CICC's Chief Overseas and Hong Kong Stock Strategy Analyst Liu Gang: Hong Kong stock liquidity needs to be improved; Hang Seng Tech presents a gradual opportunity for left-side positioning

Since the start of 2026, the Hang Seng Tech Index, a core asset, has experienced a significant pullback, with multiple technical support levels being broken consecutively. What are the main driving factors? What changes have occurred in liquidity and funding conditions? Has the current correction run its course?

Recently, Securities Times interviewed Liu Gang, Managing Director of China International Capital Corporation and Chief Overseas and Hong Kong Stock Strategy Analyst. Liu believes that the opportunity for Hong Kong stocks to outperform other markets again depends on three conditions.

Changes in Liquidity and Funding Conditions

This year, the overall performance of Hong Kong stocks has lagged behind A-shares, especially the Hang Seng Tech Index, which has declined over 20% since October last year. The technical bear market has attracted considerable investor attention.

Liu explained: “Credit cycles determine the overall index space, while economic prosperity determines structural opportunities.” Specifically, in 2026, amid overall credit cycle fluctuations or even phased slowdown, sectors still in expansion become the focus of capital. If Hong Kong’s unique structure is temporarily disliked by the market, coupled with adverse funding conditions, it’s understandable why the Hang Seng Tech Index has performed poorly.

Liu believes that first, Hong Kong stocks are more sensitive to external liquidity. The nomination of “hawkish” Jerome Powell as the new Federal Reserve Chair by U.S. President Trump has raised concerns about tightening global liquidity. Although the Fed is likely to cut rates, uncertainties and disturbances remain. Second, there is significantly more supply from IPOs and refinancing in Hong Kong stocks. Meanwhile, the strength of A-shares also diverts southbound funds, creating a “see-saw” effect between Hong Kong and A-shares.

How to View the Valuation of Hang Seng Tech?

Since October last year, the characteristic sectors of Hong Kong stocks, such as internet technology and innovative pharmaceuticals, have faded from market focus. The overall performance of Hong Kong stocks has again lagged behind A-shares and other markets.

In February this year, Alibaba, Tencent Holdings, Baidu, and other constituents of the Hang Seng Tech Index notably dragged down the index. The reasons include investor concerns over whether these tech giants’ AI capital expenditures can support commercialization and cash flow realization, as well as skepticism about their large-scale red envelope giveaways aimed at boosting user activity, which are seen as short-term KPI-driven actions with limited relation to their core AI capabilities.

In an interview with Securities Times, Liu highlighted two misconceptions: first, the Hang Seng Tech Index also includes electric vehicle companies and others, so it’s not a narrow tech stock basket; for example, Ctrip’s relevance to AI is limited. Second, regarding valuation, the cheapness of Hang Seng Tech should not be judged solely on absolute valuation. Although the absolute valuation of Hong Kong stocks is lower than that of U.S. stocks and other markets, comparing without considering profitability, liquidity environment, and investor structure can be misleading. For example, the median PE and net profit margins of core internet tech leaders in Hong Kong and the U.S. are aligned, and Hong Kong stocks are not necessarily cheaper.

However, in the short term, the PE ratio of Hang Seng Tech has fallen below its average minus one standard deviation, and the RSI indicator suggests it may be oversold, offering some appeal. For some investors, current valuations and market sentiment present an opportunity for gradual dollar-cost averaging.

When Will Hong Kong Stocks Strengthen?

In 2025, the rise of the Hang Seng Tech Index mainly reflected valuation-driven gains. Liu believes that future upside requires earnings recovery support, rather than relying solely on valuation and risk premium expansion.

However, with the overall credit cycle lacking expansion this year, corporate earnings are unlikely to improve significantly, with more focus on structural highlights. According to CICC’s overseas strategy estimates, the earnings growth rate for Hong Kong stocks in 2026 will be around 3%–4%, lower than 6% in 2025 and also below A-shares’ 4%–5%. Liu suggests that the overall index upside in 2026 is limited, and investors should focus more on next-stage scarce assets.

Structurally, Hong Kong stocks and A-shares each have their focus. Hong Kong’s high-dividend, internet technology, new consumption, and innovative pharmaceutical sectors remain distinctive. In these sectors, mid-term trends still center on AI technology and cycles, which are also the main directions of current credit expansion. The recently discussed “HALO trading” essentially reflects industry trends and economic cycles. While cyclical sectors with heavy assets benefit, for AI, short-term hardware policy support is highly certain, especially in infrastructure, domestic substitution, and supply chain security, where A-shares’ related stocks may see more direct gains. Hong Kong stocks are more concentrated on internet and application sectors, with less clear short-term monetization pathways, requiring more catalysts. Even if overall performance remains weak, Hong Kong’s characteristic sectors still offer scarce allocation value for southbound funds.

Regarding funding conditions, 2026 is unlikely to surpass 2025, and probably will be weaker than A-shares. First, the net inflow of southbound funds in 2025 was larger than in 2024, mainly driven by ETF and other trading funds like private equity and retail investors, which are closely linked to market sentiment. Without a significant market surprise, it’s difficult for southbound funds to grow substantially beyond last year. Second, although the Fed is likely to cut rates again, uncertainties following Powell’s appointment could cause more volatility in Hong Kong stocks. Lastly, IPO and refinancing activities in Hong Kong remain active; CICC’s overseas strategy estimates this year’s scale could reach HKD 1.1 trillion, far exceeding the approximately HKD 600 billion in 2025. Additionally, the large number of IPO lock-ups in 2025 may pose potential liquidity pressures in 2026.

Looking ahead, the key conditions for Hong Kong stocks to outperform other markets again are: an easing of Fed policy expectations, a return of Hong Kong’s characteristic sectors to market focus, and weak A-shares driving southbound capital inflows.