Although global markets have shown enormous divergence and volatility so far this year, Hong Kong stocks, and especially Hang Seng Tech, still stand out as particularly "eye-catching" in their persistent underperformance. Hang Seng Tech has fallen 23.9% year-to-date, lagging globally. Measured from last October's high, it is down nearly 40%. One fact that may have been overlooked: two years on, Hang Seng Tech once came within less than 4% of the September 2024 "924" level that is regarded as the starting point of this bull market, and after two years it has almost returned to "square one."

Chart 1: Hang Seng Tech down 23.9% year-to-date, at the bottom globally. Data as of October 9, 2026. Source: Bloomberg, CICC Research Department. Chart 2: Hang Seng Tech is now just one step away from returning to the 2024 "924" starting point. Source: Wind, CICC Research Department.

Looking back to the end of last year, the market was still filled with broadly optimistic sentiment, and many narratives still ring in our ears: household deposits shifting out of banks, balance-sheet repair, reflation expectations after the wealth effect, Hong Kong stocks taking over after the A-share "good start," RMB appreciation driving foreign inflows with Hong Kong stocks benefiting, and so on. But we did not agree with the mainstream view at the time and have consistently held a cautious view: in the end-2025 report "Hong Kong Stocks 2026 Outlook: The Next Step of the 'Bull Market'," we judged that the rise in Hong Kong stocks was more a phased repair brought by policy pulses plus capital rebalancing and did not have the foundation for a sustained major bull market, with a clear ceiling on index upside itself. In "Who Is 'Wrong', the Stock Market or the Exchange Rate?" we argued that currency appreciation cannot be regarded as the cause of Hong Kong stock gains, and that directly applying historical relationships without considering the reasons for the current appreciation is a fallacy. In "Hong Kong Stock Market 2026 Second-Half Outlook: The Excitement Is Theirs?" we further pointed out that the root cause of Hong Kong stocks' significant underperformance this year is essentially a reflection of weakening domestic demand fundamentals and the household credit impulse. If this does not change, Hong Kong stocks will still mainly reflect odds value.

Reviewing the past two years, the economy has still been growing, exports have continued to beat expectations and drive a record trade surplus, the RMB exchange rate has appreciated sharply, and the global and domestic AI industries have flourished. We cannot help but ask: why could Hong Kong stocks surge in 2025 and then plunge in 2026? Why is it that only Hong Kong's Hang Seng Tech has fallen back to square one? What has changed in the two years since 924? What went wrong? Clarifying these questions will better help us judge whether Hong Kong stocks will further break below the 924 low, and what could enable them to rise again.

1. Why did Hong Kong stocks perform strongly in 2025 but lag major global markets in 2026?

After Hong Kong stocks, especially Hang Seng Tech, rose 23.5% in 2025, the gain from the September 2024 low to the October 2025 high was as high as 94%. Yet in 2026 they lagged the world with a 23.9% decline. What exactly changed?

First, the most important change is the direction of the household credit cycle. It must be clear that the structure of Hong Kong stocks determines that they are closely tied to China's domestic demand and the credit cycle of the household sector. Hang Seng Tech in particular is more like a "larger version of a consumption index," while the Hang Seng Index has some additional dividend, local property, and financial stocks, which also explains why its performance this year has been better than Hang Seng Tech. Historically, whenever domestic consumption improved or the household credit cycle improved (such as the 2017 shantytown renovation property cycle and the post-pandemic consumption rally in 2020-2021), Hong Kong stocks, especially Hang Seng Tech, strongly outperformed. Whenever consumption weakened and the household credit cycle contracted, Hong Kong stocks generally weakened or underperformed.

Chart 3: More than 70% of Hang Seng Tech's weight is concentrated in internet, electric vehicles, e-commerce, and consumer electronics, sectors closely tied to consumption. Source: Bloomberg, Wind, CICC Research Department. Chart 4: By comparison, the Hang Seng Index has more diverse constituents, with some additional dividend, local property, and financial stocks compared with Hang Seng Tech. Source: Wind, CICC Research Department. Chart 5: When domestic consumption improves or the household credit cycle improves, Hang Seng Tech often outperforms. Source: Wind, CICC Research Department.

The ups and downs of the household credit cycle can well explain the huge gap between Hong Kong stock performance in 2025 and 2026: 1) Since the end of 2025, compared with the resilience of the corporate sector (especially technology and exports), the household sector's credit impulse has continued to decline, and since March this year it has fallen below the 924 starting point, while the household loan balance also recorded its first net decrease. Against this backdrop, Hang Seng Tech's weakness is not surprising, just as the A-share consumption sector also fell below the 924 starting point. Essentially, under this year's K-shaped divergence of strong technology and weak consumption, Hang Seng Tech reflects the lower half of the K-shaped divergence. 2) Conversely, the same logic can explain why Hong Kong stocks rebounded strongly in 2025. After 924, fiscal policy once stepped up and subsidized the household sector, driving a repair in the household credit cycle, which became the key reason Hong Kong stocks rebounded first and outperformed sharply.

