Galaxy Securities: Looking Ahead to the Next Six Months, Discretionary Consumer Goods Represent the Strongest Direction Among All Hong Kong Stock Sectors in Terms of Earnings Growth Rate and Profitability

China Galaxy Securities points out that the resilience of Hong Kong stocks comes from their valuation discount, which attracts risk-averse funds seeking certainty. Foreign investors choose to enter Hong Kong stocks largely because they see a valuation gap between Hong Kong and other major global markets (such as the U.S. and Japan). Hong Kong stocks’ low valuation often comes with high dividend yields, which are highly attractive to risk-averse funds seeking stable cash flow. Looking ahead to the next six months, consumer discretionary is currently the sector with the strongest performance growth and profitability among all Hong Kong stock sectors, while the financial sector offers ample safety margins. The technology sector has shown dual characteristics during this turbulence.

Full Text:

【China Galaxy Strategy】Safe Haven Effect of Funds? — Analysis of Liquidity Reconfiguration in Hong Kong Stocks Amid US-Iran Conflict

Key Points

US-Iran conflict causes intense shocks to global markets: If the conflict becomes prolonged, the Strait of Hormuz remains navigable in name but with significantly increased safety risks. The “geopolitical risk premium” in energy markets will rise sharply, pushing the oil price center higher and causing high-level fluctuations, which in turn raises logistics and operating costs. Global inflation will be hindered from falling, major central banks will delay rate cuts or even consider rate hikes in some cases, leading to a low-growth, high-interest, sticky inflation global environment. The synchronized tightening of global monetary conditions will further reduce policy space for countries, with the US dollar strengthening and non-US currencies under pressure. Capital will flow back into US assets, raising the global interest rate center and suppressing equity valuations, putting pressure on non-US assets. Against this backdrop, Hong Kong stocks rose 1.45% on March 16 against the trend, which seems contradictory to the macro narrative of non-US assets under pressure but actually reveals that funds are seeking “safe havens” and reallocating within non-US markets.

Is there a noticeable marginal change in southbound funds? From February 27 to March 13, the market value of holdings by international intermediary institutions decreased by about HKD 700 billion, directly reflecting that international funds, especially active funds from Europe and America, due to global risk aversion or the need to replenish dollar liquidity, chose to temporarily withdraw from Hong Kong stocks. Meanwhile, the total market share of mainland funds via the Hong Kong-Shanghai and Hong Kong-Shenzhen Stock Connect increased from 10.88% to 10.92%. This aligns with the record net purchase of HKD 32.994 billion by southbound funds on March 9, the largest single-day net buy-in in history. This contrarian increase indicates that southbound funds have acted as a ballast in this adjustment.

Is there a “seesaw” effect in international liquidity? On March 16, southbound funds net sold HKD 1.101 billion, while on March 17, foreign capital inflows into the Japanese stock market reached HKD 2.443 billion, a decrease of 84.11% compared to February 25, 2026. Despite net selling by southbound funds, the Hang Seng Index still rose strongly that day, confirming that foreign capital was a main driver of the rebound. Some of this capital may have come from Middle Eastern markets like Dubai seeking safe havens, and some from foreign investors withdrawing from the Japanese market. The core reason for Japan’s foreign capital outflows is its highly fragile economic structure. Rising oil prices could lead Japan into stagflation—simultaneous resource shortages, inflation, and economic slowdown.

US-Iran conflict mainly reshapes Hong Kong’s industry landscape through inflation expectations and safe-haven demand: First, energy becomes the only consensus among foreign and domestic investors. Second, the significant increase in holdings of internet giants like Tencent, Alibaba, and Meituan—after their previous declines—makes their valuations very attractive. From a risk-avoidance perspective, the main shift is from cyclical stocks to defensive stocks. Currently, global funds mainly operate in a “Risk-off” mode, with geopolitical risks causing concerns about stagflation. To cope with redemptions or risk reduction, passive funds must sharply reduce positions, leading to sector rotation away from high-beta assets and toward defensive assets.

Investment outlook: Hong Kong stocks’ resilience stems from their valuation discount, attracting risk-averse funds seeking certainty. Foreign investors’ entry is largely driven by the valuation gap between Hong Kong and other major markets like the US and Japan. Hong Kong stocks’ low valuation is often accompanied by high dividend yields, which are very attractive for funds seeking stable cash flow. Looking ahead six months, consumer discretionary is currently the sector with the strongest growth and profitability, while the financial sector offers sufficient safety margins. The technology sector has shown dual characteristics during this turbulence.

Risk warnings:

Risks of domestic policy measures being less effective than expected; risks of overseas rate cuts falling short; risks of market sentiment instability.

(Source: First Financial)