The Hong Kong stock market has transformed from the previous "old cow" to the current "sweetheart". In 2023, under the influence of foreign capital outflow from Hong Kong stocks and the deterioration of the real estate market, the Hang Seng Index fell nearly 14%. However, with the frequent introduction of favorable policies, its own valuation at a low level, and the depreciation of the yen, among other factors, the Hong Kong stock market is expected to turn around in 2024.

For many years, the Hong Kong stock market has been dominated by "decline", continuously putting pressure on investors' confidence. Recently, the strong performance of Hong Kong stocks has attracted investors from all walks of life to "enthusiastically" analyze the logic behind the rise.

On April 26, both major Hong Kong stock indices closed with five consecutive days of gains. As of the close, the Hang Seng Index rose by 2.12%, with a cumulative increase of more than 6.7% in April; the Hang Seng Technology Index rose by 4.61%, also up nearly 6.9% in April.

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In-depth analysis reveals that this round of Hong Kong stock market has gathered multi-dimensional positive elements including "capital inflow", "policy efforts", and "economic stabilization".

Specifically, foreign capital and southbound funds are important drivers of this round of Hong Kong stock market, playing a role in promoting the market; the introduction of multiple cooperation measures between the China Securities Regulatory Commission and the Hong Kong capital market, as well as the stabilization of Hong Kong's economy, also support the continuity of the Hong Kong stock market.

More importantly, from a valuation perspective, whether it is a vertical comparison with itself or a horizontal comparison with the global market, the "attractiveness" of Hong Kong stock valuation is very prominent.

Who is buying Hong Kong stocks crazily?

The recent performance of Hong Kong stocks has attracted a large audience.

On April 26, Hong Kong stocks continued their strong performance, with the Hang Seng Technology Index being particularly eye-catching, closing up by 4.61%. All constituent stocks rose sharply, with specific stocks such as SenseTime, XPeng Motors, and NIO leading the gains, closing up by 43.37%, 8.8%, and 7.24% respectively.

In fact, since February of this year, the performance of Hong Kong stocks has been particularly eye-catching. Choice data shows that from early February to now, the change in the Hang Seng Index has been 13.99%, and the Hang Seng Technology Index has risen by 23.7%.The core reason for the rise in Hong Kong stocks is the improvement in the capital situation. CITIC Construction Investment pointed out that the biggest suppression of Hong Kong stocks in the second half of last year was the systematic outflow of foreign capital to Japan. Recently, foreign capital's allocation focus in the Asia-Pacific region has shifted back from Japan to Hong Kong stocks, and the liquidity of Hong Kong stocks has been greatly improved.

Previously, the shift of capital to the Japanese market may have been a bet on the dual appreciation of Japanese stocks and the yen after the normalization of Japan's monetary policy. However, on March 19th this year, the Bank of Japan announced an interest rate hike of 10 basis points, raising the benchmark interest rate from -0.1% to 0-0.1%. This was the first interest rate hike by the Bank of Japan in 17 years. Unexpectedly, the yen depreciated beyond expectations. This also led to the capital that had previously placed bets to flee, while turning their attention to the more cost-effective Hong Kong stocks.

In terms of specific capital, Guotai Junan pointed out in a research report that since March 26th, southbound capital has been continuously inflow into the Hong Kong stock market for four weeks, with a total of more than 78.9 billion Hong Kong dollars. From the perspective of the industry, high dividend industries such as finance, energy, and telecommunications, as well as other high-quality assets mainly focused on the internet, are the targets favored by southbound capital. The research report further pointed out that the southbound capital's say in industries such as healthcare and information technology has exceeded 10%.

Last year, Hong Kong stocks were still the objects that capital abandoned like worn-out shoes. Overall, the Hang Seng Index fell by -13.82%. Morgan Stanley pointed out that the participation rate of overseas institutions in the Hong Kong stock market has dropped from 40% in 2020 to about 25% by the end of August 2023. After that, capital accelerated its withdrawal from Hong Kong stocks. In October, U.S. Treasury rates fell, but Hong Kong stocks remained unchanged. It is well known that the Hang Seng Index has a significant negative correlation with the U.S. dollar index.

Behind the surge in Hong Kong stocks, Hong Kong stocks have changed from "Mrs. Cow" to "Sweetie", on the one hand, due to the policy spring breeze.

Looking at April, there has been an endless stream of good news for Hong Kong stocks.

