To The Moon

The Hong Kong stock market experienced high-level consolidation last week, with innovative drug stocks surging on increased volume at the week's end, while previously under-pressure semiconductor shares first declined and then rebounded.

On the capital flow front, foreign capital continued to see net inflows. The short-selling ratio and positions declined, while southbound capital shifted to net inflows, rotating from dividend stocks to internet leaders and the semiconductor chain, reflecting a rise in risk appetite. On the fundamental side, overall earnings expectations remain weak but are showing structural improvement: expectations for innovative drugs have turned from a decline to an increase, with breadth turning significantly positive; financials are leading the upward revisions, while autos and food & beverage have weakened.

Looking ahead, the current rally remains strongly driven by capital flows. As the momentum from covering short positions fades, and with the 30-year US Treasury yield rising to multi-year highs weighing on valuations, earnings certainty during the interim reporting season will become the dominant variable. We recommend a balanced allocation: use low-volatility dividend stocks (e.g., banks) as a core position; focus on the dairy sector, select retail stocks, and CXO and innovative drug leaders that may confirm an operational bottom in their interim reports; position the AI chain (e.g., wafer foundries) as offensive plays, taking small positions to participate in oversold bounces.

Fundamentals: Financials and Pharmaceuticals Lead in Revision Magnitude and Breadth; Auto Downgrades Widen

As of August 7, the FactSet consensus estimate for 2026 earnings for non-financial Hong Kong stocks (referred to as earnings expectations) has been revised down by 0.6% over the past four weeks and 0.1% over the past week. The net breadth over the past four weeks was -3%, showing some improvement but remaining weak. By sector, innovative drug expectations have turned from a decline to an increase, rising 0.2% over the past four weeks and accelerating to a 1.2% increase over the past week, with net breadth turning significantly positive to +30%. High-dividend stocks were stable (up 0.6% over four weeks, net breadth +31%). Internet stocks still showed a 0.5% decline over four weeks, but net breadth turned positive to +30%, with downward revisions concentrated on leading stocks while most constituents saw upward revisions. Consumer stocks have turned from an increase to a decline (down 0.7% over four weeks). At the industry level, non-bank financials (up 8.3% over four weeks, net breadth +92%) and banks (up 0.9%, net breadth rising to +65%) were both strong. The telecommunications sector turned from negative to positive (up 1.2% over four weeks). The decline in non-ferrous metals narrowed (down 1.3%) with net breadth turning positive. Transportation slowed from a high level (up 5.5% over four weeks, turning negative over the past week). The auto sector was the weakest, with a 4.7% decline over four weeks widening and net breadth turning negative to -31%. Food & beverage turned from flat to a decline (down 1.3% over four weeks, net breadth turning negative). The electric new energy and utilities sectors continued their downward revisions.

Capital Flows: Foreign Capital Maintains Net Inflows; Southbound Capital Shifts to Net Outflows

Regarding foreign capital, according to EPFR data through Wednesday, total foreign capital saw net inflows of $460 million into Hong Kong stocks. This included $80 million in net inflows from active foreign capital (the second consecutive week) and $370 million in net inflows from passive foreign capital. In terms of short selling, the average weekly short-selling turnover ratio for Hong Kong stocks fell by 2.6 percentage points to 10.0% in the latest period, and the short position ratio declined significantly by 0.12 percentage points to 2.53%. For southbound capital, it turned into net inflows of approximately HK$10 billion last week (compared to net outflows of approximately HK$18.7 billion the previous week), with inflows concentrated on Monday. The sectors with the largest inflows were commercial retail, electronics, and computers, while the sectors with the largest outflows were non-bank financials, banks, and telecommunications. At the stock level, net purchases were concentrated in Alibaba (approximately HK$6 billion), Hua Hong Semiconductor, and SMIC, with the semiconductor chain turning from net selling to net buying. Net selling was concentrated in dividend-oriented stocks like ICBC and CCB.

Market Sentiment: Sentiment Remains Above Neutral, Supported by Momentum Shifting from Capital to Prices and Derivatives

The Hong Kong stock market sentiment index reading for the latest week was 58.9, a slight increase from 57.9 the previous week, remaining above the 50 neutral level for the second consecutive week. In terms of attribution, southbound net inflow/purchase intensity fell sharply to 39/34 (changes of -38/-19 from the prior week), and the futures contango/backwardation indicator fell to 53 (a change of -39 from the prior week). The recovery in the AH premium (up 19 to 42), implied volatility, turnover, the golden-implied exchange rate, and the put/call ratio (up 7 to 79) formed a counterbalance. The net long/long-short excess returns of the sentiment index timing strategy over the past year are approximately 10% and 22%, respectively.

Interim Reporting Season Approaching; Adopt a Balanced Allocation Strategy

The current rebound in Hong Kong stocks is more attributable to cross-market rebalancing during the AI hardware de-leveraging process (mainly between A-shares and H-shares, reflected in large net inflows of southbound capital) and rotation by long-only institutions moving from high to low positions. This rally is more strongly driven by capital flows. Given that AI hardware shows signs of stabilizing, and as the Hong Kong stock market's interim reporting season approaches, we recommend a balanced allocation across three areas. First, Hong Kong stocks are not fundamentally superior, and the pressure from the interim reporting season has yet to be fully realized, along with lingering capital flow disturbances such as the expiration of lock-up periods. Therefore, low-volatility dividend stocks, such as banks, remain a core position. Second, consumer stocks that may confirm an operational bottom in their interim reports, such as the dairy sector and select retail stocks, should be monitored. Continue to focus on CXO and innovative drug leaders that may show improving trends in their interim reports. Third, the AI chain, such as wafer foundries, which faces capital flow pressure but still has a demand outlook that supports its growth narrative, should be treated as an offensive allocation rather than a core position. Take small positions to participate in oversold bounces.

Risk Warning: Geopolitical fluctuations; policy implementation may fall short of expectations.