CICC: How much momentum is left for the rebound?

The Zhitong Finance App learned that CICC released a research report saying that the “opposite” of the extreme K-type differentiation centered on AI in the first half of 2026 was the weakness of Hong Kong stocks and consumption. Of course, due to compositional problems, the Hong Kong Stock Broad Base Index could have been viewed as “large consumption.” Conversely, when the tech turmoil began in July, Hong Kong stocks and Hengke experienced a rebound, just like two ends of a “seesaw.” Are there any signs of this recent rebound? In addition to judging whether the AI market is bubbling and how crowded it is, Hong Kong stocks also sent out some bottom signals at the end of June. The bank observed left-hand signals in terms of valuation, sentiment, and allocation of Hong Kong stocks, clearly indicating “odds” and left-side allocation values, especially for absolute return investors.

CICC's main views are as follows:

What is driving this round of rebound? Technology plummeted to extremely crowded positions and forced to rebalance

Since the bottom of June, the Hang Seng Index has rebounded 13.2%, and Hengke rebounded 14.2% during the same period. Among them, poor optional consumption (26.2%), healthcare (25.2%), raw materials (17.9%), transportation (14.8%) and media entertainment (14.7%) led the way in the first half of the year. The undervaluation (before the rebound, Hengke's dynamic valuation fell below the standard deviation of one times the historical average) and low positions (Hong Kong stock positions held by active biased shares fell to the 2022 level in the second quarter) all provided conditions for rebound repair, or “odds,” but the main reason for the rebound was the forced rebalance of crowded positions due to the sharp fall in technology. Specifically,

Restoration in low-level sectors dominated the rebound, such as the Internet, non-ferrous products, and innovative drugs. The rebound since the end of June showed obvious “high cut and low” characteristics. The Internet sector with the most weight in Hong Kong stocks is the main line of this round. For example, the Hang Seng Internet Technology Index rebounded close to 25% from a low point. Among them, e-commerce leaders such as Ali, Meituan, and JD, which are more related to consumption, rebounded more than 40%. In comparison, the media and entertainment sector, such as Tencent, also rebounded, but not as vigorously as the e-commerce leaders mentioned above. Furthermore, innovative drugs and non-ferrous drugs were also the main forces of the rebound, and the increase was around 20%. On the other hand, looking at optical fiber, copper foil, and large models, which led the rise in the first half of the year, the pullback was even more than 60%;

Emotional healing dominates the rebound. The current rebound was almost entirely driven by valuations, contributing 11% of the 13% increase of the Hang Seng Index and Hengke's 14% increase, respectively. The profit contribution was low. After further dismantling, the valuation repair was also a risk premium contribution, or sentiment. After all, interest rates on US bonds were still rising during this period, and the risk-free interest rate for Hong Kong stocks weighted on Chinese and US bonds rose from 3.6% to 3.9%;

The rebalance between southbound and active foreign investment drove the rebound. Previously, global and domestic public equity positions were extremely biased in terms of technology. For example, in the second quarter, the Hong Kong stock holding ratio of active equity funds fell from 22.5% in the first quarter to 15.1%, the lowest level since the third quarter of 2022, and Internet sector holdings fell to an all-time low. In the course of the rebound, southbound capital inflows of HK$62.9 billion in July, with an average daily inflow of HK$2.86 billion, which is comparable to the level in March and April of this year, significantly higher than HK$1.29 billion in June and HK$210 million in May. Overseas capital has also flowed in for two consecutive weeks since the end of July, for the first time after a lapse of nearly 3 months. In contrast, there was an outflow of capital from the South Korea and Taiwan markets, which also reflected the “seesaw” of capital.

Has the problem of suppressing Hong Kong stocks been solved? Fundamental constraints remain, and high technological fluctuations reduce “opportunity costs”

The bank pointed out that the root cause of the weakness of Hong Kong stocks in the first half of the year was mainly due to three constraints: 1) weakening domestic demand fundamentals, which of course included Hong Kong stocks as “big consumption”; 2) the lack of AI hardware in the Hong Kong stock structure and Internet leaders lagged behind in this round of AI, making them unable to keep up with the main AI line in this round; 3) large numbers of IPOs, high interest rates on US bonds, and outflows of capital to the south and overseas.

Through the above review, it can be seen that during the recent rebound process, only the third constraint has improved markedly; the other two, especially the first, have not changed much. 1) The first constraint has not changed, and consumption is not the main force behind the rebound; 2) Although the second constraint helped to avoid the current round of hardware decline, the problem itself was not solved; 3) The third had a marked improvement. Fluctuations in technology led to the return of some capital, and the pressure on the Federal Reserve to raise interest rates eased somewhat after the collapse in July.

The fundamentals of domestic demand are still weak, and the Politburo meeting incremental policy is limited, requiring “924 hours.” The main reason for the K-type differentiation between technology and consumption is the differentiation of the credit cycle between enterprises and the residential sector. This is also due to the fact that fiscal policy clearly favors technology when the total amount remains the same (fiscal deficit remained flat last year), and residents' income and confidence are slowly recovering. Therefore, fiscal policies need to be strengthened and skewed towards consumption to recreate the “924 hour.” However, the incremental policy for the Politburo meeting at the end of July was limited and still mainly focused on implementing the stock policy. Compared with the six Politburo meetings since 924 2024, the signal strength of this round of policy strengthening was lower than the two meetings after 924 2024 and April 2025. Although strength will accelerate in the third quarter, it will not change the pattern of shocks throughout the year and will not be enough to drive broad-spectrum recovery.

