In a dramatic turn of events last week, from February 14 to the following days, the Hong Kong stock market experienced a roller-coaster like no otherThe Hang Seng Tech Index soared by a startling 5.29% on February 14, reaching an impressive 5526.22 pointsThis remarkable surge marked a staggering 7% increase over the week, achieving a three-year highSince its low on January 14, the index had seen an astounding rise of 30.56% within just one month.

So what triggered this surge? First and foremost, the AI sector was invigorated by the unexpected emergence of a market player, DeepSeek, which rapidly became a frontrunner in the artificial intelligence industryThe low-cost yet high-performance advantages provided by DeepSeek have contributed to considerable market fluctuations, prompting investors to reassess the technological potential of Chinese tech firms in the AI domainThis rejuvenation hints at a potential revaluation of tech stocks.

In addition, news of a collaboration between Alibaba and Apple further fueled market optimism. On February 12, media reports indicated that Apple had plans to work with Alibaba to develop AI functions for domestic iPhone usersThe next day, Alibaba’s co-founder and chairman, Daniel Zhang, confirmed these rumorsIndustry experts noted that while the specific benefits of this collaboration remain unclear, the partnership represents a significant opportunity for both companies within the tech sectorThis has triggered a positive wave of valuation release for tech stocks listed in both the A-share and Hong Kong markets.

Thirdly, there has been a marked shift in the attitude of overseas investors towards Chinese technology stocks, as evidenced by the recent performance of Alibaba

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Following breakthroughs in artificial intelligence, overseas investors began to view DeepSeek as a beacon of hope for the resurgence of Chinese tech stocksMajor international financial institutions such as Goldman Sachs and Deutsche Bank expressed a bullish outlook on Chinese equities, believing that the valuations of Hong Kong stocks are particularly advantageous, thereby attracting international capital inflow.

Furthermore, the combination of economic recovery and AI assistance has ushered in a renewed golden era for the internet sector. In recent years, mainland China has implemented numerous policies aimed at boosting consumption and stabilizing economic growthThe internal growth momentum of the domestic economy is on an upward trajectory, alongside moderately relaxed monetary policies and a more proactive fiscal policy, which have laid a solid foundation for the Hong Kong stock marketThese policies particularly support the development of tech innovation enterprises, high-end manufacturing, artificial intelligence, and the semiconductor industry, creating a favorable environment for major internet companies and enhancing investor confidence.

From a monetary policy perspective, the People's Bank of China uses tools like adjusting reserve requirements and interest rates to influence market liquidityEasing monetary policy boosts market liquidity, aiding stock market rallies, whereas tightening could lead to market fund strain, pressuring stocksOn the fiscal front, government investments in infrastructure and tax cuts stimulate economic growth and enhance profitability expectations in related industries, further propelling stock markets upward.

Moreover, continuous pro-industry policies have started showing favorable outcomes, with the government guiding funds toward strategic emerging industries, including new energy, AI, and 5G technologies

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These initiatives offer development opportunities for companies in relevant sectors and unveil new investment directions for investors.

Additionally, significant capital inflow from the mainland into the Hong Kong stock market has been evident. In 2024, the total net buying reached an astounding 807.869 billion Hong Kong dollars, marking an increase of 2.5 times from 2023, setting the record for the largest annual net purchasesIn January 2025, net inflow reached 125.6 billion Hong Kong dollars, the highest monthly figure since February 2021, underscoring growing confidence from mainland investors in the Hong Kong market.

On February 14, the southern funds witnessed a streak of real-time purchases amounting to 8.7 billion Hong Kong dollars, bringing the total to 154.136 billion as of the 13thThe ongoing support from southern funds and industrial capital repurchases has significantly improved the resilience of the Hong Kong market.

As the index hits new heights, what should investors expect next?

Advantage remains on the undervaluation front.

Overall, the undervaluation continues to be a key advantage for the Hong Kong stock market.

Market sentiment for the Hong Kong stocks is gradually improving, with the Hang Seng Tech Index's valuation sitting at historical lows, with a trailing P/E ratio of only 22.69 times, lower than 78.19% of its historical duration

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This provides enhanced value for investors and grabs their attention in the market.

The investment cost-performance ratio of quality internet companies is steadily rising.

The internet sector constitutes a critical segment within the Hong Kong stock market, boasting vast development prospectsWith the rapid advancement of technologies like 5G, AI, and big data, the internet industry is poised to seize new growth opportunities, particularly in sub-sectors such as cloud computing, fintech, and e-commerce, which demonstrate high growth potential and investment value.

Leading internet enterprises within the Hong Kong market, such as Tencent and Alibaba, maintain robust profitability and growth capabilities, leveraging their extensive user bases and innovative business modelsBy expanding into novel sectors like cloud computing and fintech, they have achieved continuous growthFurthermore, strategic mergers and acquisitions have broadened their business domains, enhancing their competitive prowess in the market.

However, with the surge in the index, profit-taking activities are becoming apparent, especially towards ETFs. The outflow of funds currently is not surprising; on one hand, there is profit-taking by investors, and on the other, as seen with the Hang Seng Tech Index, the current levels have exceeded the highs achieved in last year’s April surge, which typically results in investors cashing out during the recovery phase.

While short-term trading focuses heavily on the internet sector in China, the medium-term outlook remains optimistic

The continued growth momentum of the technology sector in China and signs of policy support for the real estate sector are likely to sustain investor sentiment towards Chinese assets.

Nonetheless, analysts have reflected on the latest significant trends in the Hong Kong stock surge, noting that despite the index rising, it remains primarily a structural market, one even more extreme than beforePresently, merely over 20% of stocks are outpacing the index, compared to over 60% during the April rally.

This situation poses an adversity to the larger market performance, and the main reasons attributed to this include:

1) The overall size of the Hong Kong stock market is relatively small;

2) Hong Kong has more software and large enterprises, a factor not represented in the A-share market;

3) In index construction, the Hang Seng series limits the weight of individual stocks to 8%, which enhances the impact of small and medium-sized companies on the index.

Furthermore, recent analysts have suggested that the current rally starkly lacks participation from long-term foreign institutional investors, instead seen as driven mainly by passive and trading short-term capitalShould technological advancements effectively address macroeconomic deleveraging and contraction, coupled with enhancements to macro policy, this rally could extend its influence across the broader market; otherwise, structural trends may persist.

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