers **Tech Leadership**: AI breakthroughs (e.g., OpenAI’s Sora2, DeepSeek-OCR) and policy support (e.g., China’s 「AI+」 action plan) favor Hong Kong’s tech heavyweights. Valuations remain reasonable post-correction, with earnings poised for AI-driven growth.

**Biotech Breakout**: China’s pharma innovators are commercializing globally, with BD deals surpassing $100 billion. Fed easing could amplify upside.

**Brokerage Boom**: Surging turnover (166% YoY in Q3 2025) and financial innovation will drive earnings for Hong Kong brokers.

*Risks*: Slower policy stimulus, trade tensions, or delayed Fed cuts could disrupt momentum.