On April 19th, the China Securities Regulatory Commission issued five measures to cooperate with the Hong Kong capital market, including relaxing the scope of eligible products under the Shanghai-Shenzhen-Hong Kong Stock Connect ETF; including real estate investment trust funds (REITs) in the Shanghai-Shenzhen-Hong Kong Stock Connect; supporting the inclusion of Renminbi stock trading counters in the Hong Kong Stock Connect; and optimizing the mutual recognition of funds.

This can attract more mainland capital and institutional investors.

A few days later, the Hong Kong Monetary Authority injected 525 million Hong Kong dollars and 500 million Hong Kong dollars of liquidity into banks through the discount window. In fact, since the beginning of this year, the Hong Kong Monetary Authority has repeatedly used the discount window to inject liquidity into banks. Specifically, the Hong Kong Monetary Authority injected funds on January 3rd, January 9th, January 29th, March 18th, March 21st, and March 26th this year, involving funds of 1.7 billion Hong Kong dollars, 1 billion Hong Kong dollars, 2.114 billion Hong Kong dollars, 138 million Hong Kong dollars, 20 million Hong Kong dollars, and 900 million Hong Kong dollars, with a total amount of approximately 6.897 billion Hong Kong dollars.At the same time, Hong Kong's economy is also stabilizing. It is reported that Hong Kong's GDP growth for the first quarter of this year is expected to be between 2.5% and 3.5%. At the same time, the Hong Kong Stock Exchange also stated that the average daily transaction amount of the spot market in the first quarter of this year was 99.4 billion Hong Kong dollars, a year-on-year decrease of 22%, and an increase of 9% quarter-on-quarter.

On the other hand, the "lowland" attribute of the Hong Kong stock market is quite prominent.

As of April 26, 2024, the rolling price-to-earnings ratio of the Hang Seng Index was 8.89 times, at the 14.97% percentile in the past decade; the price-to-book ratio is less than 1, only 0.9 times, at the 8.73% percentile in the past decade.

It is worth mentioning that the current dividend yield of the Hang Seng Index has reached 4.08%, ranking at the 89.06% percentile in the past decade; the risk premium rate has also reached 9.55%, which is also higher than the 95.08% percentile in the past decade.

Therefore, looking at itself vertically, the current Hong Kong stock market not only has a low valuation but also significantly presents a state of "rich dividend returns and considerable potential returns" compared to the past decade.

In addition, compared with the global stock market, the absolute valuation and valuation percentile of the Hong Kong stock market are both obviously low.

In terms of the Asia-Pacific market, the Nikkei 225 Index has a rolling price-to-earnings ratio of 17.28 times, at the 31.52% percentile in the past decade; the Taiwan Weighted Index has a rolling price-to-earnings ratio of 21.14 times, at the 95.2% percentile in the past decade; the South Korean KOSPI 200 Index has a rolling price-to-earnings ratio of 18.29 times, at the 83.79% percentile in the past decade.

In terms of the European and American markets, the rolling price-to-earnings ratio of the Dow Jones Industrial Average in the United States is 25.21 times, at the 78.31% percentile in the past decade; the rolling price-to-earnings ratio of the UK's FTSE 100 Index is 14.81 times, at the 47.02% percentile in the past decade; the rolling price-to-earnings ratio of France's CAC 40 Index is 16.02 times, at the 24.9% percentile in the past decade.

So, will the "lowland" of the Hong Kong stock market eventually be filled?Upon reviewing research reports, it is found that most institutions, based on factors such as domestic real estate and overseas inflation, still "look down" on the short-term rebound space of the Hong Kong stock market.

Changjiang Securities stated that before there is a significant improvement in domestic real estate sales and consumption data, it is expected that the earnings expectations of Hong Kong-listed companies will temporarily lack upward flexibility; and the expectation for loose dollar liquidity may not be realized in the short term, coupled with the ongoing disturbance of geopolitical frictions, maintaining the judgment on the fluctuating pattern of the Hong Kong stock market.

Guotai Junan believes that the domestic economy continues to improve, and the earnings expectations of the Hong Kong stock market have improved, but inflation and real estate sales performance are still weak, the structure needs to be solidified, and the momentum for subsequent economic repair still requires time, with limited upward space; the stickiness of US inflation exceeds market expectations, increasing the uncertainty of the prospects for reducing inflation overseas, disturbing the Federal Reserve's interest rate reduction pace in 2024. It is expected that the Hong Kong stock market will enter a fluctuation, with limited space in the short term.