Hang Seng Index Hits Yearly High with Six-Day Winning Streak: Tech Stocks Lead the Rally

Hang Seng Index Hits Yearly High with Six-Day Winning Streak: What Drives the Tech-Led Rally?

Hong Kong's Hang Seng Index has recently staged a strong six-day winning streak, breaking through its year-to-date high and drawing widespread market attention. Driven by improved liquidity expectations and a recovery in earnings from heavyweight tech stocks, the Hong Kong stock market is undergoing a structural repair. This article dissects the core logic of this rebound from three dimensions: driving factors, capital flows, and sustainability.

I. Improved Macro Environment: Liquidity Expectations and Policy Tailwinds

The primary driver of this Hang Seng rally is the marginal improvement in the external macro environment. The Federal Reserve signaled a dovish stance at its latest meeting, reigniting market expectations for a rate cut this year. According to CME FedWatch data, the market now prices in a over 60% probability of a rate cut in September. A weakening US dollar has stabilized the Hong Kong dollar exchange rate, easing the liquidity pressures that had previously plagued the Hong Kong market.

Meanwhile, China's domestic economic data shows signs of stabilization. The National Bureau of Statistics reported that year-on-year profit growth for industrial enterprises above a designated size turned positive in April, and the manufacturing PMI has remained in expansionary territory for two consecutive months. On the policy front, the State Council recently introduced a package of measures to boost consumption and stabilize foreign trade, injecting confidence into the market. As an offshore market, Hong Kong is particularly sensitive to the interplay of US and China policies, and the convergence of domestic and international positives has driven the index higher.

II. Tech Stocks Lead: Earnings Expectations and Capital Return

The Hang Seng Tech Index has been particularly outstanding in this rally, with heavyweight stocks like Tencent Holdings and Alibaba Group leading the charge. Tencent's upcoming first-quarter earnings report is highly anticipated, with the market broadly expecting double-digit growth in its advertising revenue and fintech business. According to research reports from multiple brokerages, the monetization of Tencent's video accounts is accelerating, and with the normalization of game license approvals, the company's profit inflection point is largely confirmed.

For Alibaba, with the implementation of its organizational restructuring, its core e-commerce business has seen a recovery in GMV driven by a low-price strategy. Narrowing losses in its international business and cloud computing division have further boosted market expectations for earnings improvement. On the capital flow front, southbound capital has recorded net buying for several consecutive days. According to data from the Hong Kong Stock Exchange, net inflows from southbound capital exceeded HKD 10 billion in the past week, with tech stocks accounting for the highest proportion.

Additionally, second-tier tech stocks such as Meituan, JD.com, and NetEase have also experienced catch-up rallies. The competitive landscape for Meituan's in-store and food delivery businesses has stabilized, leading to upward revisions in market expectations for its 2024 profit margins. JD.com, benefiting from the trade-in policy that boosts the home appliance category, is expected to see a stabilization in revenue growth.

III. Capital Flows: Foreign Capital Return and Structural Allocation

From a capital structure perspective, this rally is not solely driven by southbound capital; signs of foreign capital return are also evident. According to EPFR Global data, as of last week, overseas funds investing in Chinese stocks have recorded net inflows for three consecutive weeks, with passive funds contributing the majority of the increase. This contrasts sharply with the persistent foreign capital outflows in 2023, reflecting a recovery in global funds' willingness to allocate to Chinese assets.

Notably, this round of foreign capital return is more concentrated in the technology and internet sectors rather than traditional financial and real estate sectors. This is underpinned by two logics: first, after two years of adjustment, tech stock valuations are at historical lows, with the Hang Seng Tech Index's P/E ratio below 20 times, lower than the Nasdaq index; second, the expectation of industrial transformation brought about by breakthroughs in AI technology is leading to a repricing of Chinese tech companies. The layout of giants like Tencent and Alibaba in the AI large model space is seen as a new engine for future growth.

IV. Sustainability of the Rebound: Opportunities and Challenges Coexist

Despite strong short-term momentum, whether this rebound can be sustained faces multiple tests. First, the pace of Fed rate cuts remains uncertain. If inflation data proves stubborn, the market may reprice the interest rate path, triggering volatility in Hong Kong stocks. Second, the strength of China's domestic demand recovery still needs verification. Although real estate sales data has improved, investment and new construction starts remain low, and the drag on the overall economy has not been fully eliminated.

From a valuation perspective, the Hang Seng Index's current P/E ratio is around 10 times, still below its historical average, offering some margin of safety. However, after the rapid rise in tech stocks, some individual stocks are approaching institutional target prices, and further upside requires earnings to exceed expectations. Additionally, geopolitical risks remain a non-negligible variable, with potential adjustments in US policy towards China during an election year potentially unsettling market sentiment.

Overall, the Hang Seng's six-day winning streak marks a shift in market sentiment from pessimistic to moderately optimistic, and the leading position of tech stocks is unlikely to be shaken in the short term. Investors should closely monitor the upcoming quarterly reports from Tencent and Alibaba, as well as China's May PMI data, to determine whether fundamentals can support current valuations. If the trend of earnings improvement is confirmed, Hong Kong stocks may continue their repair rally in the second quarter; otherwise, they may enter a phase of consolidation and fluctuation.