Hong Kong Stock Review: The hotter AI gets, the more dangerous long-term bonds become

The Hong Kong stock market is basically fluctuating. The AI hardware that rebounded the most the previous day has started to give back, and funds are flowing towards sectors like domestic banks, energy, shipping, and pharmaceuticals.

In the AI hardware sector, storage, PCB, and optical communication have generally retreated, with overseas strong stocks like SanDisk and Coherent also weakening before the market opens. This indicates that the previous days' movements were more about recovery after a sharp decline, with many trapped positions above. To re-enter a major upward trend, it’s not enough to rely solely on emotional rebounds; we need to wait for new orders and continued upward revisions in profits.

The tech sector is also showing divergence, with Alibaba relatively strong, while stocks like Zhipu and MiniMax, which are large model stocks, have dropped more significantly due to news about anthropic ARR. Although the data may not be entirely accurate, it remains the same as before; the market needs to see opportunities beyond coding.

Interestingly, the stronger sectors today are those supported by price or profit. Oil prices are rising again, supporting energy stocks; shipping continues to trade on freight rates and tightening effective capacity; CXO and biopharmaceuticals rely on performance certainty. Domestic banks have also strengthened again, somewhat reflecting a risk-averse sentiment among funds.

What’s more noteworthy today is not the Hong Kong stock market, but the global bond market. The prospects for peace between the U.S. and Iran have been thwarted, oil prices have rebounded, and the yield on 30-year U.S. bonds has reached its highest level since 2007, with long-term bond yields in Germany, Japan, and other countries also rising. This indicates that it’s not just a matter of whether the Federal Reserve will raise interest rates, but that global long-term funds are starting to become more expensive.

Additionally, if Japan continues to raise interest rates and the yen appreciates, funds that previously relied on cheap yen for carry trades may withdraw, which is not good for high-leverage, high-beta assets.

Ironically, AI is currently the industry that needs money the most, coinciding with the U.S. government issuing a large amount of debt, leading everyone to compete for the same pool of long-term funds.

Thus, there is an interesting contradiction in AI right now: the better the income, the more aggressive the CapEx; the larger the CapEx, the more financing; the more financing, the more likely it is to push long-term interest rates higher, which in turn pressures AI valuations. Ultimately, the market will start to pick companies; those with strong cash flow, cheap financing can continue to burn cash, while smaller players relying on external financing will face increasing pressure. In the end, the market will question the speed at which AI can generate profits and whether it can outpace rising capital costs.

In the short term, the fundamentals of AI are not bad, but global long-term interest rates are suppressing valuations, so companies with profits, cash flow, and shareholder returns will be more favored. If long-term interest rates continue to rise, even if AI performs well, valuations may not necessarily follow suit