Hang Seng Index Falls for Third Straight Day, Breaks Below 18,000 Mark; How Much More Pressure for Tech Stocks? Analyzing Tencent and Alibaba's Outlook

Hang Seng Index Falls for Third Straight Day, Breaks Below 18,000 Mark; How Much More Pressure for Tech Stocks?

Recently, the Hong Kong stock market has experienced a notable technical correction. The Hang Seng Index has closed lower for three consecutive trading days and has broken below the key 18,000-point psychological level, sparking widespread discussion about the market's future direction. The tech sector, a bellwether for Hong Kong stocks, particularly heavyweight stocks like Tencent and Alibaba, has become the focus of investor attention. This article will analyze the underlying reasons for this correction from technical, capital flow, and fundamental perspectives, and look ahead to possible future developments.

1. Three Consecutive Bearish Days for the Hang Seng Index: A Signal of Technical Correction

After a rapid rally, the Hang Seng Index hit a short-term high at the beginning of this week, then closed bearish for three consecutive days. Market observers estimate the cumulative decline is around 2% to 3%. The 18,000-point level, serving as both a psychological and technical support, has been breached, indicating weakening short-term bullish momentum. Technically, the 14-day Relative Strength Index (RSI) for the Hang Seng Index has fallen from overbought territory to a neutral-to-weak range, suggesting market sentiment is cooling. In terms of trading volume, turnover has shrunk day by day over the past three trading days, indicating a lack of willingness to chase highs and increasing profit-taking pressure.

This correction is driven by a confluence of factors: On one hand, the Federal Reserve signaled a hawkish stance after its latest policy meeting, hinting that the pace of rate cuts this year may slow, putting pressure on global risk assets. On the other hand, the Hong Kong stock market had accumulated significant unrealized gains during its rebound from early May to mid-June, prompting some short-term funds to cash in profits near key resistance levels. Additionally, geopolitical uncertainties and fluctuations in the renminbi exchange rate have also disrupted the pace of northbound capital inflows.

2. Tech Stock Pullback: Tencent and Alibaba Lead the Decline

The tech sector has been the hardest hit in this correction. The Hang Seng Tech Index is estimated to have fallen over 3% during the same period, with heavyweight stocks Tencent Holdings and Alibaba Group seeing their share prices drop by approximately 4% and 5%, respectively. Analysts point to several reasons for the tech stock pullback:

• Profit-Taking After Valuation Recovery: Tencent and Alibaba have seen substantial gains since the start of the year, with their price-to-earnings (P/E) ratios recovering to around 20x and 15x, respectively, near historical median levels. In the absence of new catalysts, some institutions have chosen to reduce positions to lock in gains.
• Changing Expectations for Industry Regulation: Recent media reports suggest that regulators may step up antitrust enforcement against the platform economy. Although no official documents have been released, market concerns about policy risks have resurfaced. The pace of game license approvals for Tencent and compliance issues for Alibaba's cloud computing business have become investor focal points.
• Concerns Over Slowing Earnings Growth: Although both companies' first-quarter earnings reports exceeded market expectations, the trend of slowing revenue growth is evident. Tencent's advertising revenue is struggling due to macroeconomic headwinds, while Alibaba's e-commerce business faces continued pressure from competitors like Pinduoduo and Douyin. The market is cautious about whether second-quarter earnings can sustain growth.

Other tech stocks such as Meituan, JD.com, and Xiaomi have also experienced varying degrees of decline, with estimated drops ranging from 2% to 4%. Overall, the tech sector correction appears broad-based, but the declines are relatively moderate and have not yet triggered panic selling.

3. Capital Flows and External Environment: Short-Term Pressure vs. Long-Term Support

In terms of capital flows, southbound funds have shown net selling during the Hang Seng Index correction, with estimated net outflows of about HK$5 billion over the past three trading days based on HKEX data. Among them, Tencent and Alibaba saw net selling of approximately HK$1 billion and HK$800 million, respectively, indicating that mainland funds have turned cautious on tech stocks in the short term. Meanwhile, northbound funds (flowing into A-shares via Stock Connect) have also seen minor net outflows, reflecting a decline in global risk appetite for emerging markets.

On the external front, U.S. Treasury yields have risen again recently, with the 10-year yield reportedly climbing back to around 4.3%, putting pressure on high-valuation growth stocks. Additionally, a stronger U.S. dollar has weighed on the renminbi exchange rate, with the offshore renminbi briefly falling below the 7.3 level against the dollar, increasing currency risk for Hong Kong stock assets. However, some analysts note that the broader direction of the Fed's rate-cutting cycle remains unchanged, though the timing may be delayed to September or later. Therefore, the pressure from external liquidity conditions on Hong Kong stocks should be temporary.

4. Market Outlook: Limited Downside, Structural Opportunities Remain

Looking ahead, most institutions believe the Hang Seng Index has strong support in the 17,500 to 17,800 range. Reasons include: First, Hong Kong stock valuations remain historically low, with the Hang Seng Index currently trading at a P/E ratio of around 10x, below major global markets. Second, China's macroeconomic data is showing marginal improvement, with May indicators such as industrial value-added and retail sales beating expectations, providing fundamental support for Hong Kong stocks. Third, policy measures continue to be favorable, including reductions in stamp duty and optimization of the Stock Connect mechanism, which should help improve market liquidity.

For tech stocks, analysts advise investors to focus on the following structural opportunities: Tencent's monetization of its WeChat Video Account, Alibaba's progress on spinning off its cloud business, and Meituan's competitive moat in local services. In the short term, tech stocks may still need time to digest valuation pressures, but the mid-term correction could provide a window to position in high-quality names. Investors should closely monitor the upcoming mid-term earnings season, as individual stock performance will diverge, and companies with earnings visibility are likely to stabilize and rebound first.

Risk Warning

The above content is for reference only and does not constitute investment advice. Markets are risky, and investment should be made with caution. The data cited in this article is from public market information and may be subject to delays or errors. Investors should make independent investment decisions based on their own risk tolerance.