China Merchants Securities has released a research report stating that while the Hang Seng Tech Index has shown weak performance recently, the firm firmly believes this is due to a severe liquidity shock. The fundamental outlook and the rationale for a bullish stance on Hong Kong-listed tech stocks remain unchanged. From a liquidity perspective, the peak of the overseas liquidity shock has passed, making "buying the dip" an effective strategy. Regarding valuation, the current discount of Hong Kong tech stocks relative to their A-share counterparts is near historically extreme levels, suggesting a potential rebound is imminent. In terms of industry trends, multiple large AI models are flourishing, indicating steady progress toward significant long-term advancements. Looking ahead, buying on dips and holding positions through holidays may prove to be effective strategies. The main points from China Merchants Securities are as follows:
The firm maintains a strong positive view on the Hang Seng Tech Index. Recent significant declines in Hong Kong tech stocks, represented by the index, have fostered various pessimistic narratives. However, following a brief liquidity shock, narratives spanning from regulation to industry trends have reached extremely negative levels. At its current level, the Hang Seng Tech Index offers substantial allocation value. Firstly, the recent market volatility is merely a sharp liquidity shock. Secondly, there is nothing new under the sun; the current substantial market fluctuations are essentially no different from those seen in November 2025. Finally, looking forward, favorable factors are accumulating.
1. Overseas Liquidity – The Peak Shock Has Passed: Recent liquidity shocks stemming from the "Wash trade" led to a sharp decline in Hong Kong stocks. However, looking ahead, this short-term impact is expected to gradually subside. On one hand, the Federal Reserve's balance sheet reduction faces significant obstacles in the current environment, making a substantive reversal of the weak US dollar narrative unlikely; it is more probable to be a short-term disturbance. On the other hand, the impact of this round of Wash trades has primarily remained at a micro level, representing a correction after previous anticipatory bets on loose liquidity and "short cash" trades. It 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 improved liquidity expectations.
2. Domestic Liquidity – Disturbances from Mutual Funds' Overweight Positions in Hong Kong Stocks Have Eased: Domestic mutual funds' allocations to Hong Kong stocks were significantly above benchmark levels, resulting in 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 greatly diminished, as the scale of mutual funds' overweight positions in Hong Kong stocks has shrunk considerably. Looking forward, net selling driven by positions above the benchmark may be coming to an end.
3. Valuation – Relative Valuation of Hong Kong Tech Sector at Historic Lows: Using the Hang Seng Tech Index to A-share "Double Innovation" Index ratio to measure the A-H premium for the tech sector shows it is currently near historically extreme lows. Previous lows occurred in March 2022, October 2022 (during rapid foreign capital outflows), and late 2023 (due to gaming regulations). The current regulatory environment for internet companies and the economic development backdrop are clearly better than in 2022 and 2023. Against the backdrop of significant AI development and national strategies to revitalize through technology, Hong Kong tech stocks are evidently significantly undervalued. Looking ahead, the risk-reward ratio and probability of success for a long position in Hong Kong tech stocks are both high.
4. Capital Demand – Strict Control Over IPO Sponsorship Quality Boosts Market Sentiment: Tightening controls over IPO quality is expected to improve market sentiment to some extent, as excessive IPOs had previously become a consensus narrative explaining Hong Kong's weak market performance. However, there is no necessary link between IPOs and market performance; the dynamic often follows the pattern of "market performance creating fundamentals." Hong Kong IPOs are characterized by pro-cyclicality, weak correlation, liquidity stratification, and attraction of foreign capital. In the long run, a supply of high-quality companies will benefit the market's healthy development.
5. Fundamentals – Hong Kong Market Fundamentals Remain Solid, Profit Expectations Stabilizing: The recent divergence between the performance of the Hang Seng Index and the Hang Seng Tech Index corresponds to a divergence in their recent profit expectation trends. Overall, profit expectations for the Hang Seng Index have been gently revised upwards recently, which explains its relative resilience. In contrast, EPS expectations for the Hang Seng Tech Index have been consistently revised down since September but have now begun to stabilize, indicating that current stock prices already reflect this phase of earnings downgrades by the market.
6. Industry Trends – Smooth Progress on Industry Front, Proliferation of Large Models: From an industry progress perspective, there are continuous catalysts for Hong Kong tech stocks. Recently, during the Spring Festival period, companies like Tencent and Alibaba actively promoted their large AI models. Kuaishou's annualized ARR for its AI model "Kling" exceeded expectations, and DeepSeek may release its latest V4 large model during the holiday period.
Risk warnings include economic data falling short of expectations, incomplete understanding of policies, and overseas policies tightening more than anticipated.