When will Hong Kong stocks bottom out?

In 《What Conditions Are Needed for a Hang Seng (H Shares) Reversal? (20260326)》, we clearly emphasize that there is no need to be pessimistic about H shares, and that H shares will rebound as scheduled in the following period. However, affected by the geopolitical situation over the weekend, H shares are falling again today. Looking ahead, we will model the subsequent H shares行情 from perspectives including sentiment, valuation, earnings, geopolitics, liquidity, and historical patterns. For details, see the report:

I. Has H shares reached a bottom?

Looking ahead, the timing of short-term geopolitical conflicts is hard to gauge, and with external disruptions, H shares will likely exhibit “follow-the-leader” style volatility. However, considering that H shares have already priced in pessimistic expectations sufficiently, pressure from downward revisions to earnings is easing, and expectations for the mid-term U.S.-Iran negotiations are also in play, we are not pessimistic about H shares either. Therefore, the risk-reward ratio for going long versus short on H shares may not be high at present, and the best strategy is to “wait and observe.” If, later on, an active U.S. military action beyond expectations triggers panic selling in the market, then it could become the true opportunity for TACO and a deeply undervalued rebound.

First, given that short-term uncertainty is relatively high, global risk assets will likely maintain high volatility, and H shares may continue to be restrained by a pullback in overseas risk appetite. In 《Iran-U.S. Tracking 4: Can We Start to Expect a Downgrade in the Situation? (20260325)》, we pointed out that, at present, Trump still lacks any motive for a direct “surrender,” and the risk of ground war that the market worries about still exists. According to a report from CCTV News, the U.S. Department of Defense is preparing to carry out several weeks of ground operations in Iran on its behalf, so in the short term, global markets may remain in a high-volatility environment, weighing on H shares’ performance.

Second, H shares sentiment is still in the panic zone. As of March 27, our constructed H shares sentiment index (for details, see 《How to Scientifically Measure H Shares Market Sentiment and Its Practical Use (20260121)》) fell 13.3% month-over-month to the panic range of 21.8%, the lowest level since 2024, indicating that a rebound may still be possible going forward (this year to March 27, based on the timing strategy using Hang Seng Index / Hang Seng Tech Index, the excess return is 5.7%/12.0%).

Third, compared with overseas markets, H shares are currently valued lower, and the impact from liquidity shocks may be relatively smaller. As of 2026/3/27, the Hang Seng Index’s forward 12-month PE is 11.1x, cheaper than the U.S. (19.7x), Japan (17.2x), Europe (14.4x), and non-China emerging markets (12.3x). Going forward, the impact from liquidity tightening should be smaller.

Fourth, the earnings season is nearing its end; the drag from earnings is easing, and H shares may be able to “lighten their load” going forward. As of March 27, the proportion of companies in the H shares market that have already published their 2025 annual reports is close to 70%, and the proportion by market cap is 88.5%. In particular, most of the core leading companies have already disclosed their performance, so the negative impact on the market from earnings falling short of expectations afterward is relatively limited.

Fifth, although the situation with Iran may still experience volatility in the short term, in the medium term we are more inclined to expect a downgrade of the conflict rather than a continued escalation. Given the pressure placed on Trump by the international community and by politics within the U.S. itself, together with the fact that Iran is more hardline and more united than before, the U.S. no longer has the political and military motivation to “endlessly” push the conflict toward escalation. Going forward, as pressure from high oil prices rises and the risk of setbacks on the battlefield increases, the U.S. is more likely to push toward negotiations in the medium term; therefore, the medium-term path is more likely to move toward a downgrade and negotiations.

Sixth, the market may be overpricing liquidity tightening. Due to the “learning effect” from 2022, the market’s judgment about the Fed often overshoots. Since March, the U.S. financial conditions index has fallen to around 0, which corresponds to the 12.7th percentile since 2023. Based on the analysis above, if in the medium term geopolitical conflicts are expected to be downgraded, and given that household demand in this cycle is weaker than in 2021–2022, the extent and lag with which rising oil prices transmit into U.S. inflation may be less than what the market currently expects. “Stagflation” may not be the final baseline scenario for this cycle; the market’s excessively pessimistic policy expectations are likely to gradually be repaired.

Seventh, under the baseline assumption that the global economy does not fall into recession, the impact of the current geopolitical conflict on U.S. stocks is already on par with historical levels, so the room for a further large decline may be limited. After compiling the impact of 25 geopolitical conflicts since 1939 on U.S. stocks, we found that in the short term (within 60 trading days after a war breaks out), the median/mean of the maximum drawdown in the S&P 500 is 5.1%/7.1%. The market typically needs more than 20 trading days to reach a bottom. In this round, after the outbreak of the U.S.-Iran war, U.S. stocks have already fallen 7.4% since March. In addition, if we consider only geopolitical conflicts as a sample from after the end of World War II, we find that only when the U.S. economy experiences a recession during the war does the maximum drawdown of the S&P 500 reach more than double digits—for example, the 1973 oil war, the 1990 Gulf War, and the 2001 9/11 terrorist attacks. Furthermore, as of 2026/3/27, the percentage of constituents in the MSCI Global Index that are above the 50-day moving average has fallen back to 25.37%, suggesting that the level of selling pressure in this round is already approaching that of past market bottoms.

Regarding when a trend upward rally might arrive, the following points should be watched going forward: （1）Clearer regulatory signals against “involution”;
（2）Whether the new generation of Hunyuan and DeepSeek foundation models released in April can strengthen confidence in China’s technology;
（3）Whether data from the economic activity peak season in March–April can again exceed expectations;
（4）When H shares ETFs turn to net inflows;
（5）Progress in the U.S.-Iran negotiations.

This article is sourced from the Xingzheng Strategy Zhang Qiyau team

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