CITIC Securities' 2026 Strategy for Hong Kong Stocks: Will usher in a second round of valuation repair+performance bottoming back, and grasp the five main lines

The Zhitong Finance App learned that CITIC Securities released a research report saying that looking ahead to 2026, Hong Kong stocks will benefit from internal “15th Five-Year Plan” catalysis and the “financial+monetary” double easing policies of major external economies, particularly the US and Japan. Looking at it themselves, Hong Kong stocks not only have a complete domestic high-quality AI industry chain (including infrastructure, software, hardware, and applications), but more and more leading high-quality A-share companies are listed in Hong Kong. It is expected that Hong Kong stocks will benefit from the liquidity spillover in domestic and foreign markets and the continued catalysis of AI narratives. As the fundamentals of Hong Kong stocks bottomed out, compounded by their still significant valuation discounts, it is determined that the Hong Kong stock market will usher in a second round of valuation repair and further recovery in performance in 2026.

Investors are advised to grasp five medium- to long-term directions: 1) the technology industry, including AI-related segments, consumer electronics, etc.; 2) the large medical sector, especially biotechnology; 3) benefiting from rising overseas inflation expectations combined with de-dollarization resources, including non-ferrous and rare earths; 4) In the future, as the domestic economy recovers further, the essential consumer sectors that are relatively stagnant and undervalued are also expected to usher in valuation restoration; 5) the paper and aviation sectors benefiting from RMB appreciation.

CITIC Securities's main views are as follows:

The valuation has been repaired, and we are waiting for the performance to rebound.

Benefiting from the revaluation of Chinese assets after the release of R1, Hong Kong stocks rose second only to South Korea in major global markets from the beginning of this year to the end of October. After experiencing a three-year “killing valuation” market from 2021 to 2023, the Hang Seng Index has entered a “performance+valuation” double click market since 2024, and Hang Seng Technology also ushered in a major valuation repair this year, indicating that global investors' confidence in Hong Kong stocks is picking up. In terms of valuation, Hong Kong stocks are currently still a valuation depression in major global markets, and the calculation of the current Hang Seng Index ERP is still as high as 5.7%. In terms of performance, Bloomberg's current consensus forecast shows that Hang Seng Index and Hang Seng Technology's 2026E net profit will increase by 8.5% and 29.9%, respectively. Considering that next year is the US midterm election year, Japan is also expected to increase policy incentives after the new prime minister takes office. China may also usher in a policy increase in the beginning of the “15th Five-Year Plan.” Combined with the implementation of “antitrust” and the promotion of AI commercialization, if macro-level improvements can be realized in the performance of listed companies, the fundamentals of Hong Kong stocks will continue to rebound from bottom in 2026.

Lay out the key directions of the “15th Five-Year Plan” and focus on emerging industry trends.

The five-year plan guides the direction of industrial development and is an important basis for grasping long-term investment opportunities. Historically, market performance in the range from the release of the five-year plan proposal to the official release of the five-year plan was often better than the market performance after the five-year plan was officially released. At the same time, five-year plans often indicate future industrial development trends. For example, during the “14th Five-Year Plan” period, China's new energy industry, artificial intelligence industry, semiconductor industry and other segments continued to develop, and market performance was also clearly better than the overall market. The “15th Five-Year Plan” proposal emphasizes building a modern industrial system and speeding up self-reliance and self-improvement in high-level technology. It is expected that strategic emerging industrial clusters such as new energy, new materials, aerospace, and future industries such as quantum technology may usher in new policy support. Traditional industries such as chemicals, machinery, and shipbuilding will be further upgraded, and advanced manufacturing clusters in aerospace, biomantry and other fields may usher in new development opportunities.

Emerging industries are poised to spawn trillion-level markets. 1) The current acceleration of solid-state battery industrialization is expected to open a new cycle of electrification innovation. The global solid-state battery industry is expected to reach 1.2 trillion yuan in 2024-2030. 2) Brain-computer interfaces set sail in the blue ocean, and the potential for collaborative evolution is limitless. Governments at all levels attach great importance to the development of brain-computer interfaces, and the latest policies of the National Health Insurance Administration are expected to greatly resolve clinical pain points. 3) Biomaneling is an important part of China's new quality productivity. With continuous expansion of application fields, the market size is expected to reach the trillion level. 4) Quantum technology has broad prospects and is expected to become a key force driving future industrial system restructuring. Among them, quantum communication is expected to take the lead in industrialization. 5) Technological breakthroughs are compounded by industrial policy to accelerate progress in the controlled nuclear fusion industry. It is estimated that the average annual global nuclear fusion market space between 2026-2030 and 2031-2035 is about 44 billion yuan and 450 billion yuan, respectively.

