Underlying Logic and Allocation Opportunities of HK Stock Recovery

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Underlying Logic and Allocation Opportunities of Hong Kong Stock Market Recovery

After a prolonged period of volatile consolidation, the Hong Kong stock market has recently experienced a notable recovery rally. The Hang Seng Tech Index was the first to stabilize and rebound, foreign capital ended its consecutive quarterly outflows, southbound capital turnover continued to expand, and market sentiment and liquidity both showed signs of synchronized improvement. Facing this rebound, the market's core concerns are: Is this a short-term repair or a trend reversal? What substantial changes have occurred in foreign investors' positioning logic? In the future, how will core variables in policy, industry, and capital dimensions influence the market's direction?

To deconstruct the underlying logic of this HK stock recovery, China News Service's Jingwei interviewed Li Zhiying, Head of Greater China Equities at UBS Wealth Management Investment Chief Office. In her view, this rebound is not a short-term speculation driven by a single factor, but rather the result of a triple resonance of AI technology revaluation, market sentiment repair, and capital inflows from domestic and foreign investors. The market is still in the early stages of recovery, with structural opportunities dominating. Whether a trend-following market can emerge subsequently depends crucially on the sustainability of corporate earnings recovery.


Triple Resonance: Repricing of the AI Tech Main Line

Li Zhiying pointed out that the core support for this rebound lies in the revaluation of the AI technology main line. Recent breakthrough progress in China's domestic large model technology has directly reshaped overseas investors' perception of the Chinese internet sector. For example, the Kimi K3 model released by Beijing-based Moonshot AI has 2.8 trillion parameters, making it the world's first open-source model at the 3 trillion level. Meanwhile, profit expectations for AI cloud computing businesses at leading internet platforms have been continuously upgraded. Coupled with the bottoming out of internal competition in core local life services, the sector's fundamentals have seen substantial marginal improvement.

Sentiment repair has also significantly contributed to the market recovery. Previously, leading Hong Kong-listed internet stocks experienced a prolonged deep correction, with the valuation gap versus their US-listed counterparts widening continuously, highlighting their cost-effectiveness. Moreover, foreign investors had been underweighting Chinese assets for years, with overall market positioning at historical lows. Once marginal fundamental improvements emerged, market sensitivity increased sharply, sparking a notable sentiment-driven rally.

Evolution of Capital Structure: Short-Term Drives and Long-Term Waiting

From a capital flow perspective, the structure of foreign capital inflows deserves attention. According to calculations based on HKEX clearing system data, foreign capital turned into net inflows of approximately HK$49.4 billion into Hong Kong stocks in the second quarter of 2026, the first quarterly net inflow since 2024. Li Zhiying analyzed that long-term stable foreign capital accounted for about 30% of inflows, while short-term nimble foreign capital accounted for about 70%. This indicates that the return is mainly driven by short-covering and risk-appetite-recovery funds; although long-term capital has turned positive, it has not yet fully increased positions.

She emphasized that the key signal for whether long-term foreign capital will structurally reallocate lies in whether earnings forecasts turn positive. Currently, the allocation of the 40 global funds tracked by UBS to China Hong Kong stocks remains low, with the MSCI China forward P/E ratio at about 11 times, below the historical average. Once earnings forecasts turn positive, if foreign holdings return to historical averages, the overall Hong Kong stock market could achieve a low-to-mid double-digit upside.

In this rebound, southbound capital has also been active, with its influence continuously rising. Li Zhiying noted that the rules for mainland residents' overseas investments are clear, making the Stock Connect a mainstream channel. Hong Kong stocks host a large number of high-quality AI and internet scarce targets not listed in A-shares, coupled with valuation advantages. The scale of southbound capital inflows in the second half of the year is expected to surpass that of the first half, becoming a stable incremental source of liquidity.

Balanced Allocation: Six Core Tracks and Risk Outlook

Combining valuation and industry logic, Li Zhiying is particularly bullish on six sub-tracks:

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1. Tech Equipment (Non-Semiconductor): Outstanding valuation cost-effectiveness, strong earnings growth certainty.
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2. Internet Platforms: AI commercialization is the core highlight.
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3. Semiconductor Sector: Ranked third, but attention needed on chasing highs.
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4. Healthcare Sector: Negative policy impacts from industry overseas expansion have been fully digested, long-term growth logic is clear.
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5. Power Equipment: Benefiting from power demand driven by the global AI industry, with vast overseas expansion space.
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6. High-Dividend Financial Sector: In a low-interest-rate environment, the trend of deposit shifting brings incremental funds to banks and insurance, offering both stability and defensive attributes.
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Li Zhiying reminded that the market has moved beyond a "easy win" scenario in a single track, and balanced diversification with both offense and defense is the optimal strategy. The tech sector continues to rebound, but overall valuations remain within a reasonable range with no obvious bubbles.

Meanwhile, investors need to be wary of four major risks: first, slowing AI capital expenditure among global tech companies and commercialization falling short of expectations; second, volatility in tariff and chip export policies; third, weak corporate earnings recovery; fourth, geopolitical conflicts disrupting the global supply chain. Market opportunities and challenges coexist; cautiously capturing structural opportunities is key to current investing.