Galaxy Securities: The rhythm of Hong Kong stocks this year looks "water" concentrated on "quality," with significant room for valuation recovery in the tech index

China Galaxy Securities previously published a report on the outlook for Hong Kong stocks in 2026. (1) The fundamentals of the Hong Kong stock market largely depend on the domestic macro economy. Looking ahead to 2026, China's macro policies are expected to maintain continuity and stability, with economic growth remaining resilient and inflation expected to rebound from low levels. (2) In terms of major broad-based indices, market expectations indicate that the profit growth rate of the three major indices is expected to decline for the full year of 2025. In 2026, the earnings per share of the Hang Seng Index is projected to grow by 9.64% year-on-year, the Hang Seng TECH Index by 34.63%, and the Hang Seng China Enterprises Index by 9.9%. By industry, non-essential consumption, materials, and information technology sectors are expected to lead in earnings per share growth in 2026.

Regarding the funding situation in the Hong Kong stock market: (1) As of December 19, 2025, the market value of shares held through the Hong Kong Stock Connect accounted for approximately 13.1%, while the market value held by international intermediary institutions accounted for about 40.1%. These proportions increased by 2.7 percentage points and decreased by 2.4 percentage points, respectively, compared to the end of 2024, indicating that domestic investors have net increased their holdings in Hong Kong stocks compared to foreign investors, and the influence and voice of southbound funds in the Hong Kong stock market have further increased. (2) From the beginning of the year to December 19, the cumulative net inflow of the Hong Kong Stock Connect into the Hong Kong stock market reached HKD 1.4 trillion, a year-on-year increase of 74% compared to the net inflow in 2024. Looking ahead to 2026, China will continue to implement moderately loose monetary policies, and in a low-interest-rate environment, southbound funds are motivated to flow into Hong Kong stocks for returns. (3) From early 2025 to December 17, foreign capital had a cumulative net inflow of USD 17.689 billion into the Hong Kong stock market (statistical scope: H shares + P shares + red-chip stocks). The Federal Reserve's dot plot from last December indicated that by the end of 2026, the median forecast for the federal funds rate would be 3.4%, which is 0.25 percentage points lower than the current range of 3.5% to 3.75%. Influenced by multiple key factors such as the Federal Reserve chair election, U.S. first-quarter economic data, and inflation data, the specific pace of interest rate cuts by the Federal Reserve may become clearer after April 2026. Overall, the U.S. dollar index and U.S. Treasury yields are expected to continue to decline from current levels in 2026, which will help enhance the valuation of Hong Kong stocks and attract foreign capital into the Hong Kong stock market.

Regarding the investment outlook for 2026: Galaxy Securities states that under the background of loose domestic and foreign monetary policies, both foreign capital and southbound funds are expected to continue to maintain a net inflow trend. Driven by favorable policies such as accelerating technological innovation, a new round of supply-side reforms, and expanding domestic demand, the profitability of Hong Kong-listed companies is expected to achieve substantial improvement, and the market is expected to welcome a pattern of rising profits and valuations, with Hong Kong stocks generally expected to trend upward.

In terms of allocation, it is recommended to focus on: (1) Technology innovation theme: Under the goal of significantly improving the level of technological self-reliance during the 14th Five-Year Plan period, technological innovation will be a major theme for Hong Kong stock investment. The valuation repair space for the Hang Seng TECH Index remains large, and leading companies are expected to show high prosperity characteristics. Coupled with the ongoing trend of mainland companies listing in Hong Kong, the vitality of the Hong Kong stock technology innovation ecosystem will be further released. (2) Cyclical industries: Under the guidance of deepening supply-side reform policies, the supply-demand pattern of related sectors such as steel, building materials, electrical equipment, and papermaking is expected to optimize, with capacity utilization rates and gross margins likely to steadily improve (3) Consumption Theme: Under the strategy of expanding domestic demand, the performance growth rate of the consumer sector is expected to rise, and valuations are at historically low to medium levels, especially in service consumption, "trade-in," and new consumption sectors.

Overall, Hong Kong stock investment in 2026: the rhythm looks at "water" (capital flow), focusing on "quality" (performance). As an offshore market, Hong Kong stocks are highly sensitive to global liquidity, domestic policy implementation, and corporate profit recovery, emphasizing the importance of phase timing and the resonance of policies and capital. At the same time, the structural differentiation of Hong Kong stocks is highly certain, with the dual main lines of new economic growth elasticity and high dividend defensive attributes remaining unchanged, and 2026 may further solidify with the slope of economic recovery and industrial policies.

From market performance, as of December 19, 2025, the price-to-earnings ratio (P/E) of the Hang Seng TECH Index (over the past 12 months) is 23.1 times, an increase of 11.91% compared to the end of 2024, at the 31.43% percentile level historically; earnings per share (over the past 12 months) increased by 9.58% compared to the end of the previous year. From a longitudinal perspective, the current P/E ratio of the Hang Seng TECH Index (over the past 12 months) has significant room for recovery compared to the historical peak of 70.73 times in 2021. Horizontally, it is also significantly lower than other technology indices in major global equity markets— as of December 19, 2025, the P/E ratio of the Nasdaq 100 Index (over the past 12 months) is 36 times, and the P/E ratios of the S&P 500 Information Technology and ChiNext Index (over the past 12 months) are about 40 times. Investing in core technology assets in Hong Kong stocks stands out in terms of cost-effectiveness globally. Meanwhile, the Federal Reserve is in a rate-cutting cycle. In 2025, the Federal Reserve cut rates three times, with a total reduction of 75 basis points for the year. In 2026, the Federal Reserve's monetary policy is expected to remain in a loose range, and resilient technology stocks may attract capital