Since the beginning of this year, a notable trend has emerged in the Hong Kong stock market, with significant capital inflows from foreign investors amounting to almost HKD 13 billion as of February 7. This influx is particularly concentrated in sectors such as technology and consumer industries, which are perceived to be undervalued relative to the broader marketThe recent trend of short covering has also contributed to the recent upsurge in the Hong Kong stock marketInterestingly, despite the positive momentum, the proportion of outstanding short positions relative to the market capitalization remains high at 1.37%, which is double the historical average since the start of 2023. This indicates a persistent bearish sentiment among investors, even amidst a corrective phase for other markets.
One of the significant drivers behind this bullish behavior is the recent launch of the DeepSeek R1 model on January 20, which has drastically reduced the costs associated with training AI models and has shown capabilities comparable to those of leading American AI firmsThe swift deployment of AI models by domestic companies, along with collaborations between giants such as Alibaba and Apple, illustrates a robust synergy between the training and application sectors of artificial intelligence in ChinaDuring this period, there was increasing skepticism among global investors regarding the massive capital expenditures by major US tech firms in the AI field and their ability to translate into tangible performance.
As the expectations surrounding the upcoming Two Sessions (a significant political event in China) began to surface, positive sentiments boosted the sectors of technology and consumer goods within the Hong Kong marketFrom January 14 to February 12, the Hang Seng Index and the Hang Seng Tech Index surged by 14.1% and 25.1%, respectivelyParticularly influential in this rally were the information technology and consumer discretionary sectors, which saw gains of 26.2% and 22.7% respectively.
In stark contrast to these developments in Hong Kong, the US market is currently facing challenges
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The introduction of increased tariffs on Chinese goods, which took effect on February 1, has added pressure to US equitiesAdditionally, tariffs on steel and aluminum imports announced on February 10 are further straining expected corporate earnings for 2025, leading to adjustments in profit forecastsComparing performance expectations, estimates for the S&P 500's net profit and revenue for 2025 were down by 0.5% and 0.1% as of February 7 from projections made on January 24, and similar declines were noted for the NASDAQ-100.
Amidst these fluctuations affecting the US market, the relative valuation of Hong Kong stocks has continued to stand outUnlike the decreased profit expectations experienced in the US, the projections for Hong Kong stocks have remained stable, with valuations still at historical lowsAs of February 13, the price-to-earnings ratio (P/E) for the Hang Seng Index was recorded at 9.8 times, considerably lower than the historical averageThe Hang Seng Technology Index, although reaching post-pandemic highs, has a P/E ratio of just 17.4, well below the peaks observed in October 2024 and January 2023.
The contrasts in valuation highlight the opportunity for arbitrage between the US and Hong Kong markets, especially in sectors like consumer goods and technology where the Hong Kong market currently boasts valuation discounts of around 50% compared to their US counterpartsThe foreign inflow of approximately HKD 12.76 billion since January 24 correlates closely with the downturn in US equities and predominantly favors undervalued sectors like technology and consumer goods.
Despite the positive inflow of foreign investments and a notable net buying trend, particularly since the beginning of the year, there are still concerns about short sellingWhile there has been some short covering, causing a rebound in the Hong Kong market, the outstanding short positions still account for a significant portion of market capitalizationNotably, the medical, consumer staples, and materials sectors have relatively high short selling ratios, indicating that bearish sentiment persists in these areas
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