DBS has released a research report indicating that Hong Kong stocks have gained 4.5% since September, once again reaching new highs for the year. Despite concerns over divergent individual company performances and persistent mainland deflation worries, the market has been driven primarily by a few sectors including artificial intelligence, batteries, and biotechnology.
Southbound capital inflows have increased, mainly due to A-share corrections following rapid gains, coupled with regulatory cooling measures that have temporarily halted the A-share rally. Looking ahead, DBS reiterates its long-term optimistic outlook for Hong Kong stocks, though short-term profit-taking pressure and geopolitical developments may resurface.
While interim corporate earnings have led to slight profit downgrades, the Hang Seng Index's valuation has become more attractive amid a global liquidity-driven rally. Continued anti-involution measures across industries have helped stabilize market expectations for the macroeconomic environment.
Although Hong Kong liquidity has tightened slightly, unexpected declines in US PPI and weakening employment data have led markets to expect more rate cuts this year. Long-term, active Hong Kong IPOs help improve market structure and continue to attract global long-term growth investors.
Based on this analysis, DBS has raised its 12-month Hang Seng Index target to 28,000 points (from 26,000), reflecting: 1) updated 2025 and 2026 earnings forecasts to -2.2% and 12.1% respectively; 2) valuation multiple forecasts raised from 11.6x to 13x. The new target assumes the valuation gap between the Hang Seng Index and MSCI All Country World Index (ACWI) will return to its ten-year average.
The bank believes structural valuation discounts that have plagued Hong Kong markets for years (such as unclear China policies and weak local liquidity) have been largely absorbed. Policy shifts since September last year, combined with anti-involution measures, have helped stabilize macroeconomic and corporate earnings expectations.
The new target aligns with the risk premium model, currently at 5.8%. DBS expects market risk premium to compress to 5.4%-5.5% (about one standard deviation below the ten-year average), a level validated multiple times in recent years. Assuming continued southbound capital increases (as mainland bond yields fall), this premium level corresponds to approximately 28,000 points for the Hang Seng Index.
In an optimistic scenario where risk premium returns to the 2020-21 tech bull market lows, the Hang Seng Index could reach 30,500 points, though this would require significant fundamental improvements, policy support, or looser liquidity conditions.
DBS maintains its preference for technology and non-bank financial sectors, while anti-involution measures continue to create trading opportunities in solar and battery sectors. Consumer sector valuations have become reasonable, upgraded to neutral.
Regarding stock picks, DBS has removed CALB (03931) and added TRIP.COM-S (09961) to capture tourism recovery opportunities ahead of the National Day holiday.