Economic Information Service reporters Qi Langxuan and Wang Zeyan reported on the 30th: After experiencing a sharp decline in May and June, Hong Kong stocks staged a strong rebound in July. As markets in the US, Japan, and South Korea pulled back from highs, Hong Kong, benefiting from its valuation advantage, successfully attracted capital inflows. Additionally, the lifting of share sale restrictions triggered sharp declines in AI and chip-related new stocks, stimulating strong rallies in heavyweight traditional tech stocks. This propelled the Hang Seng Index to rise over 3,000 points in July, not only fully recovering June's losses but also briefly surpassing the 250-day moving average, commonly known as the 'bull-bear line.' However, the rally was short-lived. In August, capital flowed back into US stocks and renewed enthusiasm for AI-related shares, while expectations for Fed rate hikes intensified. Meanwhile, earnings from major Hong Kong blue-chips generally failed to deliver surprises. After a brief breakout above 26,000, the market faced strong technical resistance and fell 300 points for the month. In September, the Fed restarted its rate hike cycle, US bond risks gradually increased, and the Xi-Biden meeting failed to provide unexpected stimulus. Daily trading volume in Hong Kong stocks continued to shrink to below HK$200 billion, maintaining a downtrend. The market dropped 963 points, or 3.7%, for the month. Nevertheless, for the third quarter as a whole, Hong Kong stocks still rose 1,732 points, or 7.57%, ending a three-quarter losing streak.
Inflation risks, yen depreciation, and AI financing demands have collectively led to continuous selling pressure on US Treasury bonds since July, causing Treasury yields to surge relentlessly and triggering a global bond market sell-off. The benchmark 10-year US Treasury yield rose from around 4.42% at the end of June to a peak of approximately 5.29% by the end of September—historically breaking above the 5% level. With no clear technical indicators to guide it, this surge impacts global asset valuations. Throughout the third quarter, rate hike expectations and the bond market turmoil almost entirely dominated global financial market movements. Experts generally believe US Treasury yields will remain above 5% in the fourth quarter, affecting asset valuations and introducing new stock selection criteria.
*High US bond yields stem from structural issues, but impact on Hong Kong stocks is limited*
The US Federal Reserve resumed its rate hike cycle in the third quarter, announcing a 25-basis-point hike in mid-September—the first such hike in over three years. Inflation is seen as the main driver behind rate hikes and surging Treasury yields. Li Mingde, fund manager at Dashing Asset Management, told the Economic Information Service that medium-to-long-term inflation expectations in the US remain strong, with oil prices, AI hardware supply, and tariffs all pushing inflation higher. Among these, geopolitical tensions and AI hardware supply shortages are difficult to resolve in the short term. Only tariff adjustments could potentially reduce inflation expectations. He further noted that although both China and the US took steps on $30 billion in reciprocal tariffs last week, substantive progress is expected to wait until further discussions during the APEC meeting in November.
In addition, Li Mingde believes the yield surge partly reflects market skepticism about confidence in dollar-denominated assets and the excessively large size of US debt. Ricky Wu, securities strategist at Everbright Securities International, shares a similar view. He argues that rate hike expectations are not the primary factor driving up Treasury yields; rather, the market's long-term outlook on the US and global economy is the core driver behind the bond market turmoil, with structural economic issues in the US being paramount. Wu adds that investors demand higher asset returns to compensate for risk appetite, as evidenced by the continuously rising bid rates in weekly US Treasury auctions. Given these unresolved uncertainties, rising Treasury yields are difficult to avoid. He also points out that as capital seeks higher returns and more stable asset performance, funds will shift from higher-risk equity markets to lower-risk bond markets, indirectly affecting stock markets.
Wu believes the fund flow into bond markets has a more pronounced impact on overseas markets, while its effect on Hong Kong stocks is relatively indirect. Li Mingde also agrees that rising yields have limited impact on Hong Kong stocks. While high yields inevitably affect stock market liquidity and pricing, Hong Kong stocks are currently mainly driven by northbound funds, and local liquidity remains ample, minimizing liquidity impact. Moreover, the overall forward P/E ratio of Hong Kong stocks is currently around 11x, relatively cheap compared to overseas markets, potentially attracting capital inflows and offering upside potential.