The performance cycle bottomed out, and fundamental expectations improved.

The market (Bloomberg agreed, same below) expects the performance growth rate of Hong Kong stocks to bottom out in 2025. The Hang Seng Composite Index's revenue and profit growth rate in 2025 is expected to reach 3.6%/3.5%, respectively, and is expected to reach 5.5%/9.2% in 2026, and is expected to stabilize at a high level in 2027; as the economy improves, it is expected that the performance of Hong Kong stocks will expand from “profit repair” to “revenue expansion”, forming a sustainable upward trend in revenue and profit resonance. Although corporate refinancing in 2025 disrupted ROE in stages, the market expects the ROE of the Hong Kong Stock Market Index to continue to reach new highs as performance enters an upward channel. In terms of changes in expectations, the 2025 profit forecast value of the Hang Seng Composite Index has taken the lead in “putting the brakes on” and has risen slightly since July 25. The 2026 forecast is now on a clear upward curve, and the overall profit sentiment of Hong Kong stocks has quietly warmed up.

Looking ahead to 2026 and 2027, the expected standard difference in profit growth between industries has settled significantly, and the profit landscape is stabilizing. It is expected to reduce the market's beta dependence on a single sector, help the market rotate in an orderly manner, and provide fundamental support for Hong Kong stocks to continue to be slow. Structurally, the growth sector is still expected to have relatively rapid performance growth. The cyclical industry expects performance to be flexible, and performance may recover upward, which will jointly drive Hong Kong stock performance to regain its upward trend.

There is still plenty of room for southbound inflows, and retail investors may become the main new force.

From the beginning of the year to the end of October, the cumulative inflow of southbound capital into Hong Kong stocks reached HK$1.26 trillion, which became the core driving force supporting Hong Kong stocks. Specifically, public funds have shown a trend of drastically increasing the allocation of Hong Kong stocks since this year. On the one hand, the Shanghai-Shenzhen-Hong Kong Stock Connect Fund is significantly increasing the allocation ratio of Hong Kong stocks in equity assets; on the other hand, starting in May of this year, the fund is booming and rapidly increasing the allocation of Hong Kong stocks. However, in recent years, the size of passively managed funds in public funds has been growing rapidly. Their shareholding ratio in the Shanghai-Shenzhen-Hong Kong Stock Connect Fund has risen 27.2 percentage points compared to the beginning of 2024.

The trend of “passive instead of active” will become more obvious in the future, and this is closely related to the increase in retail investors' participation in capital. Considering that the yield of financial management and goods products has continued to decline since the pandemic, and the “money-making effect” of the Chinese stock market has become more prominent since this year, the “deposit migration” phenomenon of residents is likely to continue. In particular, considering the low allocation situation of Hong Kong stocks, it is determined that southbound capital will continue to increase the allocation of Hong Kong stocks. In particular, retail capital has more room for allocation. Meanwhile, the trend of retail capital flowing into Hong Kong stocks through ETFs is expected to continue. Since June this year, the inflow volume of Hong Kong stock ETFs has exceeded HK$270 billion, and ETFs accounted for 88% of the southbound inflows in August. As of this year's interim report, the share of institutional holdings in Hong Kong stock ETFs is about 55.6%, which is already at a historically high level. There is room for a large increase in individual investors' holdings in the future. Furthermore, in the context of industry-themed ETFs becoming more mature, structural allocation will also become a clear trend.

Risk factors:

1) Domestic economic recovery fell short of expectations, or the introduction of the “15th Five-Year Plan” policy fell short of expectations; 2) trade and technology frictions between China and the US intensified, leading to overseas capital outflows from Hong Kong stocks; 3) Hong Kong stocks reversed their upward trend and southward outflows, especially large-scale redemptions in ETFs; 4) the AI bubble burst, impacting the valuations of Hong Kong technology stocks; 5) Hong Kong stock performance generally fell short of expectations.