The recent mismatch in technology structure has turned into an “advantage,” but the Hong Kong Stock Technology Internet still needs to “prove itself” and needs a “DeepSeek moment.” The lack of hardware has allowed Hong Kong stocks to “escape” this round of decline, but under the overall AI industry trend, the Hong Kong Stock Technology Internet still needs to prove itself by increasing investment and optimizing models, achieve breakthroughs in AI commercialization, recreate the “DeepSeek Moment”, and drive the index market by weighting individual stocks. The focus is on catalyzing investment progress and performance of leading individual stocks.

Technological turmoil and overcrowded positions have brought about capital rebalancing, and the pressure on the Federal Reserve to raise interest rates will also help ease. In addition to a large number of IPOs and the lifting of bans, the turbulence of technology stocks and highly crowded positions will cause a partial rebalance between domestic and overseas capital, which is beneficial to Hong Kong stocks. Furthermore, the July non-agricultural crisis eased the pressure on the Federal Reserve to raise interest rates. If the reopening of the Strait of Hormuz causes oil prices to fall, it can also help suppress interest rates on US bonds.

When will Hong Kong stocks outperform? Often at a stage where residents' credit pulse is rising

The K-type differentiation between technology and consumption, A-shares and Hong Kong stocks since this year essentially reflects the differentiation of the credit pulse between enterprises and residents. In turn, the bank discovered an interesting phenomenon. In the past ten years, any Hong Kong stock that has surpassed A shares by a large margin has basically corresponded to the strengthening of the credit pulse of the residential sector. This phenomenon has been particularly prominent since 2018.

The reason for this phenomenon is mainly related to the market structure of Hong Kong stocks. In the Hang Seng Index and Hang Seng Technology, the combined weight of domestic demand exposure to Internet platforms, e-commerce, new energy vehicles, and consumer electronics exceeds 70%. Index profits are also highly correlated with domestic demand consumption. In the current environment, the continued decline in the residents' credit cycle explains the failure and weakness of Hong Kong stocks. This is why the bank has repeatedly emphasized over the past period that in response to the characteristics of Hong Kong stocks having large exposure to the consumer market and the high weight of leading internet players, it takes “924 hours” (financial strength) or “DeepSeek Moment” (technological breakthrough) to continue to rebound and get out of the bottom.

How to configure it? Compared to the Hang Seng Index, Hengke still has “odds”; in addition to technology, it is balanced in the direction where fundamental resistance is low

Since the current rebound in Hong Kong stocks is more of a “relative appeal” underpinned by overvalued technology, high crowding, and high volatility, rather than an “absolute appeal” of a sharp increase in profits, once valuations and sentiment have returned to average, without the support of improved profits, “odds” will naturally decline.

In this sense, the “odds” of the Hang Seng Index, which is a broad-based index, are significantly lower than Hengke. After this round of restoration, the Hang Seng Index valuation has returned to close to the historical average, and the valuation odds of the previous game have basically been realized. Therefore, the bank temporarily maintains a point judgment, that is, the short-term central range of the Hang Seng Index is 26,000-27,000 points. Looking at Hang Seng Technology, the decline in the early period was even deeper. The current valuation is still at a historically low level, and the odds advantage has not been completely exhausted. The subsequent decline in US bond interest rates, the catalytic catalytic process of leading Internet companies, and capital rebalancing will also be stronger. The bank's newly updated cross-asset and market odds and win framework is also the same.

However, the bank still emphasizes that capital rebalancing and undervaluation can only support a phased rebound. It is still an “odds” mentality. To get out of a continuous and comprehensive market in the medium to long term, it is still necessary for “924 hours” finance to work hard on the consumer side, or “DeepSeek Moment” to achieve a breakthrough on the Internet leader.

In terms of industry choices, technology is still the main line. The bank's own AI pressure index was once close to the peak of bubble concerns in April 2025 and November 2025 last week, indicating that pressure has reached an all-time high. It also means that under normal circumstances, things should definitely not get worse. The data for the last week has indeed declined, which is also beneficial to the market. At the same time, the triple pressure on AI (high crowding, the Federal Reserve, and industry bottlenecks) has also been solved by half. These all indicate that the stage of maximum technological fluctuations may gradually pass. However, if we want to move significantly, we still need a new catalyst to open up the “ceiling” of current demand, just like Anthropic's breakthrough in coding in the same quarter.

Therefore, in addition to technology, it is possible to balance odds and win rates in other directions to prevent excessive exposure to combination fluctuations. The experience of extreme technological turmoil this time tells the bank that excessive game win rate poses a great risk of fluctuation, so equalizing the odds is a safer choice. Specific equilibrium can consider directions where there is little fundamental resistance, such as innovative drugs, some internet, and gold, which has benefited from falling interest rates on US bonds. In other words, compared to domestic consumption, the certainty of cycle and external demand is higher. Finally, the latest update to the bank's winning odds framework shows that the overall odds score for sectors such as insurance, raw materials, electrical equipment, pharmaceuticals and biotechnology, and energy is currently high.