Despite recent weakness in the Hang Seng Tech Index, we firmly believe the downturn is primarily driven by a sharp liquidity shock, while the fundamental strengths and core investment thesis for Hong Kong's tech sector remain intact. From a liquidity perspective, the peak of overseas liquidity pressures appears to have passed, making "buying the dip" an effective strategy. Valuation-wise, the discount of Hong Kong tech stocks relative to their A-share counterparts is near historically extreme levels, suggesting a potential rebound is imminent. Regarding industry trends, a flourishing ecosystem of large AI models is developing steadily. Looking ahead, accumulating positions during dips and holding through the holiday period may prove to be effective tactics.
Core Arguments ⚑ Unwavering Confidence in Hang Seng Tech: The recent significant decline in Hong Kong's tech sector, represented by the Hang Seng Tech Index, has fostered a climate for various pessimistic narratives. Following a brief liquidity shock, sentiment has turned extremely negative across aspects from regulation to industry trends. However, we see substantial allocation value in the Hang Seng Tech Index at its current level. Firstly, the recent market volatility is merely a severe liquidity shock. Secondly, there is nothing new under the sun; the current market turbulence is essentially similar to that of November 2025. Finally, looking forward, positive factors are accumulating.
⚑ 1. Overseas Liquidity – The Peak Shock Has Passed. Recent liquidity pressures stemming from the "Warsh trade" led to a sharp sell-off in Hong Kong stocks. However, looking ahead, this short-term shock is expected to gradually subside. On one hand, in the current environment, the Federal Reserve faces significant obstacles to quantitative tightening, making a substantive reversal of the weak US dollar narrative unlikely; recent moves are more likely short-term disruptions. On the other hand, the impact of this Warsh trade episode has primarily remained at the micro level, representing a correction after previous anticipatory bets on loose liquidity and "short cash" trades, and has not yet caused a systemic liquidity shock to financial markets. Once the US dollar index begins to decline and enters a downward trend, Hong Kong stocks will significantly benefit from improving liquidity expectations.
⚑ 2. Domestic Liquidity – Disturbances from Mutual Funds' Overweight Positions in HK Stocks are Easing. Domestic mutual funds' allocations to Hong Kong stocks significantly exceeded their benchmark weights, creating substantial selling pressure, which was a key narrative during the headwinds for Hong Kong stocks at the end of 2025. Currently, this headwind narrative has been greatly alleviated, as the scale of mutual funds' overweight positions in Hong Kong stocks has shrunk considerably. Looking forward, net selling driven by benchmark overweights may be coming to an end.
⚑ 3. Valuation – Relative Valuations for HK Tech Sector Hit Historic Lows. Measuring the A-H premium for the tech sector using the Hang Seng Tech Index versus the A-share STAR 50 and ChiNext indices shows it is currently near historical extremes, with previous lows seen in March 2022, October 2022 (during rapid foreign capital outflows), and late 2023 (during gaming regulations). The current regulatory environment for internet companies and the economic development backdrop are significantly better than in 2022 and 2023. Against the backdrop of rapid AI development and national emphasis on technological advancement, Hong Kong tech stocks are clearly significantly undervalued. Looking ahead, the risk-reward ratio and probability of success for going long on Hong Kong tech stocks are both high.
⚑ 4. Capital Demand – Strict IPO Sponsorship Quality Controls Boost Market Sentiment. Tightening controls on IPO quality should help improve market sentiment to some extent, as excessive IPOs had previously become a consensus narrative explaining Hong Kong's weak market performance. However, we believe there is no necessary link between IPOs and market performance; the dynamic often plays out as "market performance creates fundamentals." Hong Kong IPOs are characterized by being pro-cyclical, having a weak correlation with broad market moves, featuring liquidity stratification, and attracting foreign capital. In the long run, a supply of high-quality companies will benefit the market's healthy development.
⚑ 5. Fundamentals – HK Fundamentals Remain Solid, Earnings Expectations Stabilize. The recent divergence between the performance of the Hang Seng Index and the Hang Seng Tech Index corresponds to a divergence in their recent earnings expectation trends. Overall, earnings expectations for the Hang Seng Index have been gently revised upwards recently, explaining its relative resilience. Earnings per share (EPS) expectations for the Hang Seng Tech Index have been consistently downgraded since September but have now begun to stabilize, indicating that current stock prices have likely factored in this phase of earnings estimate reductions.
⚑ 6. Industry Trends – Smooth Progress on Multiple Fronts, Proliferation of Large Models. From an industry progress standpoint, there are continuous positive catalysts for Hong Kong's tech sector. Recently, Tencent and Alibaba both heavily promoted their large models during the Spring Festival period; Kuaishou's Kling exceeded annualized ARR expectations; and DeepSeek may release its latest V4 large model during the holiday period.
Risk Warning: Economic data may fall short of expectations, policy interpretations might be incomplete, and overseas policies could tighten beyond expectations.