Is there a chance for US Treasury yields to decline in the fourth quarter? Li Mingde expects limited room for the 10-year US Treasury yield to rise significantly above 5.2%, but it is equally difficult for it to fall below 5%. One major factor limiting further increases is the expectation of two rate hikes in the US this year, meaning at least one hike in the fourth quarter to control inflation expectations, which could slow the pace of yield increases. However, Wu believes that due to insufficient medium-to-long-term confidence in the US and global economy, judging from the momentum behind rising Treasury auction rates, it is currently difficult to cap bond yields.
Looking ahead to Hong Kong stocks, Li Mingde expects limited positive impact from the Fifth Plenary Session in mainland China between October and early November. However, from mid-to-late November through December, tech giants such as Tencent (00700) and Alibaba (09988), along with other AI companies, will successively release quarterly earnings and operating data. He expects this to drive a revaluation of Hong Kong's AI sector, with the Hang Seng Index potentially challenging the 26,000 to 27,000 range.
*Mainland banks and utilities still hold investment value; hold onto undervalued tech and internet leaders*
Rising US Treasury yields directly impact asset valuations, hitting income stocks hardest. With the 10-year US Treasury, considered the most stable asset, yielding over 5%, other dividend-paying assets become far less attractive. Wu agrees that high yields dampen investor appetite for high-dividend stocks, but when high yields trigger stock market volatility, a batch of high-dividend Hong Kong stocks may attract safe-haven capital inflows due to their defensive nature. Thus, income stocks still hold advantages in a high-yield environment. He believes mainland bank stocks remain the top choice, not only because they are less affected by global rate expectations, but also due to market optimism about their second-half earnings, making them suitable for both income and defense. High-dividend stock ETFs could also serve as basket investment options. Additionally, while utility stocks offer slightly lower yields, their performance is less volatile to global financial trends, making them suitable for portfolio stability. CLP (00002), Towngas (00006), and MTR (00066) are worth considering.
High bond yields increase corporate financing costs, with AI and innovative pharmaceutical stocks—those requiring substantial capital for R&D—expected to be most affected. However, Li Mingde believes some leading tech stocks are approaching 'floor prices,' leaving little room for further valuation cuts: Tencent's forward P/E has dropped to around 11x, which, given an expected double-digit earnings growth over the next two years, is clearly undervalued. Similarly, Alibaba and NetEase (09999) have forecast P/Es as low as about 12x and 11x respectively. He believes further declines are unlikely unless internal company issues arise. Even if valuations are cheap, the market remains cautious about fundraising activities by large tech firms. However, Li Mingde believes asset sales of non-core holdings are their primary financing method, with convertible bond issuance or share placements being less preferred options.
As for emerging AI companies such as Zhipu (02513) and MiniMax (00100), Li Mingde admits their valuations are largely based on long-term profitability projections such as those for 2030. In a high-yield environment, rising discount rates significantly impact downward valuation adjustments. Coupled with the need for substantial capital burn and increased difficulty and cost of debt financing, he holds a pessimistic view on their valuations and stock prices. He only hopes that listings of companies like Moonshot and Anthropic might slightly boost sector valuations, otherwise no other clear positive catalysts are visible.
*High yields impact fundraising for innovative pharma; AI-driven pharma firms may outperform*
Similar to the AI sector, the pharmaceutical sector is also highly dependent on market financing and significantly affected by bond yields. Li Mingde explains that in a high-yield environment, unprofitable companies are hit hardest, as biotech firms heavily rely on market fundraising and debt issuance—some even involving overseas financing. With sharply rising financing costs, companies are forced to slow down new drug development to control expenses, requiring investors to proceed with caution. In contrast, companies using AI to assist drug development (AIDD), such as GenScript (01548), CSPC (01093), and XtalPi (02228), could benefit逆势受惠; he explains that AIDD shortens drug development cycles and reduces labor costs, greatly benefiting R&D cost control. Another key sector, CXO stocks, is seen as 'neutral to slightly positive,' driven by increased R&D projects boosting clinical trial demand, but also facing pressure from rising funding costs.
