With improvements in policy, funding, and fundamentals, the Hang Seng Index has experienced an unexpected rise around the National Day holiday. Although the market has shown a certain trend of correction at present, and the future market direction is still uncertain, it is certain that the environment of the Hong Kong stock market has undergone significant changes, with the most noteworthy being the abundance of its capital pool.

Compared to the A-share market, the Hong Kong stock market has historically had distinct characteristics of low turnover and low volatility, and market liquidity is more obviously affected by exchange rates and overseas fluctuations. At present, with the Federal Reserve's interest rate cuts and global capital focusing on the Chinese market, the replenishment of Hong Kong's liquidity will be reflected in all aspects of trading. In an environment with abundant capital, the Hong Kong stock market's new share issuance environment, which has been relatively depleted recently, may see some turning points.

1. The enthusiasm for new share issuance in the Hong Kong stock market is still present, and the warming of the capital market may help improve the returns on new share issuance.

As of October 9th, there have been 48 new share IPOs in the Hong Kong stock market this year. However, under the market environment of the past, the returns on new share issuance have not been very good. According to Wind data statistics, the proportion of new share targets that broke issue on the first day of listing reached 39.58%, and those that achieved more than 10% positive returns on the first day accounted for about 35.42%. Looking at the year-to-date performance, as of October 9th, there were about 22 stocks that achieved positive gains, accounting for about 45.8%.

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The total fundraising scale of the 48 listed companies on the Hong Kong stock market reached 57 billion Hong Kong dollars, exceeding the same period last year. A large part of the fundraising depends on the secondary listing of Midea Group. However, with the listing of such large companies on the Hong Kong stock market, the sentiment of IPOs in the Hong Kong stock market has also eased. But excluding Midea Group, the scale of IPOs approved in 2024 is actually not satisfactory, with only 7 companies reaching a fundraising scale of 1 billion Hong Kong dollars.

Excluding Midea Group, the top five companies in terms of initial fundraising funds are Chabaodao (02555.HK), Xi Rui (02507.HK), Suteng Ju Chuang (02498.HK), Ruqi Travel (9680.HK), and Laopu Gold (06181.HK). However, looking at the profit perspective within the year, only Laopu Gold has achieved a doubling of the issue price, while the other four targets have negative annual gains.

Despite the poor market performance, the fundraising scale of the Hong Kong IPO market has actually increased significantly compared to last year. With the recovery of market confidence, the environment for Hong Kong IPOs is expected to improve. Currently, there are still about 100 companies waiting in line at the Hong Kong Stock Exchange for the progress of Hong Kong IPOs, including companies such as China Resources Beverages, the parent company of Yibao, Chinese catering companies like Xiaocai Garden and Green Tea Restaurant, and traditional Chinese medicine service companies like Tongrentang Medical Care.

In terms of subscription enthusiasm, the Hong Kong stock market in 2024 is not bad either. Most of the newly listed stocks have been oversubscribed, including stocks like Youbo Holdings and Laopu Gold, which have astonishing oversubscription multiples. According to the online effective subscription multiple statistics from Wind, a total of 33 new shares have achieved over 10 times oversubscription.

It can be imagined that with the recovery of market capital flows, the new share issuance environment for Hong Kong investors will warm up. Although the market is still in a correction trend, the author believes that with the certainty of the Federal Reserve's interest rate cut expectations, the interest of overseas assets in Hong Kong new share issuance may be increased. Looking forward from 2024, the returns on new share issuance of high-quality targets are worth looking forward to.

2. The domestic capital pool continues to exert strength, focusing on the "Chinese-style" changes in Hong Kong stock trading.Looking back at the past decade, the correlation mechanism between the Hong Kong stock market and A-shares has gradually drawn closer through continuous policy iterations, with increasingly tight bilateral connections. The launch of the Hong Kong-Shanghai Stock Connect has facilitated the interconnectivity of capital between the two regions. The gradual opening of foreign investment restrictions and the establishment of the interconnectivity mechanism between the mainland and Hong Kong markets have also led to more and more listed companies choosing Hong Kong as their preferred listing venue.

Comparing the trends with A-shares, the Hong Kong stock market has historically exhibited the characteristic of "short bear markets and long bull markets." The degree of internationalization and institutionalization of the market determines its higher maturity, with a more evident upward trend from a long-term perspective. However, with the interconnectivity of the two markets, the correlation between A-shares and Hong Kong stocks has rapidly increased, and their characteristics are gradually converging, with the market features of both expected to become more similar. Judging from the trend since 2021, it is more about Hong Kong stocks aligning with the trends of A-shares.

Despite the converging trends, there are still many institutional differences between Hong Kong stocks and A-shares. Hong Kong stocks operate on a T+0 trading system and have no limits on price fluctuations, only implementing a cooling-off period for rapid price changes, and they have a flexible margin trading system, which provides greater freedom in trading. Although A-shares have gradually relaxed to a 20% price fluctuation range in recent years and have been adjusting the delisting mechanism, overall, the trading system of A-shares remains relatively conservative.

As the scale of domestic capital entering the Hong Kong stock market gradually increases and its importance expands, Hong Kong stocks may become more "Chinese-style" in terms of sector rotation or new issue enthusiasm. According to research by Bank of Communications International, in this round of Hong Kong stock market trends, Chinese capital is generally overweight in the financial sector and underweight in discretionary consumption, while foreign capital is the exact opposite, with the financial sector being their largest underweight and the discretionary consumption sector being their largest overweight. In subsequent new issues or sector rotations, the preferences of Chinese capital may have an increasingly obvious impact on the Hong Kong stock market. Therefore, even investors focused on Hong Kong stock trading cannot afford to neglect the importance of domestic market policies and economic trends.

Looking ahead, data validation will become a common catalyst for both the Hong Kong and A-share markets. After the central bank's reserve requirement ratio cuts and interest rate reductions, as well as further relaxation of real estate purchase restrictions, real estate-related data in October will be crucial. The recovery of consumption data during the National Day holiday may also become an element for improving the valuation of Hong Kong consumer stocks. There may still be further fiscal support measures related to consumption, and the scale and form of these measures remain to be observed.

From a policy perspective, the Ministry of Finance meeting last Saturday provided a debt resolution signal that exceeded expectations, providing ample protection for the central leverage space and clearly affirming policy support for land reserve policies. The rumors of raising the deficit ratio also further expanded the macro environment for financial easing. Although there were not too many commitments in specific figures, the signal was more significant, and the policy was consistent in its continuity, actively promoting policy relaxation, especially at the local fiscal level, which may be able to implement the necessary conditions for fundamental improvement.

Looking forward, the Standing Committee of the National People's Congress in mid-to-late October will be the next policy node. Whether it can continue to provide policy support and promote further risk appetite will be an important focus for the continuation of the domestic market trend. In the overseas market, the U.S. election in early November will also be an important event affecting the Hong Kong stock market. However, overall, the author remains optimistic about the future market trend, looking forward to the market's ability to further deliver impressive performances and help the economic fundamentals recover rapidly.