The May Day holiday is only the second day, and the performance of Hong Kong stocks on the first trading day was amazing!

The Federal Reserve kept its benchmark interest rate unchanged last night, and overseas market performance fluctuated. Hong Kong stocks rose rapidly after opening slightly lower in early trading, and the Hang Seng Index finally broke through the annual line and stood at 18,000 points.

By the close, the Hang Seng Index had risen more than 2.5% and stabilized above 18,000 points; the technology sector maintained its recent strong performance, and the Hang Seng Technology Index soared 4.45%.

Although the attitude of cutting interest rates has not changed, the Federal Reserve actually gave a “surprise surprise”. Coupled with the positive overall tone set at the pre-holiday domestic Politburo meeting, the strong performance of A50 and China Securities, and optimistic market sentiment once again erupted in Hong Kong stocks!

The Hang Seng Index has rebounded more than 10% from its low point in the past two weeks. The continued inflow of foreign capital confirms the capital trend of switching from Japanese stocks to Hong Kong stocks. The real estate, internet, and automobile sectors, which have had a large pullback in the past two years, are undergoing a round of valuation repairs.

How long will the new wave of technical bull markets last?

01

The recent continuous inflow of capital, combined with the continued cooperation of foreign investment banks, made the Hang Seng Index the best-performing major global stock index in April, with an increase of more than 7%.

Looking back at the strength of the increase in Hong Kong stocks in the past two years, it's really rare!

As early as March, Morgan Stanley released a report saying that global capital is returning to the Chinese stock market. As bearish sentiment abates, the withdrawal of long-term global investors from the Chinese stock market (A shares and Hong Kong stocks) has already pressed the pause button.

According to the data, as of last Wednesday, EPFR's overseas active capital outflows of US$310 million from the Hong Kong stock market, which is narrower than the previous week's outflow of US$420 million, but it has been outflows for the 43rd consecutive week.

Pressing the pause button may be an early sign. Apart from the return of transactional capital, the allocation type may also be reconsidering its asset allocation throughout Asia.

There are two main factors to consider. One is an improvement in domestic fundamentals, and the other is pressure from the external environment. For example, the Bank of Japan raised interest rates and fluctuating valuations of US technology stocks.

On the domestic front, UBS Group raised the mainland China and Hong Kong stock markets to increase its holdings last month because despite concerns about China's real estate and macro situation, it is still optimistic about the company's profit performance.

At the same time, the rise in policy expectations provides some catalyst.

On April 19, the Securities Regulatory Commission issued the “5 Capital Market Cooperation Measures with Hong Kong”; the Ministry of Finance proposed supporting the central bank to gradually increase liquidity in treasury bond transactions, etc., including the loosening of real estate policies in first-tier cities, all of which made investors have positive expectations for the advancement of other key measures in the future.

Meanwhile, the pre-holiday Politburo meeting set a positive tone. First, the overall economic performance in the first quarter was affirmed. “It showed the characteristics of rapid growth, optimized structure, and improved quality and efficiency, and the economy achieved a good start.” Second, the policy points to “take advantage of the momentum and avoid being tight and loose”. This is an important setting, and active macroeconomic policies will continue in the future.

Furthermore, the conference's focus on real estate policies and fiscal debt issuance attracted much attention. The conference first proposed “integrated research on policies and measures to absorb existing real estate and optimize incremental housing”. Compared with the framework statement of “increasing the construction and supply of affordable housing and improving basic systems related to commercial housing” during the two sessions, it was also more specific.

On the foreign side, the recent trend of accelerated depreciation of the yen has weakened the return on overseas capital investment in Japanese stocks, which may cause foreign investment considerations to shift the focus of allocation from Japan to Hong Kong.

After leading the global rise in the first quarter, Japanese stocks have declined somewhat in recent weeks. While Japanese stocks were recovering, the Hang Seng Index became the best performing index in April.

Currently, Hong Kong stocks as a whole are much cheaper than Japan. The expected price-earnings ratio of the Hang Seng Index is 8.5 times, while the expected price-earnings ratio of the Nikkei 225 Index exceeds 21 times.

Last night's “surprise” came from the Federal Reserve's QT brakes that exceeded expectations.

