Over the past month, the market has once again displayed a "high-to-low" trend, ultimately returning to its starting point from a month ago. In late November, we warned that the market's overly optimistic expectations for policy support might be unrealistic, and the overall volatile pattern remains. Recent performance has validated this perspective.

Last week, the hawkish stance of the Federal Reserve led to a rapid rise in U.S. Treasury yields and the dollar index, while expectations for domestic monetary easing significantly lowered local interest rates. New highs in U.S. bonds typically signify tighter dollar liquidity, thereby exerting pressure on the valuations of Hong Kong stocks. Overall, the combination of "new highs in U.S. bonds + new lows in Chinese bonds" creates a neutral to negative impact on Hong Kong stocks.

We maintain our judgment that the Hong Kong market will continue to exhibit overall volatility for three main reasons: first, the market is entering a policy vacuum ahead of the two sessions; second, external disruptions, particularly uncertainties surrounding the Federal Reserve's future policies. Although technical indicators suggest that the Hong Kong market is currently in a relatively neutral state, we recommend focusing on supply clearance, policy support, and stable returns.

Market Performance Review

Affected by the Federal Reserve's hawkish stance and disappointing U.S. economic data, the Hong Kong market weakened again last week. The Hang Seng Index and MSCI China Index fell by 1.3% and 0.9%, respectively, while the Hang Seng Tech and Hang Seng China Enterprises indices also declined slightly. The telecommunications and media sectors showed resilience, while real estate and materials lagged.

Data Source: FactSet, CICC Research Department

Market Outlook

In the past month, the market has again demonstrated the typical "high-to-low" behavior. With significant domestic meetings, such as the Political Bureau meeting, approaching, expectations for policy support have risen. However, we previously indicated that these expectations might be overstated, and the market has not fully escaped its volatile pattern.

The current market position has already factored in substantial expectations. For further upward movement, additional policy support, particularly fiscal measures, will be necessary. However, given the constraints of financing costs and exchange rates, overly optimistic expectations in the short term may not be realistic, as recent market behavior has confirmed.

Impact of New Highs in U.S. Bonds and New Lows in Chinese Bonds

The rapid increase in U.S. Treasury yields and the dollar index has tightened overseas liquidity, placing pressure on the valuations of Hong Kong stocks. Even with domestic capital accounting for 25-30% of trading in Hong Kong stocks, changes in U.S. Treasury yields remain dominant.

Conversely, the rapid decline in Chinese bond yields has somewhat mitigated the impact of rising U.S. yields but also reflects weakening expectations for future domestic growth. Therefore, the combination of "new highs in U.S. bonds + new lows in Chinese bonds" tends to have a neutral or negative effect on Hong Kong stocks.

Data Source: EPFR, Wind, CICC Research Department

Summary and Investment Strategy

Despite the uncertainties facing the market, we believe that the overall volatile pattern of Hong Kong stocks will persist. First, we will need more time to assess the Federal Reserve's future path, but we can still anticipate interest rate cuts. Technical indicators show that the Hong Kong market is currently in a relatively neutral state, with risk premiums and short-selling ratios close to historical levels.

In the current volatile structure, we recommend focusing on three categories of sectors: first, sectors with supply clearance and marginal demand improvement, such as home appliances and consumer services; second, areas with policy support, such as home appliances and automobiles; third, high-dividend state-owned enterprises with stable returns.

Looking ahead, the market will enter a policy vacuum before the two sessions, and external shocks, particularly tariffs post-Trump’s inauguration, will determine market direction. If tariffs are gradually increased (30-40%), we expect limited impact on the market; however, if maximum tariffs of 60% are imposed, the market may face significant volatility, potentially providing attractive buying opportunities.

Additionally, the economic data for November indicates that the domestic fundamentals require further policy support. The growth of retail sales has fallen short of expectations, and real estate investment is dragging down fixed asset investment, reflecting weak endogenous consumption demand. Therefore, despite the presence of incremental stimulus, overly high expectations may not be realistic. We maintain our judgment of overall market volatility and advise investors to remain cautious.