Author: CITIC Securities Research

Summary

This week, the central bank governor Pan Gongsheng stated that the proportion of foreign reserves allocated to assets in Hong Kong will continue to increase, driving the Hong Kong stock market to rebound significantly for the second consecutive week. Currently, the proportion of outstanding shorts in the Hong Kong stock market has slightly decreased from the mid-June high to 2.43%, but it is still above three standard deviations from the historical average. As external and internal disturbance factors gradually ease, it is expected that there will be significant room for decline in the future.

However, the Hong Kong stock market also shows noticeable pair trading signs recently. In the short term, we still recommend focusing on directions with high fundamental certainty and event catalysts, including: innovative medicines, aviation, robotics, and strongly industrial property metals.

The Chinese stock market saw a significant return of trading momentum led by AI mainline activities this week. After listing on the U.S. stock market, SK Hynix's stock price rose, confirming the ongoing enthusiasm for the AI hardware industry chain. Meta's expansion of data centers and Amazon's bond issuance indicate that the capital expenditures of technology giants remain resilient, effectively easing concerns about the slowing pace of investment in the AI field.

We expect that U.S. stocks will maintain a volatile upward trend, and we recommend focusing on: software, military industry, energy infrastructure, and financial sectors.

Foreign reserves will continue to increase asset allocation in Hong Kong

According to the central bank's official website, on July 7, the People's Bank of China, Hong Kong Monetary Authority, and Hong Kong Securities and Futures Commission jointly announced 11 new measures to further deepen cooperation between Hong Kong and the mainland financial markets, aimed at improving the construction of Hong Kong's fixed income and money markets, as well as supporting the arrangement of Hong Kong's offshore RMB hub.

In his speech, the Governor of the People's Bank of China, Pan Gongsheng, stated that the People's Bank of China will cooperate with the local government and financial management institutions in Hong Kong to build, consolidate, and develop the financial center of Hong Kong. In his speech, he mentioned that the national foreign exchange reserves will continue to increase the asset allocation in Hong Kong, injecting more momentum into the development of the Hong Kong capital market.

This statement was first mentioned by Governor Pan Gongsheng at the 18th Asian Financial Forum in 2025, and subsequently, the Hong Kong stock market welcomed its second round of increase since September 24, with the Hang Seng Index rising nearly 30% in 45 trading days.

According to the annual report of the State Administration of Foreign Exchange, the currency structure of China's foreign exchange reserves shows higher diversification and dispersion compared to the global average; from a yield perspective, the average return on investment of China's foreign exchange reserves from 2010 to 2019 reached 3.2%. In the Hong Kong stock market, the TTM dividend yield of the Hang Seng High Dividend Yield Index currently stands at 6.0%, clearly possessing strong yield advantages.

Short squeeze trading and pair trading jointly unfold in the Hong Kong stock market

In the past two weeks, the leading direction of the Hong Kong stock market has been mainly the industry with the highest proportion of outstanding shorts, such as healthcare (4.07%), discretionary consumption (3.03%), and technology (2.83%).

Overall, the proportion of outstanding shorts in the Hong Kong stock market has slightly decreased from the mid-June high to 2.43%, but it is still close to three standard deviations above the historical average. As internal and external disturbance factors gradually ease, we expect there will be significant room for decline in the future.

However, since the overall rebound of the Hong Kong stock market on June 29, the A/H premium index has expanded by 2.1%, especially the premium rate of H shares with a premium has significantly narrowed recently, including companies like Lattice Semiconductor, Zhaoyi Innovation, and CATL. Coupled with the recent appreciation signs of the RMB exchange rate and the continuous outflow of southbound ETFs (a cumulative outflow of 125.6 billion yuan since March 5), we also point out the impact of pair trading on H shares.

In the short term, we still recommend focusing on directions with high fundamental certainty and event catalysts, including: 1) innovative medicines (resilient performance + repurchase support + overseas business development); 2) aviation (peak travel season + falling oil prices); 3) robotics (catalyst for expected mass production of Optimus); 4) strongly industrial property metals (high earnings growth + expectations of interest rate rises easing).

This week, the trading momentum of the AI computing power mainline in U.S. stocks has revived, and market risk appetite has risen simultaneously

The information technology, energy, and communications services sectors led the gains, with the Philadelphia semiconductor index rising 2.7%.

The stock price of SK Hynix's ADR rose 12.8% on its first day of listing in the U.S., with oversubscription and strong performance providing strong evidence for the continuation of AI momentum trading. Earlier in July, Meta signaled the sale of some surplus computing power, raising concerns in the market about the slowing capital expenditures of tech giants, resulting in significant volatility in the semiconductor sector.

However, market sentiment has recently reversed again, as Meta announced it will invest 13 billion Canadian dollars to build a new data center in Canada, sending a strong signal of increased capital expenditure willingness. Meanwhile, Amazon submitted USD bond issuance documents to the SEC this week, initiating the issuance of bonds with various maturities; according to reports from Bloomberg, CNBC, and other media, the total scale of Amazon's bond issuance is approximately 25 billion USD.

Although there are differences in the market regarding the sustainability of AI capital expenditures in the short term, the actual actions of leading companies have not turned conservative, reinforcing the narrative of an arms race in computing power, which remains a key fundamental basis for supporting the continuation of this round of momentum trading.

With mutual verification between the AI hardware supply chain and the capital expenditures of cloud computing in U.S. stocks, previous worries may gradually dissipate, and momentum trading characteristics are expected to continue

As of July 10, the dynamic P/E of the S&P 500 (20.4x) and the Nasdaq 100 (23.3x) expanded by 0.9 and 2.4 percentage points compared to last week, respectively, and remain relatively low compared to the high point on June 2; at the same time, the profit growth rates of the Nasdaq 100 and the MAG8 have been revised up by 0.36 and 0.08 percentage points, respectively, compared to last week.

Considering the current valuation levels and the ongoing upward trend in earnings revisions, we judge that U.S. stocks will maintain a volatile upward pattern in the short term and recommend focusing on:

1) The software industry may welcome further capital inflows;

2) Long-term geopolitical risks and military industry sectors with high demand certainty;

3) Energy infrastructure benefiting from data center construction and electrification transformation;

4) Financial sectors driven by both capital returns and regulatory improvements (banks and Fintech).

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