Late March ushers in the "all clear" window; institutions say that the combination of unlocking restrictions easing and clearer earnings outlook may help Hong Kong stocks reverse course

Caixin News, March 25 (Editor Hu Jiarong) Since the end of last year, differentiation within Hong Kong stocks has become increasingly evident. For example, the Hang Seng Tech Index has continued to undergo adjustments, mainly driven by foreign institutions’ pricing. Because they have a low tolerance for performance flaws and are sensitive to overseas liquidity, shares have been heavily reduced before earnings are delivered.

Meanwhile, the Hong Kong high-dividend sector has set new highs, mainly priced by Southbound capital. With strong high-dividend defensive characteristics, it has played a stabilizing role for the market, keeping the Hang Seng Index largely flat overall.

Core issue analysis

CICC pointed out two main issues affecting the market. First, there are no signs that Middle Eastern funds are flowing into Hong Kong stocks’ secondary markets in large scale “to seek safety.” Their participation approach still mainly involves strategic allocation in the primary market (such as IPO cornerstone investments), rather than forming systematic fund transfers.

Second, in recent days, the share of Hong Kong stock short-selling transaction volume was about 12%, reaching the high level seen during the 2021-2022 bear market. This suggests that further upside potential is limited. A high short-selling ratio does not necessarily indicate that the market will continue to fall; instead, when the market improves, it could trigger a “short squeeze” situation, amplifying the strength of the rebound.

Key observation window for “bad news fully digested”: late March

CICC’s report believes that multiple potential negative factors may be concentratedly digested in late March 2026, leading to a “bad news fully digested” window period:

Release peak ends: March is the first-half peak for Hong Kong stock unlocks (with a scale of nearly 100 billion HKD). After entering the second quarter, the unlock scale will decline significantly. Historically, individual stocks often hit a bottom when they become unlocked. The completion of this round of unlocks may become a stage-ending point for sentiment shocks.

Uncertainty in earnings is eliminated: The 2025 annual reports of the internet and Hang Seng Tech’s major constituent stocks will basically be disclosed by the end of March, removing the suppression caused by earnings uncertainty. Among them, Alibaba Cloud’s price increase could become a catalyst for a performance turnaround in the technology sector.

External environment may improve: The Trump visit to China, originally scheduled for the end of March, has been postponed to April. If it proceeds as planned afterward, it could ease the market’s valuation pressure from external tensions.

Geopolitical disruptions may be digested: Due to the Iran-U.S. conflict, market expectations for the U.S. Federal Reserve’s interest-rate cuts in 2026 have fallen to 0 times. Once such short-term geopolitical shocks are digested by the market, there may be room to repair the valuations that were previously suppressed.

Investment allocation recommendations

CICC’s report provides two approaches to allocation under different scenarios:

If market sentiment improves in late March: It suggests focusing on Hang Seng Tech and the Hong Kong-listed internet sector. The logic is: AI large-models need C-end application scenarios to monetize, and related progress may catalyze fundamentals; at the same time, the internet sector is priced by foreign capital. If overseas liquidity expectations subsequently reverse, the rebound elasticity of the sector could be higher.

If there is again liquidity tightening beyond expectations in the future: Consider defensive allocation opportunities in Hong Kong dividend-focused equities. The logic is: March and April are the peak period for annual report dividends. High-dividend proposals and “right-catching” trading may drive the sector higher. Historical data show that the probability of the Hang Seng Stock Connect Dividend Index rising during this period is as high as 91%.

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