Northbound funds show clear preference for biotech stocks, but Li Mingde believes they do not treat all biotech stocks equally, favoring large-cap stocks with clear themes. Within the pharmaceutical sector, northbound funds concentrate on a few leading companies such as BeiGene (06160), Innovent Biologics (01801), and Akeso (09926), helping push specific stock valuations higher, but unlikely to provide broad support for small- and mid-cap pharmaceutical stocks.
Inflation risks, yen depreciation, and AI financing demands have collectively led to continuous selling pressure on US Treasury bonds since July, causing Treasury yields to surge relentlessly and triggering a global bond market sell-off. The benchmark 10-year US Treasury yield rose from around 4.42% at the end of June to a peak of approximately 5.29% by the end of September—historically breaking above the 5% level. With no clear technical indicators to guide it, this surge impacts global asset valuations. Throughout the third quarter, rate hike expectations and the bond market turmoil almost entirely dominated global financial market movements. Experts generally believe US Treasury yields will remain above 5% in the fourth quarter, affecting asset valuations and introducing new stock selection criteria.
*High US bond yields stem from structural issues, but impact on Hong Kong stocks is limited*
The US Federal Reserve resumed its rate hike cycle in the third quarter, announcing a 25-basis-point hike in mid-September—the first such hike in over three years. Inflation is seen as the main driver behind rate hikes and surging Treasury yields. Li Mingde, fund manager at Dashing Asset Management, told the Economic Information Service that medium-to-long-term inflation expectations in the US remain strong, with oil prices, AI hardware supply, and tariffs all pushing inflation higher. Among these, geopolitical tensions and AI hardware supply shortages are difficult to resolve in the short term. Only tariff adjustments could potentially reduce inflation expectations. He further noted that although both China and the US took steps on $30 billion in reciprocal tariffs last week, substantive progress is expected to wait until further discussions during the APEC meeting in November.
In addition, Li Mingde believes the yield surge partly reflects market skepticism about confidence in dollar-denominated assets and the excessively large size of US debt. Ricky Wu, securities strategist at Everbright Securities International, shares a similar view. He argues that rate hike expectations are not the primary factor driving up Treasury yields; rather, the market's long-term outlook on the US and global economy is the core driver behind the bond market turmoil, with structural economic issues in the US being paramount. Wu adds that investors demand higher asset returns to compensate for risk appetite, as evidenced by the continuously rising bid rates in weekly US Treasury auctions. Given these unresolved uncertainties, rising Treasury yields are difficult to avoid. He also points out that as capital seeks higher returns and more stable asset performance, funds will shift from higher-risk equity markets to lower-risk bond markets, indirectly affecting stock markets.
Wu believes the fund flow into bond markets has a more pronounced impact on overseas markets, while its effect on Hong Kong stocks is relatively indirect. Li Mingde also agrees that rising yields have limited impact on Hong Kong stocks. While high yields inevitably affect stock market liquidity and pricing, Hong Kong stocks are currently mainly driven by northbound funds, and local liquidity remains ample, minimizing liquidity impact. Moreover, the overall forward P/E ratio of Hong Kong stocks is currently around 11x, relatively cheap compared to overseas markets, potentially attracting capital inflows and offering upside potential.
Is there a chance for US Treasury yields to decline in the fourth quarter? Li Mingde expects limited room for the 10-year US Treasury yield to rise significantly above 5.2%, but it is equally difficult for it to fall below 5%. One major factor limiting further increases is the expectation of two rate hikes in the US this year, meaning at least one hike in the fourth quarter to control inflation expectations, which could slow the pace of yield increases. However, Wu believes that due to insufficient medium-to-long-term confidence in the US and global economy, judging from the momentum behind rising Treasury auction rates, it is currently difficult to cap bond yields.