Although the Federal Reserve has reiterated that interest rates will continue to be high, there is no further progress in falling inflation. The interest rate cut requires more confidence. The purpose of speeding up the end of the contraction is to prevent market liquidity from running out again.

As we all know, the maturity of US Treasury bonds this year is unprecedented, reaching 8.9 trillion US dollars, and most of them are still short-term bonds within 1 year. As the Federal Reserve shrinks and US stocks rise, there are fewer and fewer short-term bonds to be used for refinancing. As soon as liquidity is exhausted, all assets will fall.

Two weeks ago, the New York Federal Reserve predicted that the downsizing might end at the beginning or middle of next year. At that time, the Federal Reserve's downsizing rate was almost 95 billion US dollars/month, which was just the right time.

In order to prevent the liquidity crisis from happening again, the Federal Reserve plans to lower the monthly downsizing limit from 60 billion US dollars to 25 billion dollars starting in June. The deceleration far exceeding market expectations is actually equivalent to increasing the liquidity of the market by 1.2 trillion US dollars per year and forcibly extending the life of US bond issuance.

As soon as the news was announced, the market's anxiety about tight liquidity was greatly alleviated. The price of US bonds rose, and the stock index also fluctuated.

However, once the valves controlling water discharge are loosened, the difficulty of reducing inflation will also increase, and the pace of interest rate cuts may also be affected.

02

In terms of sectors, retail, automobiles, software, pharmaceuticals, and real estate led the increase, while the performance of energy, telecommunications, and utilities weakened. Large-cap weighted stocks showed strong performance. Tencent rose 3.8%, Meituan rose 8.77%, BYD rose 4.36%, and JD rose 4.88%.

Boosted by policy expectations and April sales, auto stocks exploded across the board today. By the close, the new power Nio had risen 20.7%; Zero Sports had risen 15.10%; Xiaopeng had risen 8.24%; and Ideal Auto had risen 3.46%.

According to the news, NIO delivered a total of 15,600 vehicles in April, a sharp increase of 134.6% over the previous year. Among the new forces, delivery volume was second only to Ideal Cars. The latter carried headwinds after poor Mega marketing, adopted a price reduction strategy, and once again overtook the new power brand to win the top sales title.

However, the momentum has been bravely questioning that AITO deliveries unexpectedly declined month-on-month. 25086 vehicles were delivered in April, down 20.93% month-on-month. Other car companies, Zero Sports delivered 15,000 vehicles in April, a year-on-year increase of nearly 72%; Xiaopeng Motor delivered nearly 9,400 vehicles in April, an increase of nearly 33% over the previous year.

Xiaomi cars, which are in the limelight, continue to explode. Since the official delivery began on April 3, the number of Xiaomi cars delivered 7,058 vehicles in 28 days. As of April 30, the number of units sold for the first Xiaomi model, the SU7, was 8,063. However, production capacity will take some time to climb, and deliveries are not expected to be too high in the near future.

Furthermore, automobile trade-in rules have recently been introduced, and demand is expected to be released intensively in the second quarter. The agency said that since “trade-in” was proposed in early March, terminal wait-and-see orders have clearly accumulated. It is estimated that this round of subsidies is expected to drive an increase of 2.58 million vehicles, support an increase in domestic demand throughout the year, compounded by the continued export boom, and the industry's growth rate is expected to rise to double digits.

There have been frequent positive developments in Hong Kong stocks and domestic housing stocks recently.

Recently, property market optimization policies have continued to be introduced in places such as Chengdu, Nanjing, and Beijing. At the same time, statements on real estate policies at the Politburo meeting have strengthened the targeting of existing housing measures.

Today, Country Garden Services and Vanke companies increased by more than 10%, Yuexiu Real Estate by 9.57%, and Longhu Group by more than 8%.

In terms of technology stocks, since Shangtang Technology released the “Japan-Japan New SenseNova 5.0” model on April 23, its stock price has risen more than 160% for two consecutive weeks since the performance was fully compared to the GPT-4 Turbo.

Recently, Shang Tang has a strong presence in the field of generative AI. At the 2024 Beijing Auto Show, Shangtang first showcased the road test performance of UniAd, an end-to-end autonomous driving solution for mass production. At the same time, he also brought an AI large model cockpit product matrix with a multi-modal scene brain as the core, and a new 3D interactive cockpit demonstration.

