Recently, the Hang Seng China Enterprises Index has made waves in the financial market, enjoying a significant rebound of approximately 31%. To put this into perspective, during the same time frame, the S&P 500 managed only a modest 6% growth, while the MSCI index for emerging and developed markets mirrored this trend with increases of 7% and 5% respectivelyThis divergence raises questions about the factors enabling the Hang Seng to surge amidst a backdrop of caution in global markets.

The Asian market landscape appears to be shifting — the once steadfast Nikkei index looks to be teetering on the brink, impacted by a weakening yen, faltering corporate reforms, and a previous wave of enthusiastic risk appetite that has now settled

In contrast, the Hang Seng Index, which was previously out of favor, has quietly entered a bull market after hitting a multi-year low at the start of the year.

On May 13, the Hang Seng Index broke through the critical milestone of 19,000 points, closing at 19,115.06 points, marking an uptick of 0.8%. Even news about external tariffs did not prevent the rebound in Hong Kong stocksMarket rumors indicated potential tax exemptions on dividends for individual investors buying Hong Kong stocks through the Stock Connect program with Shanghai and Shenzhen, prompting institutions to believe this was part of a series of supportive measures to bolster market performanceIn fact, since the low point at the end of January, the Hang Seng China Enterprises Index has seen impressive growth, significantly outpacing other major indices.

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Consumer Price Index (CPI) for April, which was revealed on May 15, fell short of expectations, marking the first tempering of CPI in six monthsThis development provides some relief to the Federal Reserve as it contemplates the right moment to initiate interest rate cutsA more favorable external environment could, in turn, favor emerging and Asian markets, particularly as the Hang Seng is currently hovering near its secondary resistance level at 19,000 pointsEyes are now turning to the upper threshold of 19,600 points, where a battle between bulls and bears ensued last year.

Hong Kong Stocks Enter a Technical Bull Market

Given the ongoing delays in rate cuts expectations in both Europe and the U.S

alongside heightened geopolitical risks, domestic and international investors are refocusing their attention on Hong Kong stocksThe inflow of southern capital has demonstrated a temporary rejuvenation of market confidenceThe Hang Seng Index saw a notable 7.5% leap by the end of April, leading major global indices as it approached the 18,000-point milestone, and a bullish engulfing pattern emerged on the weekly chart, facilitating a breakout from a three-year downtrend.

In April, Hong Kong equities exhibited robust performance, marking the third consecutive monthly increaseThe Hang Seng Index and the Hang Seng China Enterprises Index rose by 7.4% and 8.0% respectively, while the Hang Seng Technology Index, which tracks major tech firms listed in Hong Kong, saw a growth of 6.4% that month

Within the industry indices of the Hang Seng Composite Index, the information technology sector recorded an impressive 10.3% rise in April.

In addition to southern capital, there has been a notable influx of investments from overseas hedge funds and quantitative fundsFor these speculative funds, the lack of significant correlation between Hong Kong stocks and Western markets, and the lower sensitivity of the Hong Kong market to macro events abroad, present an intriguing trading landscape.

In contrast to the evident inflow of southern capital, there appears to be minimal movement from overseas long-term funds entering the Hong Kong market

Despite this, long-term investments have narrowed some allocations in the A-sharesYear-to-date data (as of early May) reveals net inflows of $31 billion into Japanese markets, $29 billion into southern capital, $15 billion into Korean shares, $11 billion into northern capital, and a slight outflow from Indian stocks, with a $2 billion outflow from the ASEAN marketsThus, it is clear that both onshore and offshore China markets have become a magnet for capital in 2023, bolstered by low valuations and expectations of recovery.

A noteworthy aspect of the current market sentiment is the historically strong inverse correlation between Hong Kong stocks and the U.Sdollar indexTherefore, a strong dollar tends to adversely affect the Hang Seng IndexHowever, examining from a longer-period perspective, Hong Kong stocks undoubtedly represent a global valuation pit; should macroeconomic data and corporate earnings continue to show improvement, the Hang Seng could offer significant value and upside potential.

Furthermore, market rumors suggest that personal investors might see their dividend taxes waived when purchasing Hong Kong stocks via the Stock Connect program with Shanghai and Shenzhen.