Looking ahead to Hong Kong stocks, Li Mingde expects limited positive impact from the Fifth Plenary Session in mainland China between October and early November. However, from mid-to-late November through December, tech giants such as Tencent (00700) and Alibaba (09988), along with other AI companies, will successively release quarterly earnings and operating data. He expects this to drive a revaluation of Hong Kong's AI sector, with the Hang Seng Index potentially challenging the 26,000 to 27,000 range.
*Mainland banks and utilities still hold investment value; hold onto undervalued tech and internet leaders*
Rising US Treasury yields directly impact asset valuations, hitting income stocks hardest. With the 10-year US Treasury, considered the most stable asset, yielding over 5%, other dividend-paying assets become far less attractive. Wu agrees that high yields dampen investor appetite for high-dividend stocks, but when high yields trigger stock market volatility, a batch of high-dividend Hong Kong stocks may attract safe-haven capital inflows due to their defensive nature. Thus, income stocks still hold advantages in a high-yield environment. He believes mainland bank stocks remain the top choice, not only because they are less affected by global rate expectations, but also due to market optimism about their second-half earnings, making them suitable for both income and defense. High-dividend stock ETFs could also serve as basket investment options. Additionally, while utility stocks offer slightly lower yields, their performance is less volatile to global financial trends, making them suitable for portfolio stability. CLP (00002), Towngas (00006), and MTR (00066) are worth considering.
High bond yields increase corporate financing costs, with AI and innovative pharmaceutical stocks—those requiring substantial capital for R&D—expected to be most affected. However, Li Mingde believes some leading tech stocks are approaching 'floor prices,' leaving little room for further valuation cuts: Tencent's forward P/E has dropped to around 11x, which, given an expected double-digit earnings growth over the next two years, is clearly undervalued. Similarly, Alibaba and NetEase (09999) have forecast P/Es as low as about 12x and 11x respectively. He believes further declines are unlikely unless internal company issues arise. Even if valuations are cheap, the market remains cautious about fundraising activities by large tech firms. However, Li Mingde believes asset sales of non-core holdings are their primary financing method, with convertible bond issuance or share placements being less preferred options.
As for emerging AI companies such as Zhipu (02513) and MiniMax (00100), Li Mingde admits their valuations are largely based on long-term profitability projections such as those for 2030. In a high-yield environment, rising discount rates significantly impact downward valuation adjustments. Coupled with the need for substantial capital burn and increased difficulty and cost of debt financing, he holds a pessimistic view on their valuations and stock prices. He only hopes that listings of companies like Moonshot and Anthropic might slightly boost sector valuations, otherwise no other clear positive catalysts are visible.
*High yields impact fundraising for innovative pharma; AI-driven pharma firms may outperform*
Similar to the AI sector, the pharmaceutical sector is also highly dependent on market financing and significantly affected by bond yields. Li Mingde explains that in a high-yield environment, unprofitable companies are hit hardest, as biotech firms heavily rely on market fundraising and debt issuance—some even involving overseas financing. With sharply rising financing costs, companies are forced to slow down new drug development to control expenses, requiring investors to proceed with caution. In contrast, companies using AI to assist drug development (AIDD), such as GenScript (01548), CSPC (01093), and XtalPi (02228), could benefit逆势受惠; he explains that AIDD shortens drug development cycles and reduces labor costs, greatly benefiting R&D cost control. Another key sector, CXO stocks, is seen as 'neutral to slightly positive,' driven by increased R&D projects boosting clinical trial demand, but also facing pressure from rising funding costs.
Northbound funds show clear preference for biotech stocks, but Li Mingde believes they do not treat all biotech stocks equally, favoring large-cap stocks with clear themes. Within the pharmaceutical sector, northbound funds concentrate on a few leading companies such as BeiGene (06160), Innovent Biologics (01801), and Akeso (09926), helping push specific stock valuations higher, but unlikely to provide broad support for small- and mid-cap pharmaceutical stocks.
