Recent weakness in the Hang Seng Tech Index is viewed as a severe liquidity shock, with the fundamental outlook and investment rationale for Hong Kong tech stocks remaining intact. The peak of overseas liquidity pressures has passed, making a "buy the dip" strategy effective. The discount of Hong Kong tech stocks relative to their A-share counterparts is near historic highs, suggesting a potential market bottom and rebound. Investors are advised to buy on dips and hold positions, with recommendations focusing on the technology sector (AI and internet), non-bank financials (insurance), and high-dividend stocks.

Core Views Hang Seng Tech presents significant allocation value at current levels. Recent market volatility is attributed to intense liquidity shocks. The current market fluctuations are fundamentally similar to those observed in November 2025. Looking ahead, favorable factors are accumulating, supporting a strategy of buying on dips.

Fundamentals: Economic data shows a slowdown in PMI production and demand, while prices continue to strengthen. Structural issues of insufficient domestic demand persist, with policy efforts expected to focus on expanding domestic demand. PPI is anticipated to rise further.

Liquidity and Capital Flows: The Federal Reserve held rates steady in January, as expected, with a new chair nominee announced. Data indicates continued inflows from mainland and Hong Kong investors into the Hong Kong market in January.

Valuation: The relative valuation of Hong Kong's tech sector is at a historic low. The Hang Seng Tech Index's discount to A-share tech indices is near extreme levels, last seen in March 2022, October 2022, and late 2023. The current regulatory and economic environment for internet companies is significantly better than in previous years. Against the backdrop of AI development and national tech advancement, Hong Kong tech stocks appear significantly undervalued, offering high potential returns for long positions.

Policy: Stricter controls on IPO quality are expected to improve market sentiment, as excessive IPOs were previously cited as a reason for Hong Kong's weak performance.

Allocation Strategy: Focus on technology (AI, internet, advanced manufacturing), non-bank financials (insurance), and high-dividend stocks.

AI and Internet: (1) Investment focus is shifting from an "arms race" to "profit verification," leading to value discovery for Hong Kong internet companies. (2) Hong Kong's AI ecosystem is maturing, covering the full industry chain from hardware and foundational models to vertical applications. (3) Losses in instant retail businesses are narrowing and being priced in by the market. (4) The tech sector discount is near historic extremes, offering a "high-to-low" allocation advantage.

Non-Bank Financials: Insurance companies benefit from a "bull stock, bear bond" asset environment, strong sales, and high operational leverage, making them high-beta plays.

High-Dividend Stocks: The Hang Seng High Dividend Yield Index offers a stable dividend yield of around 6%. Increased allocations from insurance and "fixed-income plus" funds within southbound flows support high-dividend assets.

Risks: (1) Shift in Fed monetary policy; (2) Significant liquidity fluctuations; (3) Black swan events.

Market Outlook: Buy on Dips, Hold Positions Recent declines in Hong Kong tech stocks are seen as a liquidity shock rather than a change in fundamentals. The peak of overseas liquidity pressure has passed. The current market volatility is comparable to that of November 2025. Positive factors are accumulating, supporting a buy-on-dips strategy.

Overseas liquidity pressures have peaked. The Fed's new chair nominee advocates a "balance sheet reduction + rate cuts" approach, challenging previous "weak dollar" narratives. Global markets had priced in excessive easing expectations, increasing fragility. However, the short-term impact of this policy shift is expected to fade. Micro-level liquidity shows continued foreign inflows into China-focused ETFs since July 2025, indicating a shift from "tradable" to "investable" status for Chinese markets.

Domestic liquidity disruptions from mutual fund over-allocation to Hong Kong stocks have eased. By Q4 2025, active fund holdings in Hong Kong stocks decreased, reducing selling pressure.

Fundamentals: January's manufacturing PMI fell into contraction, with demand weakening more than production. Price indices strengthened. Policy is expected to front-load efforts to stimulate demand, with PPI likely to rebound.

Liquidity and Capital Flows External Liquidity: The Fed held rates in January, with no signals on future cuts. Inflation concerns may delay rate cuts until after the new chair takes office. The "balance sheet reduction + rate cuts" policy is seen as a conservative easing approach, potentially stabilizing the dollar long-term. Recent dollar strength has pressured Hong Kong stocks, but a retreating dollar index supports sentiment recovery.

Hong Kong Capital Flows: January saw accelerated inflows. Local Hong Kong ETFs recorded significant net inflows, while southbound flows increased sharply, driven by insurance fund demand.

Policy: Stricter IPO quality controls may boost sentiment, though IPO activity is cyclical and not a primary driver of market performance. Historical data shows weak correlation between IPO volume and market returns.

Valuation: Hong Kong stocks remain undervalued globally. The Hang Seng Index's P/E ratio is significantly lower than major global indices, with a dividend yield of 3.41%. The risk premium is high, highlighting attractive valuations.

Summary: Buy on Dips, Hold Positions Hong Kong tech stocks are undervalued, with liquidity pressures easing. A buy-on-dips strategy is recommended. Fundamentals are supported by strong new economic growth, a shift to 2026 earnings expectations, and a seasonal earnings vacuum. Policies focus on tech innovation and domestic demand, with improving Sino-U.S. relations. Liquidity improvements, attractive valuations, and a complete AI industry chain in Hong Kong support a rebound.

Market Style: Sector Rotation with Focus on High-Beta Plays Hong Kong's market is influenced by both Fed policy and China's macro outlook, leading to style rotation without a fixed pattern.

Growth vs. Value: Spring market trends are driven by policy and earnings expectations rather than fundamentals. Historical data shows no persistent style advantage. For 2026, growth stocks may outperform due to attractive valuations and inflows from mainland investors seeking undervalued tech assets.

Large vs. Small Caps: Hong Kong's spring market typically shows balanced performance between large and small caps, unlike A-shares' small-cap bias. Equal distribution of funds is expected.

Sectors: Information technology, telecommunications, and materials typically perform well in spring rallies, driven by seasonal factors and risk appetite.

Allocation Focus: Technology, Insurance, and High-Dividend Stocks Technology: Hong Kong offers unique exposure to tech giants not available in A-shares. Valuations are at historic lows, with significant upside potential.

AI and Internet: Investment focus is shifting to profitable applications. Hong Kong's AI ecosystem is comprehensive. Instant retail losses are narrowing. The sector's discount offers a "high-to-low" allocation advantage.

Advanced Manufacturing: Areas like humanoid robots and autonomous driving present growth opportunities, supported by policy and technological advancements.

Insurance: Insurers benefit from equity market gains, strong sales, and regulatory support. Hong Kong insurance stocks are undervalued compared to A-shares, offering beta enhancement.

High-Dividend Stocks: The Hang Seng High Dividend Yield Index offers an attractive yield. Improved corporate governance and inflows from insurance and "fixed-income plus" funds support these assets. International capital may favor high-dividend stocks as global rates fall.