In "Major Banks," CITIC Securities predicts that Hong Kong stocks may maintain fluctuations in the short term, suggesting active involvement during downturns and moderate profit-taking during exuberance

CICC released a report stating that last Monday (12th), both China and the U.S. issued the "Joint Statement of the China-U.S. Geneva Economic and Trade Talks," with the tariff reduction exceeding expectations, boosting sentiment and driving a rebound in the Hong Kong stock market. However, as the positive sentiment gradually dissipated, the market has recently returned to volatility. This tariff reduction has played a significant role in easing market sentiment and fundamentals between China and the U.S., with market sentiment quickly recovering. From the unexpected increase in tariffs to the unexpected reduction, market fluctuations have always been dominated by sentiment. For example, last week the Hang Seng Index rose by 2.1%, with a 2.3% contribution from the decline in risk premium being the absolute dominant factor. In contrast, earnings contributed a slight 0.5%, while the rising risk-free interest rate dragged down performance.

Current sentiment has basically recovered, with the risk premium of the Hang Seng Index dropping to 6.1%, even lower than the 6.4% before the "equivalent tariffs." This level is already comparable to the market peak in October last year. In fact, before the tariff downgrade, the market had already largely recovered from the decline following the announcement of "equivalent tariffs." Coupled with the risk premium returning to last year's sentiment peak level, it is not difficult to explain why the market's reaction after the tariff "downgrade" was rather muted. Additionally, the AH premium has also returned to 135% (with previous lows around 130%), which is one standard deviation below the average of the past five years; the short-selling transaction ratio (13.2%) and the relative strength index (RSI) at 59.8 are at average levels. Therefore, after accounting for strong expectations, the market may find it difficult to find more support on the sentiment front in the short term. The subsequent market trend will depend on whether more support can be found in terms of tariffs, macro overall conditions, and individual stock fundamentals, which are currently not obvious in the short term.

The report indicated that since mid-April, southbound inflows have significantly slowed down, and recently even turned into net outflows. Last week, southbound funds turned to an outflow of HKD 8.69 billion (compared to an inflow of HKD 7.27 billion the previous week), marking the largest single-week outflow since early February 2024, with an average daily outflow of HKD 1.74 billion. From May to date, there has been an outflow of HKD 1.42 billion, marking the first monthly outflow since June 2023. Among them, last Monday saw a net outflow of HKD 18.53 billion, the largest single-day outflow since February 2021. On the individual stock level, the most increased holdings were in China Construction Bank (00939.HK), Bank of China (03988.HK), and China Merchants Bank (03968.HK), while reductions were seen in Tencent (00700.HK), Xiaomi (01810.HK), and SMIC (00981.HK).

Possible reasons for the recent slowdown in southbound inflows or even the turn to outflows include: 1) Market sentiment has fully recovered, leading some investors to take profits; 2) The previously strong inflows may have been somewhat excessive and overdrawn, especially with an overemphasis on "southbound pricing power," and the main contributors to southbound inflows are individual and trading funds, which are easily influenced by sentiment and the market itself; 3) The increase in Hong Kong stock placements and IPOs has temporarily suppressed investor sentiment due to market expansion. As of now, the placement scale for Hong Kong stocks in 2025 has reached HKD 123.5 billion, more than double that of the entire year of 2024 The above changes also confirm the bank's previous analysis. Since March, southbound funds have become the main force in the Hong Kong stock market, primarily driven by trading and passive funds (individuals), but the "bullets" from institutions such as public offerings and insurance may not be as abundant as expected. CICC estimates that the relatively certain incremental southbound funds for the remainder of the year will be around HKD 200 billion to 300 billion, with a total inflow of about HKD 800 billion to 1 trillion for the entire year. Looking ahead, for southbound investors, the long-term allocation value of the Hong Kong stock market still exists, but short-term fluctuations are also normal. In addition, active equity public fund holdings account for only 9.6% of the overall southbound scale, and even if still seen as having alpha opportunities, it may not necessarily trigger significant portfolio adjustments.

CICC expects that the Hong Kong stock market may maintain volatility in the short term, and even does not rule out a pullback, suggesting active engagement during downturns and moderate profit-taking during exuberance. The bank estimates: 1) Market sentiment recovers to pre-tariff impact levels, with earnings not downgraded but also temporarily lacking support from the technology sector, the Hang Seng Index returns to 23,000-24,000 points. If further optimistic, assuming sentiment recovers to the early 2021 peak level (indicating significant progress on tariffs and a renewed strengthening of the technology narrative), earnings realize a 4-5% growth (policy hedging + technology earnings realization), corresponding to the Hang Seng Index around 25,000-26,000 points; 2) Market sentiment returns to the previous peak of the China-U.S. trade friction, corresponding to a 7.7% risk premium, without considering the impact of earnings downgrades, corresponding to the Hang Seng Index around 21,500 points; 3) Market sentiment maintains a 7.7% risk premium, with earnings growth slowing to zero (tariff negotiations not progressing smoothly, and domestic policy not timely), corresponding to the Hang Seng Index around 20,500 points