According to the Hang Seng Index Company, Hong Kong currently does not levy a dividend tax

However, red-chip companies, registered overseas, would face an additional 10% corporate tax when distributing dividends to non-Chinese resident enterprisesThis proposal aims to eliminate double taxation, injecting a sense of fairness for both mainland and Hong Kong investorsAlthough there has been no official confirmation regarding the tax exemption, the atmosphere for investment has noticeably improvedAs of May 14, 2024, represented by the Hang Seng Composite Index, Hong Kong stocks have surged 7.9% since May, pushing the overall return for the year to 12.4%.

Additionally, if the potential removal of dividend taxes comes to fruition, it is likely to provide an additional boost for southbound tradingHong Kong is poised to potentially achieve eleven consecutive months of net inflow from northbound capital

Since the beginning of the year, net inflows have reached approximately HK$233.5 billion, accounting for about 73% of the total net inflow for 2023.

Notably, many institutions believe that high-dividend stocks, including mainland bank shares, stand to gain directly from the aforementioned potential measures, and their performance has already noticeably outpaced the broader marketLaunched in December 2012, the Hang Seng High Dividend Yield Index reflects the overall performance of high-dividend securities listed in Hong Kong, with a current dividend yield of 6.7%. This index selects securities from the major Hang Seng Composite Index constituents, requiring them to have a track record of cash dividends for the past three fiscal years.

Data from the Hang Seng Index Company reveals that since the discussions surrounding the dividend tax exemption for the Stock Connect program began, the Hang Seng High Dividend Yield Index has grown over 4% within three trading days, boosting year-to-date returns to 15%, outpacing the broader Hang Seng Composite Index by 2.4 percentage points

Over the past three years, the Hang Seng High Dividend Yield Index has experienced a slight decline, with an annualized volatility of 20%, significantly higher compared to the total return drop of 27.9% in the Hang Seng index, which also displayed an annualized volatility of 26%. Interestingly, as of the end of April, mainland companies accounted for 84% of the Hang Seng High Dividend Yield Index with the financial sector being the largest segment at 30%.

Hong Kong Stocks Offer Increased Allocation Value and Upside Potential

Regarding the future performance of Hong Kong stocks, some viewpoints suggest that the inflow of long-term capital from overseas remains minimal compared to southern capital

Once adjustments in European, American, and Japanese markets end, this may further strain the capital landscape for Hong Kong stocksAdditionally, the historical strong inverse correlation between the Hang Seng and the U.Sdollar index indicates that a robust dollar can exert negative pressure on the index.

Nevertheless, from a broader perspective, the Hang Seng undoubtedly represents a valuation opportunity amid global marketsShould both macroeconomic indicators and micro-level financial results show continual improvement, the potential for meaningful gains and allocations will remain high for Hong Kong stocks.

Recent shifts in U.S

economic data have created a positive outlook for the potential easing of rates this yearThe April CPI report indicated a month-on-month increase of 0.3%, slightly below the 0.4% seen in March, and matching the anticipated annual decline to 3.4%. Meanwhile, the core CPI met expectations by dropping to 0.3%, marking the first cooling of CPI in half a year.

Key rental indicators have slid to a 31-month low, while both new and used car prices are decreasing, and health insurance premiums fell by over a percentage point from earlier monthsOwner's equivalent rent saw minor fluctuations, and travel prices have shown some declinesConversely, prices for hospitals and personal care services have surged, while the communication sector reverted unexpectedly, causing delays in auto insurance costs, indicating that inflation patterns are diversifying.

Furthermore, the same day, retail sales figures revealed stagnant growth at 0%, below the expected 0.4% and the preceding month's 0.6%. This apparent sales softness likely correlates with a dip in consumer confidence lately

Together, the cooling inflation and retail trends provide support for the notion that the Federal Reserve could initiate rate cuts as soon as SeptemberFollowing the data release, U.STreasury yields fell sharply, while the dollar weakened, boosting stock market performanceRate futures now fully incorporate expectations for two rate cuts in 2024, a dramatic shift from prior sentiment.

If the strong performance of the dollar and elevated dollar rates show signs of easing, this will foster a favorable environment for emerging marketsIn terms of technical trends, Hang Seng futures have adhered to a bullish trajectory since breaking through the 200-day moving average in early 2021, with nearly a 30% increase since hitting lows in January.

Despite a slight pullback after surpassing the 18,400-point resistance, recent bullish candlestick patterns affirm a generally positive sentiment among traders