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In recent months, the Hang Seng Technology Index and Hang Seng Internet Index have experienced a remarkable surge of over 30% since their lows in JanuaryHowever, this growth has not been mirrored in the corresponding ETFs—the Hang Seng Technology Index ETF and the Hang Seng Internet ETF— which suffered substantial net outflows of over 1 billion and 3 billion respectively in the past weekThis phenomenon of "rising while redeeming" raises an essential question: does this pattern signal that the current market rally is nearing its peak?
To unpack this situation, it's crucial to consider several aspects of the ETF dynamicsETFs are designed to passively track the fluctuations of the underlying indicesPicture yourself investing in an ETF that has skyrocketed by several dozen percent after a prolonged period of stagnation lasting two to three yearsThe instinctive urge to take profits is entirely reasonableA simple observational habit of monitoring the cash flows of various ETFs reveals that substantial short-term gains often lead to an uptick in redemptions, a cycle that investors frequently engage in as they seek to lock in profits.
On the other hand, it is also worth noting that a concentrated and excessive scale of redemptions in a short time could indeed apply pressure to the marketIn extreme cases, this situation might contribute to a substantial market dropHowever, given that the current scale of the Hang Seng Technology Index ETF and the Hang Seng Internet ETF exceeds 20 billion, the recent redemption volumes do not indicate an immediate cause for concernIn this sense, it seems prudent to assess the situation without jumping to conclusions.
Turning our attention back to the broader market sentiment, after the New Year, the Hong Kong stock market has displayed a vibrant and bustling atmosphere, accumulating significant gainsWhen viewed against the backdrop of the A-share market, the recent rally in Hong Kong stocks stands out remarkably
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This brings forth a natural question for investors: is the Hong Kong market becoming "expensive"?
For many investors, the sight of sustained increases with substantial returns can often lead to the impression that valuations are at elevated levels, increasing the perceived risk of investmentsHowever, the reality may differ substantially from this common impressionTo analyze the situation comprehensively, a more extended perspective is necessary.
Looking back in time, the Hang Seng Index, along with the Hang Seng Technology and Internet indices, has experienced a pronounced period of volatility and decline that has persisted since reaching its peak in early 2021. The market has been under constant pressure from various internal and external factors, including a slowing global economy, geopolitical tensions, and shifts in regulatory policies, each contributing to repeated cycles of market fluctuations.
Throughout this tumultuous period exceeding three years, indices such as the Hang Seng and its technology counterparts have shown consistent downward trends, deeply impacting investor confidenceAn array of stocks faced significant dips, and even some high-quality companies were subjected to considerable market undervaluation.
Today, even though Hong Kong stocks have demonstrated considerable upward momentum since the beginning of the year, their current position remains far removed from the highs observed in early 2021. Take the Hang Seng Technology Index, for example: it reached a notable peak in early 2021, mirrored by substantial peaks in stock prices across the technology sectorYet, as the market adjusted, this index experienced a significant decline, causing the valuations of many technology firms to drop dramaticallyDespite the uptick seen recently, vast discrepancies persist between the Hang Seng Technology Index's current levels and the heights observed in early 2021.
Along the same lines, both the Hang Seng Index and the Hang Seng Internet Index confront parallel scenarios
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This indicates that while the Hong Kong market has performed robustly since the start of the year, historical trends suggest its valuation levels have yet to reach previously observed highs, thus offering potential room for growth.
However, one should not solely rely on the distance of the indices from their historical peaks to ascertain whether the Hong Kong market is “expensive.” A myriad of other factors must also be considered, including macroeconomic conditions, corporate earnings situations, and sectoral growth trajectoriesFrom the perspective of market performance, the current positioning of the Hong Kong market may not be as overvalued as some tend to assume; rather, its investment appeal could be worth investigating further.
Moreover, taking a closer look at the Hang Seng Index's current valuations reveals interesting figures: its P/E ratio percentile is above 60% over the last five years, presenting a reasonably adequate valuation, while the P/E percentile of the Hang Seng Technology Index stands at a mere 31%, indicating it is at historically low levelsWhen we compare these figures to broader markets, the valuations of Hong Kong stocks appear relatively lower than those in the U.S., Japan, and EuropeOne could argue that this region represents a valuation "niche" on the global capital market landscapeThus, whether viewed through the lens of potential short-term corrections or the perspective of long-term mean reversion, Hong Kong equities exhibit substantial appeal.
It’s also notable that, unlike many other Hong Kong ETFs, the Hong Kong Consumption ETF has not faced net redemptions amid the recent rally; instead, it has been the recipient of sustained net purchasesThis particular ETF tracks the CSCI Hong Kong Consumer Theme Index, a segment where, when considering the A-share market, consumer sectors emerge as vital contributorsTypically, names like liquor and home appliances come to mind, emphasizing traditional consumption sectors
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