In an impressive turn of events, the Hang Seng Index achieved a new year-to-date high this weekBy the close of trading on the 21st, the index surged by 0.91%, closing at 20,106.55 points, while the Hang Seng Technology Index rose by 2.14% to settle at 4,693.72 pointsThis marks a remarkable rebound as the index climbs back above the 20,000 point threshold, recording its sixth consecutive riseThis recent resurgence of the Hong Kong stock market can be attributed to several factors, including the release of quarterly economic data that exceeded expectations, a decline in U.Streasury rates, and a recalibration of pessimistic external policy predictionsCompared to its sluggish performance at the start of the year, the Hong Kong market is gradually recoveringWith improving earnings and liquidity forecasts, there is potential for the market to sustain this upward trend

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Possible mispricing in the market may include an alleviation of extreme pessimistic tariffs; an earlier peak in U.Streasury yields than anticipated, possibly by the end of the first quarter or the second quarter; and a stronger-than-expected improvement in fundamental data aided by enhanced policiesAgainst a backdrop of a spring rally, the current low valuation levels of the Hong Kong stock market suggest that the short-term recovery trend is likely to continueInvestors are encouraged to explore opportunities in the Hong Kong stock market, including ETFs such as the Hang Seng Index ETF (159920) and the Hang Seng Technology ETF (513180).

Both components of the market—the numerator and denominator—are working in concert to drive the reboundThe Hang Seng Index and Hang Seng Technology Index rebounded significantly, with respective increases of 6.53% and 11.18% last week, showcasing a comprehensive industry uptick, particularly in non-essential consumption and information technology sectors that surged by 9.71% and 7.56% respectively.

On the numerator side, recently published economic data has surpassed expectations across the board

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For instance, the actual GDP growth for the fourth quarter of 2024 registered a year-on-year increase of 5.4%, exceeding the market's anticipated 5.1%, which supports an annual GDP growth of 5%. Additionally, exports in December saw a year-on-year growth of 10.7% compared to November's 6.7%, outpacing the expected 7.5%—with exports to the U.Srising by a notable 15.6%. Stronger-than-expected retail performance was reflected with a year-on-year increase of 3.7% in December's retail sales, surpassing the anticipated 3.5%. Furthermore, industrial production indicators also rebounded slightly, with December's industrial added value and service sector production indices improving to 6.2% and 6.5% respectivelyNew housing sales remained stable, showing a year-on-year slight decline of 0.5%, however, sales revenue managed a 2.4% increaseMonetary supply data reflected better-than-expected figures as well, with M1 decreasing by only 1.4%, higher than the projected -3.3%, while M2 saw a growth of 7.3%, signifying an acceleration in credit expansion.

On the denominator front, U.S

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consumer price index (CPI) data for December, including core CPI figures, came in below expectations, easing the market's tension regarding U.Streasury yields and Federal Reserve rate cutsAs a result, U.Streasury rates fell sharply, with a decrease of over 20 basis points in a single dayFurthermore, Federal Reserve Governor Christopher Waller noted that if more positive data like the December CPI report continues to emerge, the possibility of a March rate cut cannot be ruled outThe yield spread between the 10-year Chinese and U.Streasuries has contracted to within 300 basis points, which is a favorable signAdditionally, the Chinese central bank's adjustment of macroprudential factors this week has caused market expectations for currency exchange rate stability to strengthenBoth the numerator and denominator’s positive developments are likely to boost short-term expectations for the Hong Kong stock market.

Moving forward, it seems that expectations may continue to improve

• Enhancing Service Quality in the Futures Market
• Private Bond Fund Yield Exceeds 260% Last Year
• $37 Billion Flows into Broad-Based ETFs to Start the Year
• Sharp Decline of the Dollar
• Real Estate Market Showing Signs of Improvement

Investors are seeing potential adjustments to the previously bearish earnings forecasts.

Recently, earnings growth forecasts for Hong Kong stocks have been widely revised upwardThe latest projections indicate that the forward 12-month earnings per share (EPS) growth for the Hang Seng Index is estimated at 2.82%, while for the Hang Seng Technology Index, the figure skyrockets to a significant 24.2%. Over 80% of the earnings in the Hong Kong market stem from Chinese companies, thereby making the performance closely aligned with the economic cycle in mainland ChinaDespite the current overall earnings headwinds, there is reason to believe that expectations for earnings improvements—especially following policy announcements following key two sessions—could materialize sooner than the market anticipatesClarity in policy direction post-meetings may lead to revaluation in the market concerning the magnitude of such policies.

Moreover, it appears that the peak in U.S

treasury yields might be reached earlier than market expectationsThe U.Sdollar liquidity seems excessively priced concerning the new president's policies, suggesting that the peak interest rates may arrive earlier than anticipatedThe latest economic indicators from the U.Sjob sector show a robust environment; for example, non-farm payroll figures and unemployment rates were significantly better than expected in DecemberCurrent dynamics suggest that there is no significant indication of extreme job market deterioration at this timeIn light of high-frequency metrics, small business optimism and hiring plans remain strong, indicating a lack of immediate threat to employmentIn terms of inflation, while the labor supply-demand gap has stabilized, wage growth still possesses room for a downward adjustment, suggesting that core service inflation could see further cooling despite rising pressures in food, energy, and core goods in the near term

Investors might be overpricing the future economic and inflation risks in the U.Sdollar and treasury markets, given that pre-tariff implementation pressures on exchange rates may consistently burden non-dollar economies.

Another notable factor influencing market behaviors is the shifting expectations around tariff policiesAs of this week, the newly inaugurated U.Spresident delivered an inauguration speech that notably sidestepped the mention of any tariff-related measures, causing the dollar index to drop sharply while other currencies appreciated against it, leading to a substantial increase in market risk appetiteAlthough several executive orders were signed by the new president, there were no immediate tariff implementationsThis potentially phases out previously doom-laden tariff projectionsWhile tariffs may inevitably be enacted, we predict changes regarding their magnitude and timeline of implementation, moving forward.

Overall, the valuation of the Hong Kong stock market remains at relatively low levels

The P/E ratio (TTM) of the Hang Seng Index stands at 9.1, a valuation quantile of 22.2%, putting it slightly above the lower one standard deviation level viewed over the last decadeNotably, even within this long-term perspective, it sits below the ten-year average of 10.52, with a discount exceeding 15%. The current valuation advantages of Hong Kong stocks on a global scale are particularly pronouncedFurthermore, inflationary pressures in China that have impacted the income side are expected to gradually ease; in the first ten months of 2024, cumulative inflows from the southbound trading amounted to nearly HKD 630 billion, resulting in a significant increase in the influence of domestic investors compared to foreign players, especially in the small to mid-cap sectorsGiven the anticipated transitional changes in fundamental aspects, liquidity, and tariff policies, it is likely that investor sentiment will continue to improve.