Galaxy Securities has released a research report indicating that stronger-than-expected US non-farm payroll data will likely pressure Hong Kong stock valuations in the short term by pushing up US Treasury yields and reinforcing expectations of sustained high interest rates. However, this should be viewed more as a market stress test rather than a confirmation signal of a trend reversal.

The key to whether Hong Kong stocks can break out of this pressure lies in whether the market's own liquidity conditions and industry fundamentals can offset the disruption from overseas interest rates. Three key signals deserve close attention: first, whether southbound capital can resume a sustained net inflow trend; second, whether the Hang Seng Tech Index can break above previous highs on expanding volume; third, whether the AI rally can broaden from leading hardware sectors like computing power and PCBs into internet, AI applications, Agent and Physical AI sectors. If Hong Kong stocks can hold their ground and rally on higher volume despite external headwinds, it would suggest that China asset repricing, southbound capital inflows and the tech industry cycle are becoming the core drivers of the Hong Kong market, paving the way for a genuine breakout. Conversely, if these conditions fail to materialize, the market is likely to shift into a high-level consolidation phase.

Market Performance Overview

During the week from August 31 to September 4, global risk-off sentiment prevailed, leading to notable divergence within Hong Kong stocks. The Hang Seng Index rose 0.26%, the Hang Seng Tech Index fell 0.77%, and the Hang Seng China Enterprises Index gained 0.76%. Among Hong Kong's primary industry sectors, only two posted gains. Financials led with a 4.62% advance and communication services rose 0.44%, while materials fell 3.38%, industrials declined 2.73%, information technology dropped 2.44%, healthcare slipped 2.07%, real estate lost 2.04% and consumer discretionary retreated 1.99%.

Liquidity and Fund Flows

Hong Kong Exchanges and Clearing recorded an average daily turnover of HK$249.432 billion this week, a decrease of HK$3.675 billion week-on-week. The average daily short selling amount was HK$33.677 billion, up HK$1.222 billion from the previous week, with short selling representing an average of 13.66% of total turnover, an increase of 0.90 percentage points. Southbound capital recorded a cumulative net inflow of HK$7.364 billion this week, down HK$2.406 billion from the prior week. As of September 2, global active foreign funds posted a net inflow of US$34 million into Hong Kong-listed Chinese stocks over the trailing seven days, while global passive foreign funds recorded a net outflow of US$76 million, representing week-on-week changes of plus US$46 million and minus US$976 million respectively.

Valuation and Risk Appetite

As of September 4, 2026, the Hang Seng Index traded at price-to-earnings and price-to-book ratios of 11.3 times and 1.2 times respectively, placing them at the 68% and 50% percentile levels since 2010. The 10-year US Treasury yield rose 5 basis points week-on-week to 4.78%, while the Hang Seng Index's equity risk premium stood at 4.07%, representing -1.05 standard deviations from the three-year rolling average and sitting at the 6th percentile since 2010.

Investment Strategy: Four Main Investment Themes

The first theme centers on the technology sector. Market discussions around the AI industry chain are increasingly focused on earnings delivery and application commercialization. Investors should focus on AI application leaders and large model companies, particularly those capable of translating AI technology into concrete business revenue. While hardware opportunities may be less abundant than in the first half of the year, leading hardware companies with genuine technological moats and sustained order flows remain worthy of attention.

The second theme is healthcare, with a focus on innovative drugs and biotechnology companies. The third theme involves high-dividend and income-generating assets, particularly banks, utilities and energy companies. The fourth theme targets sectors with confirmed interim earnings momentum, including non-ferrous metals and select consumer sub-sectors.

Risk Factors

Key risks include domestic policy support falling short of expectations, overseas interest rate cuts underperforming market expectations, and persistent market sentiment volatility.