Institutions are moving south, and Hong Kong stocks will continue to be bullish in 2026! Cathay Pacific Securities Wu Xinkun: Public offering insurance funds are expected to exceed 800 billion in holdings

Low valuations, capital inflows, and AI resonance continue to support the Hong Kong stock market bull run. Let's take a closer look at the threefold support for Hong Kong stocks in 2026. For the live replay, please click → Are Hong Kong stocks expected to reach new heights? | 2026 Annual Outlook · Issue 2 Core Insights Overview The bull market pattern in Hong Kong stocks will continue in 2026. The threefold support of valuation, capital, and structural assets means the bull market logic remains unchanged. The two main driving forces behind this year's market: first, substantial buying from southbound funds has brought ample liquidity; second, the advantageous asset structure of Hong Kong stocks is highlighted, with outstanding performance in the internet, new consumption, and innovative pharmaceuticals. Hong Kong stocks still offer value for money. The Hang Seng Index and the Hang Seng TECH Index are currently at historical percentiles of about 60% and 30%, respectively, significantly lower than major markets in the US and Europe. The liquidity landscape will remain accommodative. Southbound institutions (public funds, insurance funds) have strong allocation inertia; improvements in Sino-US relations and reduced uncertainty for foreign capital will continue to support liquidity through 2026. The AI application cycle has become the biggest structural opportunity. Hong Kong's internet companies are concentrated in the application and software sectors, making them the part of Chinese assets that can truly embrace the AI wave. Three investment themes worth noting: Technology (AI applications): the growth logic is the clearest; innovative pharmaceuticals: the industry is moving from concept to fundamentals; brokerages: the beta representatives in a bull market, with greater performance elasticity. The rise of the "new economy" is reshaping the structure of Hong Kong stocks. The proportion of new momentum industries such as new energy, AI, and biotechnology continues to increase, becoming the core of Hong Kong stock growth. The discount issue of Hong Kong stocks is showing a trend of improvement. Increased trading activity and the concentration of new economy companies listing in Hong Kong are driving the valuation center upward. The pricing power of domestic capital has significantly increased. The proportion of foreign capital in the existing funds has dropped to 58%, with southbound funds nearing 30%, and in some industries, the proportion of domestic capital has exceeded half. Two major risks need attention: first, geopolitical fluctuations; second, changes in global liquidity. However, the overall trend remains positive, and Hong Kong stocks are expected to reach new heights in 2026. Q1: What are the core drivers behind the surge in Hong Kong stocks this year? Eddie Wu: The impressive performance of Hong Kong stocks this year is mainly driven by two factors. First, incremental capital. This year, Hong Kong stocks have clearly become an incremental capital market, with southbound funds being the primary driving force. Data shows that by mid to late July, the scale of southbound funds allocated to Hong Kong stocks has exceeded the total amount for last year, and in September, cumulative net inflows surpassed one trillion. The substantial buying by southbound funds has brought ample liquidity, which is the primary reason for the strong performance of Hong Kong stocks. Second, asset structure advantages. Looking back since the beginning of the year: the internet sector performed outstandingly in the first quarter, followed by new consumption and innovative pharmaceuticals leading the way in the second and third quarters, and the internet once again becoming the focus in the fourth quarter. These sectors are all advantageous assets for Hong Kong stocks. Structurally, Hong Kong stocks have a large concentration of software and application-oriented internet companies, while the technology sector in A-shares is more focused on hardware and semiconductors Under the wave of AI applications, Hong Kong stocks have taken on more opportunities at the application layer, forming a unique structural advantage. Summary ：The strong performance of Hong Kong stocks this year mainly comes from ample liquidity and structural enhancement of advantageous assets . Q2: Will Hong Kong stocks continue the bull market in 2026? Eddie Wu: I believe Hong Kong stocks will continue the bull market pattern in 2026 for three reasons: First, valuations remain advantageous. Although the Hang Seng Index and the Hang Seng TECH Index have both risen significantly this year, current valuations are still around the historical median, overall not expensive, and high cost-performance ratio. This is the most important foundation for being optimistic about Hong Kong stocks. Second, the liquidity environment is ample and sustainable. Southbound funds remain the main allocation force. A breakdown of the structure shows that institutional funds (public offerings, insurance funds) are the main players, with allocation having inertia. At the same time, the improvement of China-U.S. trade relations and the decrease in foreign investment uncertainty are raising expectations for the allocation of Chinese assets (including Hong Kong stocks), which will continue to support liquidity. Third, the attractiveness of advantageous assets is increasing. We are currently in a large cycle