Chart 6: The household credit impulse has been below the 924 starting point since March. Source: Wind, CICC Research Department. Chart 7: Since March, the year-on-year growth of household stock social financing turned negative for the first time in history. Source: Wind, CICC Research Department.

So why did the household credit cycle decline again? Behind it is a change in the direction of fiscal efforts. In addition to structural factors such as slow repair of income expectations and confidence and the continued drag from property, the main change in 2026 compared with 2025 is that fiscal intensity is basically flat versus last year (the broad deficit ratio of 8.1% is in line with last year's 8.5%), and the direction of efforts has tilted more toward technology and industry, while the household side has actually seen less support (such as trade-in programs).

Chart 8: After 924, consumption benefited from fiscal efforts and policies such as trade-ins, but has recently fallen back markedly. Source: Wind, CICC Research Department.

This is highly consistent with the experience we obtained in our November report "The 'Ignored' Bull Market: Lessons from Japan's Three Bull Markets in the 1990s," which reviewed the experience of Japan's three bull markets in the 1990s: Japan also had three considerable bull markets during its "lost three decades," but each lasted only about a year and ended, each beginning with fiscal stimulus and ending with fiscal contraction. Fiscal stimulus can bring a phased rebound, but if deep-seated contradictions are not resolved (such as household balance-sheet repair and debt resolution), once policy stimulus fades, it is hard for the rally to be sustained. Therefore, over a long cycle, these three "bull markets" failed to reverse the trend and looked more like a "large box range." How similar this is to the performance of Hong Kong stocks over the past two years.

Chart 9: After the bursting of the bubble in the 1990s, Japanese stocks saw three bull markets with rebounds of 50% lasting more than a year. Source: Bloomberg, FactSet, CICC Research Department. Chart 10: But over a longer horizon, they ultimately all showed a "box range" pattern. Source: Bloomberg, FactSet, CICC Research Department.

Second, the lack of technology hardware exposure and the lag of Hong Kong's leading internet companies in AI investment. The AI rally shifted from the main line of computing chips and cloud vendors in 2025 to a one-sided rise in storage in 2026, but Hong Kong stocks' lack of hardware exposure caused them to miss the 2026 technology hardware rally. In addition, besides being dragged down by domestic demand, Hong Kong's leading internet companies also lag behind the United States and other Chinese large-model and unlisted companies in AI investment, model research and development, and revenue realization, unlike the momentum after the DeepSeek moment in 2025, all of which dragged down overall index performance.

Chart 11: The AI rally gradually shifted from cloud vendors in 2025 to hardware in 2026. Source: Bloomberg, FactSet, CICC Research Department. Chart 12: In model research and development, China's major companies also generally lag behind the United States and other Chinese large-model and unlisted companies. Source: Artificial Analysis, CICC Research Department.

Third, liquidity conditions tightened markedly. 1) Compared with abundant liquidity in 2025, Hong Kong stock liquidity in 2026 clearly tightened. Southbound inflows shrank from HK$1.4 trillion in 2025 to HK$441.8 billion so far this year; active public fund allocation fell from a high of 32.1% in mid-2025 to 15.1%, below the 924 starting point; overseas active funds also continued to flow out, with their allocation to China falling from 7.2% in mid-2025 to 6.0%. 2) IPO and refinancing volume reached HK$715 billion, already higher than the full-year 2025 level of HK$613.8 billion. 3) Rising US Treasury yields and the Fed's restart of rate hikes also created additional pressure ("How Rate Hikes Affect Chinese Markets"). But it must be clear that liquidity is more a result of the market. When the market is good, inflows create a flywheel that reinforces market performance, while when the market is bad, further outflows create negative feedback that suppresses it.

Chart 13: Southbound funds shrank from a net inflow of HK$1.4 trillion in 2025 to only HK$441.8 billion year-to-date. Source: FactSet, CICC Research Department. Chart 14: Active public fund allocation fell from a high of 32.1% in mid-2025 to 15.1%. Source: Wind, CICC Research Department. Chart 15: Overseas active funds' China allocation also fell from a mid-2025 high of 7.2% to 6.0%. Source: EPFR, CICC Research Department. Chart 16: 2026 IPO and refinancing volume reached as high as HK$715 billion, already above the full-year 2025 level of HK$613.8 billion. Source: Wind, CICC Research Department.

