Huatai Hong Kong Stock Strategy: Recommend Maintaining a Low Portfolio Allocation in Hong Kong Stocks

Investing in stocks? Rely on Golden Kylin Analysts’ Reports—authoritative, professional, timely, comprehensive—helping you uncover potential thematic opportunities!

(Source: Huatai Ruisi)

Last week, two major market changes occurred: first, short positions stopped declining, indicating that short covering may be nearing the end, reducing the hedging effect on the market; second, geopolitical conflicts and their impacts continue to escalate, leading to a noticeable correction in global risk assets, especially U.S. stocks, which had previously shown relative resilience. Currently, the main trading focus remains on risk control rather than chasing returns. In the short term, attention is still recommended on power operators, leading oil and gas companies, coal-power joint ventures; mid-term, consider accumulating storage-related semiconductor hardware and export-capable power equipment at dips; dividends (especially Hong Kong local stocks) remain a key focus for bottom positions.

Core Views

Last week, two major market changes occurred: first, short positions stopped declining, indicating that short covering may be nearing the end, reducing the hedging effect on the market; second, geopolitical conflicts and their impacts continue to escalate, leading to a noticeable correction in global risk assets, especially U.S. stocks, which had previously shown relative resilience. U.S. stocks and their reflected assets have been the main allocation direction of global funds over the past three years. If volatility persists, it could further intensify the current global liquidity crunch. In previous reports—“Short-term Disruptions Not Yet Over” (2026.3.8), “Winners and Losers in High Oil Prices” (2026.3.9), “Maintaining Defensive Positions” (2026.3.15)—we repeatedly warned that the market underestimates risk pricing. Even after three weeks, the market still largely prices in rising risk premiums and higher interest rates, with potential earnings downgrades just beginning. The core trading strategy remains risk management rather than seeking gains. In the short term, focus on power operators, leading oil and gas companies, coal-power joint ventures; mid-term, accumulate storage-related semiconductor hardware and export-capable power equipment at dips; dividends (especially Hong Kong local stocks) remain a key focus for bottom positions.

Fundamentals: Internet Sector Earnings Expectations Significantly Downgrade; High-Dividend Sectors Show Resilience

Hong Kong stocks (non-financials) consensus earnings forecast for the next 12 months (hereafter “earnings expectations”) have been revised downward by 0.1% over the past week, and upward by 1.1% over the past four weeks. Among key sectors tracked by ETFs, the sectors with the largest upward revisions in earnings expectations over the past week and four weeks include high dividends (0.5%/1.1%) and non-bank financials (0.3%/1.6%). Internet giants have experienced significant earnings downgrades (-2.6%/-3.1%) following their earnings reports, reflecting investor concerns about lower-than-expected profit margins and increased AI investments, which introduce earnings uncertainty for 2026. Industry-wise, excluding volatile steel, sectors like non-ferrous metals (2.3%/7.0%), oil and gas (1.7%/3.4%), and semiconductors (1.2%/2.5%) show marginal improvement and sustained positive momentum. Among top-performing sectors last week, electric power (0.4%) and banking (0.2%) saw slight upward revisions, while auto (-0.3%) experienced a slight downgrade.

Liquidity: Short Covering Slows Down, Southbound Flows Turn Outflows

Foreign capital, as of Wednesday according to EPFR data, net outflow from Hong Kong stocks was $330 million (compared to a net outflow of $1.06 billion last week), with active/passive foreign outflows of $130 million/$200 million (vs. $460 million/$600 million previously). Short positions saw little change, with the latest short position ratio slightly up by 0.02 percentage points to 2.34%, possibly indicating that short covering is nearing completion. Southbound flows turned into net outflows of HKD 6.3 billion last week (vs. net inflow of HKD 52.4 billion the previous week). Sector-wise, as of Wednesday, net inflows were strongest in banking, retail, media, automotive, and real estate, while net outflows were prominent in non-ferrous metals, electronics, oil & petrochemicals, non-bank financials, and consumer services.

Sentiment: Entering Pessimistic Zone, Trading Opportunities Still Await

The latest Hong Kong stock sentiment index reads 39.8, entering the pessimistic zone. Breaking down the components: the sub-index representing southbound capital sentiment (Southbound inflow strength/net buy strength/AH premium) sharply declined from 77/66/70 to 47/41/53; foreign capital indicators (premium/put-call ratio) showed mixed changes (12/51 to 24/29). According to our model, the right-side trading window requires sentiment to fall near the panic level of 30, which is still some distance away. Considering the current Hang Seng Index futures night session has dropped over 2%, sentiment may further weaken on Monday. Since its release in September last year, the pure long/long-short strategies have achieved excess returns of 8.1%/16.5%, with annualized excess returns of 15.9%/32.7%.

Allocation: Prioritize Power Chain, Increase Short-term Hedging, Focus on Power Operators

In the short term, geopolitical risks abroad causing sharp oil price increases and stagflation risks are the main concerns. It is recommended to increase hedging positions, with a preference for power operators with strong anti-inflation properties, operating cycles at bottom levels, and demand driven by token exports (Hong Kong stocks are also more cost-effective). Additionally, focus on oil and gas leaders benefiting from energy price rises, and coal-power joint ventures with substitution effects. Semiconductor hardware related to storage and AI chain gaps can be accumulated at dips if macro beta declines. The mid-term logic for power equipment remains unchanged, and continued holdings are advised. The more cyclical consumer sectors with improving outlooks offer alpha opportunities, and maintaining a defensive stance is still valid. Hong Kong local stocks and some non-ferrous metals remain key bottom positions.

Risks: Geopolitical volatility, policy support weaker than expected.

Charts

Market Performance

Valuation Comparison

Hong Kong Stock Earnings

Hong Kong Stock Liquidity and Sentiment

Buybacks, Placements, IPOs, and Unlocking

Risk Warnings

Geopolitical Risk: Geopolitical conflicts may suppress risk appetite, leading to foreign capital outflows and increased market volatility, which could diverge from our views.

Policy Support Risk: If market overheating prompts policy tightening, it could reverse the current valuation upward trend or reduce trading activity, causing market movements to differ from our expectations.