of AI applications. In this wave, Hong Kong internet companies are the group within Chinese assets that can truly undertake AI application industry opportunities. Meanwhile, more and more mainland technology growth enterprises are listing in Hong Kong, further enriching the quality asset pool of Hong Kong stocks. Summary ：In 2026, Hong Kong stocks still possess high valuation cost-performance ratio, stable funding, and prominent structural advantages as three major supports, continuing the bull market logic. Q3: What is the valuation level of Hong Kong stocks in the global market? Eddie Wu: From both vertical and horizontal perspectives, Hong Kong stocks have significant valuation advantages. First, vertical comparison with its own history. The Hang Seng Index has a valuation percentile of about just over 60% since 2005; The Hang Seng TECH Index has a percentile of only just over 30% since data has been available; overall, it is around the historical average, and not expensive. Second, horizontal comparison with overseas markets. The historical valuation percentiles of major markets such as the U.S. and Europe are generally in the 70%–80% range, with some even exceeding 90%; If we look further at the industry level, whether measured by PE or PB, most industries of Hong Kong stocks have valuations that are significantly lower than U.S. stocks. Conclusion ：Whether compared vertically or horizontally, Hong Kong stocks are currently in the lower range of valuation central tendency and have a significant cost-performance advantage . Q4: The structure of Hong Kong stocks is becoming increasingly rich, with technology, new consumption, and innovative drugs all performing well. Which main lines and sectors do you favor more in 2026? Eddie Wu: In 2026, I believe we should adhere to one main line: growth and technology, especially in areas related to the internet and AI applications. First, the technology main line remains clear. Chinese assets experienced a round of technology stock cycles from 2013 to 2015, driven by the mobile internet and Apple supply chain wave, with the path being "hardware—software—content—application." The current logic of the AI mega cycle is also similar, transitioning from content to application stage. The launch of DeepSeek at the beginning of this year marks that the domestic field of large models and AI applications has already achieved global leading strength. Second, Hong Kong stocks have more advantages in AI applications. A-share technology is mainly hardware-focused, with about 60%–70% concentrated in hardware and semiconductors; while the Hong Kong stock technology sector has 60%–70% belonging to application and software-oriented enterprises. The AI application wave continues, and in this context, the technology sector in Hong Kong, especially the internet sector, deserves special attention. Third, innovative drugs and brokerages also have opportunities. Innovative drugs: The industry has shifted from "concept-driven" to "fundamentals-driven," with some leading enterprises achieving revenue growth and international breakthroughs through BD transactions, supported by solid fundamentals. Brokerage sector: If 2026 remains a bull market, brokerages have obvious β attributes, with greater performance elasticity. Hong Kong brokerages also outperform A-shares in terms of valuation and cost-effectiveness. Summary : The three investment main lines for 2026 are technology (AI applications) — innovative drugs — brokerages , among which the technology main line is the most crucial. Q5: In the context of southbound funds continuously strengthening pricing power, will the discount issue of Hong Kong stocks improve in 2026? Eddie Wu: I believe that the discount phenomenon of Hong Kong stocks is currently undergoing a trend of improvement. First, the differences in systems and liquidity are the main historical reasons for the discount. The fluctuation limits of Hong Kong stocks are more relaxed, and there are more short-selling mechanisms; at the same time, historically, the trading activity has been significantly lower than that of A-shares and U.S. stocks, leading to a long-term discount in Hong Kong stocks. Second, current trading activity has significantly increased. Against the backdrop of continuous buying by southbound funds, the turnover rate of Hong Kong stocks and the trading proportion of active sectors have both improved significantly, and liquidity discount is narrowing. Third, the asset structure is optimizing. In the past, Hong Kong stocks were mainly composed of traditional and cyclical industries, but now the proportion of the new economy is rapidly increasing. Since the beginning of this year, several leading mainland enterprises have listed in Hong Kong (such as CATL), most of which belong to new economy and growth industries, changing the overall structure of Hong Kong stocks. Traditional industries have low valuations, while growth and technology companies have higher valuations, and structural changes lead to an overall upward shift in valuation center. Conclusion : With the improvement in trading and the rise of the new economy, the discount issue of Hong Kong stocks will continue to improve _in 2026 _ Q6: You have mentioned "new economy" multiple times. Can you explain more specifically what areas this concept mainly includes? Eddie Wu: "New economy" refers to a category of industries that align with the current industrial cycle, with technology and growth as the core driving forces. In the past, domestic economic growth relied more on "old driving forces" such as real estate; now, new