Guolian Minsheng Securities released a research report stating that despite Hong Kong stocks' overall weaker performance compared to A-shares since the second quarter, they remain optimistic about this round of Hong Kong stock market rally, and AH premium does not necessarily face "mean reversion" in the short term.

First, from a market ecosystem perspective, the intensive listing of A-share "new economy" companies in Hong Kong will further enrich the sector distribution of companies listed in both AH markets, broadening funding options. Second, the Federal Reserve is expected to enter a rate-cutting window, and as the Hong Kong dollar exchange rate stabilizes, expectations of liquidity tightening in the Hong Kong market are expected to ease; meanwhile, southbound funds still have demand and room for further allocation after substantial inflows this year. Additionally, referring to the latest interim earnings forecasts, Hong Kong stock earnings are still in a recovery channel, and sectors like new consumption have fundamental support beyond thematic catalysts.

**Guolian Minsheng Securities' main viewpoints are as follows:**

**Viewing AH Premium from Simple "Mean Reversion" Perspective is Questionable**

Since the beginning of the year, the Hang Seng AH Stock Premium Index has continued to decline, with most industries showing convergence, leading some investors to use this as a timing basis for both markets. However, after review, Guolian Minsheng Securities believes there may be some bias in using the AH premium index to represent the relative performance of both markets.

First, the current number and market capitalization ratio of AH dual-listed companies remain relatively limited, with a style bias toward cyclical and defensive sectors, primarily state-owned "traditional economy" sectors such as industrial and financial industries. Second, in terms of central levels, from the opening of Shanghai-Shenzhen-Hong Kong Stock Connect to mid-2020, the AH premium index mostly fluctuated in the 120-130 range. The current level still has room for movement compared to historical lows, making it imprudent to simply judge AH premium "inevitable regression" based on the previous central level of 140.

**Consensus on AH Premium Factors Lies in Liquidity, Cognitive Difference in Fundamentals**

The existence of AH premium essentially stems from the inability of shares in both markets to flow freely. The core determinant of AH premium levels may lie in the liquidity differences between the two markets. Key factors affecting Hong Kong stock liquidity have been analyzed.

In terms of institutional construction, Hong Kong stock market's less downside protection corresponds to certain risk compensation. On one hand, Hong Kong stocks have a mature short-selling mechanism with active trading, plus no price limit restrictions, exposing investors to greater tail risks. On the other hand, considering various taxes comprehensively, Hong Kong stock trading costs are relatively higher, affecting investors' actual returns.

The continuously increasing proportion of southbound funds will directly compress Hong Kong stocks' discount space. From a turnover ratio perspective, institutional investors account for over 60% of Hong Kong stocks, with a high proportion of non-local institutional investors, and low-frequency trading also affects the liquidity environment.

AH premium convergence also depends on international intermediary buying, and international intermediaries, especially overseas long-term funds, have characteristics of valuing fundamentals with strong allocation attributes. Meanwhile, in recent years, southbound funds' influence on AH premium has accelerated marginally, with significant AH premium index convergence after 2020 often accompanied by substantial southbound fund inflows.

**US Dollar Weakness Benefits Hong Kong Stock Liquidity Improvement, But It's Not an Excellent Leading Indicator**

Under the linked exchange rate system, changes in the US Dollar Index do affect Hong Kong market macro liquidity. This year's continued US dollar weakness may be a major driver of AH premium convergence. However, historically there have been multiple instances of divergence between the US dollar and AH premium trends, with divergence situations significantly increasing in recent years. The current US Dollar Index can hardly serve as an effective leading indicator.

In the short term, the relative earnings growth rates and dividend yield changes of AH markets are important factors. In terms of earnings growth, when Chinese Hong Kong stocks' net profit improvement is greater than A-shares, AH premium often converges. Combined with the high proportion of institutional investors, strong fundamentals may enhance relative attractiveness. Regarding dividend yields, when AH stocks are grouped by dividend yield, after dividend yields exceed 4%, AH premium rates significantly decrease, with high dividends partially compensating for liquidity discount.

**Continue to be Optimistic About Hong Kong Stocks' Current Rally, AH Premium Not Necessarily Subject to "Mean Reversion" in Short Term**

Guolian Minsheng Securities pointed out that despite Hong Kong stocks' overall weaker performance compared to A-shares since the second quarter, they remain optimistic about this round of Hong Kong stock rally, and AH premium does not necessarily face "mean reversion" in the short term.

First, from a market ecosystem perspective, the intensive listing of A-share "new economy" companies in Hong Kong will further enrich the sector distribution of companies listed in both AH markets, broadening funding options. Second, the Federal Reserve is expected to enter a rate-cutting window, and as the Hong Kong dollar exchange rate stabilizes, expectations of liquidity tightening in the Hong Kong market are expected to ease; meanwhile, southbound funds still have demand and room for further allocation after substantial inflows this year. Additionally, referring to the latest interim earnings forecasts, Hong Kong stock earnings are still in a recovery channel, and sectors like new consumption have fundamental support beyond thematic catalysts.

**Risk Warnings**

US tariff policies exceeding expectations: If Trump's tariff policies escalate beyond expectations, they may cause negative impacts on the US and global economy, affecting asset prices.

Federal Reserve rate cuts falling short of expectations: If the US economy maintains resilience and inflation shows signs of rising, Federal Reserve rate cuts may be further delayed, potentially affecting Hong Kong stock market liquidity.

Escalating geopolitical conflicts: If geopolitical conflicts further intensify or expand, they may have significant impacts on global demand, China's export performance, and asset prices.