2. Two years after 924: what has changed and what has returned to square one?

Standing at the point of the second anniversary of the 924 policy bottom and Hang Seng Tech's return to square one, compared with two years ago, what has changed and what has returned to square one? We review the changes over the past two years across multiple dimensions including the credit cycle, market performance, valuation, earnings, and liquidity:

Credit cycle: households have returned to the 924 starting point, corporates have repaired, and fiscal policy is flat. Compared with before 924, the fiscal impulse is basically flat, but the policy focus has shifted from consumption to technology, so the corporate sector's credit cycle (especially in technology and export chains) has continued to repair, while the household credit impulse turned downward from the third quarter of 2025 and is now below the 924 policy bottom.

Market performance: Hang Seng Tech has almost returned to the 924 starting point, technology is strong while consumption is even lower, and divergence is more obvious. Hang Seng Tech is only 7.2% from the 924 starting point, almost back to the starting point of the rally. Breaking down Hang Seng Tech's performance, earnings contributed 2.8 percentage points of the 7.2% gain, while valuation expansion contributed 4.4 percentage points, both quite limited. The Hang Seng Index and MSCI China still had positive returns of 25% and 17%. A-shares performed more strongly. Compared with 924, Wind All A rose 50%, while the STAR 50 and ChiNext Index rose 118% and 88%.

Chart 17: Breaking down Hang Seng Tech's performance, earnings were basically flat, while the risk-free rate was a major drag. Source: Bloomberg, CICC Research Department.

At the sector level, compared with the 924 starting point, communication equipment (+114%), semiconductors (+113%), and electronic equipment (+108%) doubled, but within the consumption sector, hotels and catering and personal goods were the weakest, both falling more than 30%. The same was true for A-shares: communications and electronic components led with gains of 179% and 143%, food and beverages fell 4%, and catering, tourism, and property lagged.

Chart 18: Since 924, Hong Kong-listed communication equipment, semiconductors, and electronic equipment have all doubled, but domestic consumption sectors have weakened. Source: FactSet, CICC Research Department.

Valuation: Hang Seng Tech valuation has almost returned to square one, with rising risk-free rates the main drag. Two years later, Hang Seng Tech's 12-month forward PE is 14.2, basically back to the starting point of 14 times before 924. By comparison, the Hang Seng Index's forward PE was 8.7 at the beginning and is now 9.9, an expansion of 14.2%; A-share valuation repair was more obvious, with the Shanghai Composite's forward PE rising from 10.7 to 12.4, an expansion of 16.7%; ChiNext valuation rose from 17 to 19.3, an expansion of 13.7%.

Chart 19: Hang Seng Tech valuation has returned to square one; although ChiNext led gains, its valuation changed little. Source: Wind, CICC Research Department.

Further decomposing valuation into the risk-free rate and equity risk premium, we find that Hong Kong stock valuations were mainly dragged down by the risk-free rate (with China and US bond yields dynamically weighted by southbound trading share). The rise in US Treasury yields (from 3.7% to 5.2%) dragged down Hang Seng Tech valuation by 13.7%, while the improvement in risk premium contributed 18.1%. By industry, since 924, banks and capital goods have seen the most significant valuation increases, with forward PE rising from 4.4 and 7.8 to 6.2 and 10.5, respectively; consumption sector valuations contracted sharply, with autos and parts falling from 29.1 to 12.6, a contraction of 56.7%; food retail fell from 30.1 to 14.9, a contraction of 50.4%. By contrast, leading sectors such as hardware equipment, semiconductors, and raw materials also saw forward PE contract by 10%-20%, mainly thanks to stronger earnings growth.

Earnings: Hang Seng Tech EPS has marked time, with technology growing and consumption declining. From 924 to now, Hang Seng Tech's forward EPS has risen only slightly by 2.5%, at the bottom among major indices. Hang Seng Index and MSCI China EPS grew 10% over the same period; A-share earnings improvement was more prominent, with Shanghai Composite EPS up 14% and ChiNext EPS up 69%, with earnings growth contributing the vast majority of the 88% gain.

Chart 20: Hang Seng Tech forward EPS rose only slightly by 2.5%, while ChiNext EPS expanded 65%, with performance contributing most of the gain. Source: FactSet, CICC Research Department.

The same is true at the industry level. EPS in raw materials and hardware equipment grew 83.3% and 80%, with share-price gains relying entirely on earnings growth; on the contrary, EPS in consumption sectors such as food and beverages, household products, and durable consumer goods was generally revised down by 5%-20%, which also corroborates the macro signals mentioned earlier regarding the household credit impulse and weakening stock credit.