According to Wang Xiaogang, co-founder of Shangtang Technology, UniAd, a true end-to-end autonomous driving solution for mass production, aims to be mass-produced and implemented by next year.

03

As a special entity, Hong Kong stocks are viewed domestically in terms of fundamentals and abroad in terms of liquidity. Over the past few years, due to various reasons, they have experienced a severe decline. However, the sharp rise this time without capital going south shows that external investors are taking a positive view of Hong Kong stocks.

The research records we have followed show that currently there are indeed foreign-funded long-term investment (long-only) institutions that are increasing their allocation to the Chinese stock market. Hong Kong stocks are the main ones, followed by A shares.

However, judging from the trading style, this backflow is generally “transactional”, mainly due to the need to adjust positions. Because in the past 3 years, global capital has continued to increase the allocation of US stocks and Japanese stocks, which have significantly exceeded the allocation, while the allocation for China is significantly lower.

However, by March of this year, the US inflation data was very strong. After the Federal Reserve's interest rate cut expectations for the year were repeatedly postponed, the currency in the Asia-Pacific region depreciated significantly, especially the yen. Because of long-term capital allocation, it generally does not deliberately hedge against the exchange rate. Although they have made money on Japanese stocks, they have also lost money in exchange rates. Recently, the fall in Japanese stocks and the sharp fall in the yen have accelerated the pace of overseas capital allocation in the Chinese stock market.

In addition, Hong Kong stocks are denominated in Hong Kong dollars, and the Hong Kong dollar is also linked to the US dollar, so there is no need to consider exchange rate issues for US dollar funds. Moreover, Hong Kong stocks fell too much before, and the cost performance ratio was very high, so it is not surprising that Hong Kong stocks have surged.

As for today's sharp rise, one more possibility is that foreign investors took advantage of the Federal Reserve's release of pigeons and the rebound in US stocks, and there was no southbound capital involved, so it is not ruled out to rush ahead and wait for southbound capital to take over after returning from vacation.

Therefore, if the periphery continues to improve, the probability that Hong Kong stocks will continue to rise this week is still very high. Investors with positions can continue to hold and continue to make money while enjoying their vacations.

However, I need to remind everyone that, as mentioned earlier, it is still only an adjustment of the position of transactional capital. Looking at this position adjustment for the time being, I don't fully believe in the reversal of China's economic fundamentals. Although the Politburo meeting just ended, it rarely proposed dealing with domestic real estate inventory issues. This has greatly changed the capital market's views on the fundamentals of the Chinese economy.

However, for the capital market to fully expand, more data verification is needed. Foreign investors increased their allocation of Hong Kong stocks at this time, mostly because they think that current valuations are cheap. At the same time, they also have exchange rate stability, which has the advantage of relative choice.

However, one of the important risks of transactional capital is that in the relatively short term, once peripheral capital markets such as US stocks and Japanese stocks complete adjustments and return to growth, then capital may be withdrawn from Hong Kong stocks and re-embraced peripheral capital markets.

Therefore, from a prudent perspective, if profits are good, investors can also gradually reduce their positions and lock in profits. However, if you firmly believe that economic fundamentals have been reversed and keep holding positions or even going long in line with overseas liquidity, it is also a good strategy, as long as you do a good job of risk management and hedging the necessary risks.

04

Because of the staggered holidays, every major holiday like May 1st and 11th, peripheral markets are rushing to varying degrees, or soaring or falling. Therefore, keeping an eye on peripheral markets at this time is important for post-holiday operations.

Looking at peripheral markets over the past two days, Hong Kong stocks are doing well, and there are many favorable factors, while US stocks are more volatile because they want to discuss interest rates. However, after Powell released his pigeons last night, and US stocks have already experienced a wave of sell-offs some time ago, they should gradually enter a new stage of buying in the future.

Although the global economy is still generally weak, the stock market atmosphere is not very bad, which is really rare. Because, we still maintain a cautious bullish general view, whether it's US stocks, Japanese stocks, or Hong Kong stocks.

Editor/Jeffrey