Huatai Securities’ research report highlights that Hong Kong stocks witnessed significant volatility last week, as the market absorbed earlier gains. The innovative pharmaceuticals sector strengthened, with trading volumes surging towards the week’s end. Meanwhile, the semiconductor sector, which had faced earlier pressure, initially declined before rebounding. On the funding side, there was a consistent net inflow of foreign capital, accompanied by declines in both short-selling ratios and positions. Southbound funds also shifted to a net inflow, moving away from dividend stocks towards internet giants and semiconductor chains, signaling an improvement in risk appetite.

From a fundamental perspective, while overall earnings expectations remain subdued, there have been some structural improvements. The innovative pharmaceuticals sector transitioned from a downturn to growth, with the financial sector leading the way in upward revisions. Conversely, the automotive and food and beverage sectors weakened. Looking forward, this round of gains is still primarily driven by funding dynamics. As the momentum from short covering diminishes and the 30-year U.S. Treasury yield climbs to multi-year highs, exerting pressure on valuations, earnings certainty during the mid-year earnings season will become the key determinant.

In terms of allocation strategy, it is advisable to adopt a balanced approach. This involves using low-volatility dividend stocks, such as banks, as the core holding. Attention should be focused on dairy products, certain retail sectors, and leaders in CXO (Contract Research Organization) and innovative pharmaceuticals that may confirm operational bottoms during the mid-year earnings season. Simultaneously, AI-related chains, such as wafer foundries, should be positioned as offensive plays. Additionally, one can participate in oversold rebounds with small positions to capitalize on market fluctuations.