CICC's Chief Overseas and Hong Kong Stock Strategy Analyst Liu Gang: Hong Kong stock liquidity needs to be improved; Hang Seng Tech presents a gradual opportunity for left-side positioning

Since the start of 2026, the Hang Seng Tech Index, a core asset, has experienced a significant pullback, with multiple technical support levels being broken consecutively. What are the main driving factors? What changes have occurred in liquidity and capital conditions? Has the current correction run its course?

Recently, Securities Times interviewed Liu Gang, Managing Director of China International Capital Corporation and Chief Analyst of Overseas and Hong Kong Stock Strategies. Liu believes that the opportunity for Hong Kong stocks to outperform other markets again depends on three conditions.

Changes in Liquidity and Capital Conditions

This year, the overall performance of Hong Kong stocks has lagged behind A-shares, especially as the Hang Seng Tech Index has fallen over 20% since October last year, drawing investor attention to its technical bear market status.

Liu explained, “Credit cycles determine the overall index space, while economic prosperity determines structural opportunities.” Specifically, in 2026, amid oscillations or even phased slowdown in the overall credit cycle, sectors still in expansion become the focus of capital. If Hong Kong’s unique structure is temporarily “disfavored” by the market, coupled with adverse capital conditions, it’s understandable why the Hang Seng Tech Index has performed poorly.

Liu believes that first, Hong Kong stocks are more sensitive to external liquidity. The nomination of “hawkish” Jerome Powell as the new Federal Reserve Chair by U.S. President Trump has raised concerns about tightening global liquidity. Although the Fed is likely to cut rates again, uncertainties and disturbances remain. Second, the supply of IPOs and refinancing in Hong Kong is significantly larger. Meanwhile, the strength of A-shares also diverts southbound funds, creating a “see-saw” effect between Hong Kong and A-shares.

How to View Hang Seng Tech Valuations?

Since October last year, the characteristic sectors of Hong Kong stocks, such as internet technology and innovative pharmaceuticals, have faded from market focus. The overall performance of Hong Kong stocks has again lagged behind A-shares and other markets.

In February this year, major constituents of the Hang Seng Tech Index like Alibaba, Tencent Holdings, and Baidu notably dragged down the index. The reasons include investor concerns over whether these tech giants’ AI capital expenditures can support commercialization and cash flow, as well as skepticism about their large-scale red envelope giveaways aimed at boosting user activity, which are seen as short-term KPI-driven actions with limited relation to their core AI capabilities.

In an interview with Securities Times, Liu highlighted two misconceptions: first, that Hang Seng Tech constituents include electric vehicle companies and are not a narrow tech stock basket—companies like Ctrip are also included but have low AI relevance; second, regarding valuations, the cheapness of Hang Seng Tech should not be judged solely on absolute valuation. Although Hong Kong stocks have lower absolute valuations compared to U.S. stocks and others, comparing without considering profitability, liquidity environment, and investor structure can be misleading. For example, the median PE and net profit margins of core internet tech leaders in Hong Kong and the U.S. are aligned, and Hong Kong stocks are not necessarily cheaper.

However, in the short term, the PE ratio of Hang Seng Tech has fallen below its average minus one standard deviation, and the RSI indicator suggests it may be oversold, offering some appeal. For some investors, current valuations and market sentiment present an opportunity for gradual dollar-cost averaging.

When Will Hong Kong Stocks Strengthen?

In 2025, the gains of the Hang Seng Tech Index mainly reflected valuation-driven growth. Liu believes that future upside requires earnings recovery; simply relying on valuation and risk premium expansion is insufficient.

However, with the overall credit cycle lacking expansion this year, corporate earnings are unlikely to improve significantly, with more focus on structural highlights. According to China International Capital Corporation’s overseas strategy estimates, in 2026, Hong Kong stocks’ earnings growth will be around 3%–4%, lower than 6% in 2025 and also below A-shares’ 4%–5%. Liu suggests that the overall index upside in 2026 is limited, and investors should focus more on next-stage scarce assets.

Structurally, Hong Kong stocks and A-shares each have their focus. Hong Kong’s high-dividend, internet technology, new consumption, and innovative pharmaceutical sectors remain distinctive. In these sectors, mid-term trends still center on AI technology and cycles, which are also the main directions of current credit expansion. The recently discussed “HALO trading” essentially reflects industry trends and economic cycles. While cyclical sectors benefiting from heavy assets are affected, for AI, short-term hardware policy support is highly certain—especially in infrastructure, domestic substitution, and supply chain security, where A-shares’ related stocks benefit more directly. Hong Kong stocks are more concentrated on internet and application sectors, with less clear short-term monetization pathways, requiring more catalysts. Even if Hong Kong stocks underperform overall, its characteristic sectors still hold scarce allocation value for southbound funds.

From a capital perspective, surpassing 2025’s environment in 2026 appears challenging, and it’s likely to be weaker than A-shares. First, the net inflow of southbound funds in 2025 was significantly higher than in 2024, mainly driven by ETF and other trading funds like private equity and retail investors, which are closely linked to market sentiment. Without a substantial market surprise, it’s difficult for southbound funds to exceed last year significantly. Second, although the Fed is likely to cut rates again, uncertainties following Powell’s appointment could cause more volatility in Hong Kong stocks. Lastly, IPO and refinancing activities in Hong Kong remain active; China International Capital Corporation’s overseas strategy estimates this year’s scale could reach HKD 1.1 trillion, far exceeding the approximately HKD 600 billion in 2025. Additionally, the large number of IPO lock-ups from 2025 may pose potential liquidity pressures in 2026.

Looking ahead, the key conditions for Hong Kong stocks to outperform other markets again are: increased easing expectations from the Federal Reserve, a return of Hong Kong’s characteristic sectors to market focus, and weak A-shares driving southbound capital inflows.

(Article source: Securities Times)