growth points come from: New energy AI and large models Next-generation information technology, biotechnology Aerospace, intelligent manufacturing, etc. The proportion of these industries in GDP is rapidly increasing, representing areas where new driving forces are emerging. Therefore, "new economy" essentially represents the technology growth sector that indicates the direction of China's economic structural upgrade. Q7: The strength of the Hong Kong stock market still lies in the capital side. In 2026, which funds will become the main sources of incremental capital? Eddie Wu: I believe there are two main sources: improvement in foreign capital and continuation of southbound capital allocation. First, marginal improvement in foreign capital allocation. In 2025, foreign capital experienced three phases in the Hong Kong stock market: net outflow in the first quarter, inflow in the second quarter (May to July), and another outflow in the third quarter. The core reason for the inflow was the easing of China-U.S. trade relations. Looking ahead to 2026, as the global landscape continues to trend towards cooperation, this will further improve foreign capital's attitude towards the Hong Kong stock market. Second, southbound capital remains the main force. In 2025, southbound capital allocation reached a historical high, with significant contributions from institutions (public funds, insurance funds), peaking at around 70%. It is expected that in 2026, institutions will continue to focus on allocating Hong Kong stocks, especially in technology, internet, innovative pharmaceuticals, and other growth sectors. According to estimates, the total allocation scale of public funds and insurance funds is expected to exceed 800 billion yuan. Third, the pricing power of domestic capital is rising. As of the end of the third quarter of 2025, the proportion of foreign capital in the stock market dropped to about 58%, while the proportion of southbound capital increased to nearly 30%. Over the past year and a half, the proportion of foreign capital has decreased by about 10 percentage points, while domestic capital has increased by 10 percentage points. In some sectors (such as the dividend sector), the proportion of domestic capital has exceeded 50%. This means that the pricing power of the Hong Kong stock market is accelerating its transfer to domestic capital. Summary : Three positive factors for capital in 2026— marginal improvement in foreign capital, continuation of southbound institutional allocation, and enhancement of domestic capital's voice . Q8: Financial reports from major internet companies like Tencent and JD.com will be released successively. What indicators should investors focus on? Eddie Wu: I believe we should look at it from both static and dynamic perspectives. First, static perspective: look at profitability and valuation matching. We need to assess "cost-effectiveness" by combining performance growth and valuation levels. In our investments, we should neither look only at cheapness nor only at quality; we need to comprehensively evaluate the PEG model (profit growth/valuation) to find reasonably matched targets Second, Dynamic Perspective: Looking at the Position in the AI Application Cycle. The performance of tech stocks often follows the rule of "supply creates demand." Looking back at the Apple supply chain cycle from 2013 to 2015, there was a sequence of profit transmission from hardware to software to applications at each stage. The current AI cycle is no different: large models are rapidly penetrating production and life, creating new demand. The key is: which types of companies are investing deeper in AI applications and achieving results faster. Hong Kong internet companies are leading in both AI investment and results. Conclusion : When assessing financial reports, it is essential to combine static profit/valuation matching with dynamic AI application potential to find companies with the best cost-effectiveness and growth space. Q9: We have discussed many positive factors; what risk points should we pay attention to in advance? Wu Xinkun: I believe there are mainly two categories: external risks and liquidity risks. First, external risks. About 57%-58% of the existing funds in the Hong Kong stock market come from foreign capital. Foreign capital is significantly affected by geopolitical issues and global liquidity. If new trade frictions or geopolitical conflicts arise, such as the U.S. pushing for tariff policies again, global risk appetite will significantly decline, and funds may flow from risk assets to safe-haven assets. Second, changes in global liquidity. The Federal Reserve's interest rate cut pace, monetary policy orientation, and statements will all affect foreign capital risk appetite and fund flows in the Hong Kong stock market. If liquidity tightens, short-term market volatility will increase. Conclusion : The overall Hong Kong stock market is still worth paying attention to in 2026, but investors should be particularly wary of geopolitical disturbances and global liquidity fluctuations as two major risks. Q10: The last question, do you think the Hong Kong stock market in 2026 will be like a mountain that continues to rise, or like a plateau that needs to catch its breath? Wu Xinkun: I believe the Hong Kong stock market will continue its upward trend in 2026, moving towards a new height. As the title of our live broadcast states, "The Hong Kong stock market is expected to reach new heights," I maintain a positive and optimistic judgment on this. 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