Preface

Hong Kong's stock market experienced a significant downturn last week, mainly due to external disturbances. What can investors expect in the coming months? We believe that short-term disturbances are increasing, suggesting a need for caution. We do not rule out the possibility of further volatility, but our baseline scenario remains that of market oscillation, and we caution against excessive pessimism.

From a technical perspective, the market is approaching an oversold condition, with increased short-sale activity marking a high point since late September. The 19,000-point region serves as a critical support zone across daily, weekly, and monthly charts. If the risk-free interest rate and earnings remain steady, we estimate that the risk premium could rise to the 2024 average of 8.4%, aligning with the Hang Seng Index at 18,000 points, though this implies greater shock expectations without timely policy countermeasures.

Externally, the primary focus is on disruptions. U.S. Treasury yields are climbing, and the dollar is strengthening. Most significantly, President Trump’s nomination of hawkish cabinet members has heightened market anxiety regarding potential policy risks once he takes office, notably concerning tariffs. Before his official inauguration, a 'Trump trade' might persist, driven by the potential for immediate tariff policy changes by executive order. To offset the tariff impact, the Chinese yuan would need to depreciate by 7-10% against the U.S. dollar, but room for such a move may be limited, highlighting the need for fiscal stimulus of 2-3 trillion yuan.

Domestically, fundamental policy maneuvers remain crucial. Growth stabilization policies are aiding the marginal recovery of economic and financial data for October. However, high-frequency data indicate weakening trends in production, consumption, and real estate, necessitating further policy interventions. To counter credit contraction, efforts should focus on lowering financing costs and boosting return expectations, with direct fiscal intervention being the most effective route.

In light of the prevailing oscillatory market environment, a strategy of cautious accumulation during market lows and measured profit-taking during highs could be effective. Sectors to watch include those undergoing supply-side rationalization, benefiting from policy support, or offering stable returns.

Lazy bag