Liquidity: southbound inflows have narrowed markedly, and public fund and overseas fund allocations have both approached or even fallen below 924. Hong Kong stock liquidity has tightened significantly this year, with southbound net inflows in the first nine months totaling only HK$440 billion, significantly below the HK$1.4 trillion inflow in 2025. In terms of allocation, domestic public funds and overseas active funds' allocations to Hong Kong stocks have both fallen back to near or even below the 924 bottom. Domestic active equity public funds' Hong Kong stock holdings fell from a mid-2025 high of 32.1% to 15.1% in the second quarter, a new low since the third quarter of 2022. The same is true for overseas funds. EPFR shows that overseas active funds have continued to flow out this year, and as of the end of August their allocation to Chinese stocks had fallen from 7.2% in mid-2025 to 6%, close to 5.6% at the time of 924.

In summary: two years after 924, Hang Seng Tech has "marked time," with valuation back to the starting point and earnings almost zero growth. Among this, the technology sector's performance and earnings have both grown significantly, while consumption's performance, earnings, and valuation have all contracted sharply and are below 924, meaning structural divergence is even more significant than before 924. In terms of capital allocation, public fund Hong Kong stock allocation is already below 924, and overseas funds have also basically given back the allocation built up over the past two years.

3. Why, when the overall economy is still okay, has Hang Seng Tech become a global return laggard?

Over the past two years, China's real GDP growth has remained around 5.0%. The aggregate growth rate is not bad, and at the industry level there has been no shortage of bright spots, such as the vigorous development of new quality productive forces tracks like AI computing power and new energy, while external demand has remained strong and continued to beat expectations. But in sharp contrast, Hong Kong stocks, especially Hang Seng Tech, have retreated sharply, almost falling back to the 924 starting point, with index returns clearly diverging from the macroeconomy. Compared with the United States (around 2.2%), although real GDP growth is lower than China's, its stock market performance has been stronger. Besides the special structural factors and liquidity conditions of Hong Kong's Hang Seng Tech itself mentioned earlier, there are two aggregate reasons: first, US nominal growth is higher (US nominal GDP growth in 2025 was about 5% vs. China's nominal GDP growth of 4%); second, the transmission from nominal growth (revenue) to actual profit (earnings), which includes differences in profit margins and turnover.

Chart 21: Although China's real GDP growth is higher than that of the United States, after accounting for inflation, US nominal GDP growth is higher. Source: Wind, CICC Research Department.

Expansion of aggregate economic output, export growth, and improvement in industry prosperity do not necessarily mean listed company profits grow in tandem. If 1) overly fierce or even irrational competition leads to lower profit margins, then there will be "revenue growth without profit growth"; 2) excessive investment that ignores returns will lower turnover and increase leverage, and even if book profits grow, it will squeeze cash flow and ultimately affect capital returns. Specifically:

Intensified industry competition, rising raw material prices, exchange losses, and other factors can all lead to lower profit margins, resulting in "revenue growth without profit growth." Against the backdrop of insufficient demand and rapid supply expansion, companies compete for market share by cutting prices and expanding revenue scale, but may face continued margin declines. The gross margin of industrial enterprises above designated size (12-month average) fell from 17% in 2021 to the current 15%, with a slight improvement since 2026. In addition, along with the continuous decline in capacity utilization, the share of loss-making enterprises rose to 30%, also reflecting intensified industry competition. At the listed company level, the gross margin of A-share non-financial companies fell from 18.3% in 4Q21 to 17.7% in 2Q25 and returned to 18.3% in 2Q26. In the first half of the year, the gross margin and net margin of Hong Kong-listed non-financial companies were 22.8% and 6.4%, respectively, also a slight improvement, but still significantly below the first-half 2018 highs of 25.8% and 8.3%. The above improvement was also driven by some industries. Profitability in the technology sector improved, with the information technology industry's gross margin rising from 17.4% in the first half of 2025 to 18.9% in the first half of 2026, among which the semiconductor net margin rose sharply from 3.8% to 9.0% over the same period. By contrast, the consumption sector remained under pressure, with its gross margin falling from 29.6% to 28.8% over the same period and its net margin falling from 9.4% to 7.3% ("How to Allocate in the Fourth Quarter? Win-Rate and Odds Clues from Financial Reports").

Chart 22: Profitability in the technology sector improved; by contrast, the consumption sector remained under pressure, with its gross margin falling to 28.8% over the same period. Source: Wind, CICC Research Department.

Excessive investment and inefficient expansion reduce capital efficiency, and even if absolute book profits are still growing, ROE may still be depressed. Even if large amounts of new investment may lift profits in the short term, if continued reliance on leverage and low-return capacity expansion persists, the ultimate return on capital may instead decline. Inefficient capacity is cleared slowly, causing supply growth to outpace demand, which not only intensifies price competition but also reduces the utilization efficiency of existing assets, lengthens accounts receivable collection cycles, and slows inventory turnover. For example, the average collection cycle for manufacturing accounts receivable has lengthened to more than 70 days, and the inventory turnover days for finished goods have risen to 21 days, with longer collection cycles and higher working capital occupation. In "A Comparison of Chinese and US Listed Company Profitability," we deeply explored the systematic gap between the profitability of Chinese non-financial listed companies and US companies. MSCI China's ROE is clearly lower than that of US stocks, with margin differences explaining most of the ROE difference, and asset turnover also generally low, consistent with the conclusions above, and this can in turn be attributed to differences between China and the United States in the efficiency of factor resource allocation in primary distribution (the allocation mechanism of financial resources), tax differences in secondary distribution, position in the global value chain, industry concentration, and other aspects. In summary, converting high investment in booming industries into profits requires matching high profit margins and higher asset turnover to support it. Overly fierce or even irrational competition, or excessive investment that ignores returns, may squeeze final profits and asset returns.

4. Will it break below 924, and what could make it rise again?

Short-term odds value is prominent, but the long term depends on household credit repair. In the short term, according to the framework we outlined in "Bottom Characteristics of the Hong Kong Stock Market," after the recent new round of rapid pullback, Hang Seng Tech has once again acquired short-term bottom characteristics, namely odds value: 1) valuation and risk premium: the current 14.2 times forward PE is already the lowest since 924, and the 2.9% risk premium is just one step away from the late-June high of 3%; 2) sentiment: the 14-day RSI once reached an oversold level of 27.7; 3) liquidity: southbound funds have recently shown signs of accelerating inflows, which, according to the patterns summarized in "Who Is 'Smart Money'," can be regarded as a short-term bottom indicator. Our latest odds-win-rate framework shows that Hang Seng Tech's odds are in an attractive range.

Chart 23: Hang Seng Tech has once again touched the oversold range. Source: Bloomberg, CICC Research Department. Chart 24: Our latest cross-asset and market odds-win-rate framework shows that Hang Seng Tech's odds are in an attractive range. Source: Wind, FactSet, CICC Research Department.

But it must be clear, and this is also a point we have consistently emphasized: relying solely on oversold sentiment, low positions, and valuation odds only constitutes the conditions for a short-term rebound and does not directly mean that a trend-level major bottom has been established. Low valuation can mean it does not fall (odds), but it does not necessarily mean it rises (win rate). This is both the lesson the market has taught us over the past year and the experience the Japanese market gave us in the 1990s ("The 'Ignored' Bull Market: Lessons from Japan's Three Bull Markets in the 1990s"). For Hong Kong stocks to rise again, the core lies in a substantive improvement in the credit cycle, especially the household credit cycle, which was also the key to the 2025 rebound, and in the short term this again depends on tilted fiscal efforts (reproducing the 924 moment). This week the Ministry of Finance arranged RMB 550 billion in local government debt carryover quota, which will mainly be deployed in November-December[1], about RMB 50 billion more than the same period last year. We estimate that the broad fiscal deficit impulse in the fourth quarter is expected to rise slightly, but more direct efforts on the household side are still needed. In addition, a DeepSeek moment for Hong Kong's internet leaders is another catalyst to watch (after the year-end index adjustment, its structure is expected to improve slightly, "The Impact and Significance of Hang Seng Tech Expansion"). Therefore, Hang Seng Tech still has the characteristic of prominent odds but insufficient win rate. To truly open upside space, it needs to reproduce the "924 moment" or the "DeepSeek moment." If the household credit impulse repairs, Hang Seng Tech's elasticity may even be better than consumption itself. At the allocation level, continue to follow the approach of "odds gaming + structural stock selection": technology must wait for industry catalysts (third-quarter results and the Anthropic listing catalyst), cyclicals depend on easing rate-hike concerns (CPI and the late-October FOMC); domestic demand still needs a stronger fiscal signal (the year-end Central Economic Work Conference); if none of the above occurs, then one can only hedge with dividends. Our latest updated industry-level odds-win-rate shows that the recently top-ranked industries are energy, transportation, insurance, autos and parts, raw materials, and pharmaceuticals.

[1]https://www.xinhuanet.com/20261010/8ce4ee187164442d99f055a800fcc728/c.html