A research report from China Galaxy Securities indicates that if the U.S. and Iran become entangled in a prolonged conflict, the Hong Kong stock market is likely to undergo a three-stage evolution: short-term sentiment shock, medium-term fundamental transmission, and long-term structural divergence. Macroeconomic conditions are expected to remain challenging, characterized by low growth, high interest rates, and persistent inflation. However, Hong Kong stocks maintain relative resilience among non-U.S. assets due to their valuation discounts, high dividend yields, and support from southbound capital. Investors are advised to focus on three main themes: cyclical sectors, financial and discretionary consumption sectors trading near valuation lows, and technology sectors—particularly hard tech with self-sufficient and controllable logic.
Key observations from the report include: This week, all three major Hong Kong stock indices declined. The Hang Seng Index fell 0.74%, the Hang Seng Tech Index dropped 2.12%, and the Hang Seng China Enterprises Index decreased by 1.12%. Among sectors, three industries recorded gains while eight declined. Industrials rose 2.54%, financials increased 1.71%, and energy advanced 0.96%. In contrast, materials fell 10.09%, communication services declined 3.7%, and information technology dropped 3.19%. At the sub-sector level, electrical equipment, automobiles and components, banking, consumer durables, and industrial trading and conglomerates were among the top performers. Non-ferrous metals, media, steel, defense and military, and chemicals were among the weakest.
Market liquidity data showed: The average daily turnover on the Hong Kong Stock Exchange this week was HKD 284.505 billion, a decrease of HKD 8.921 billion from the previous week. Southbound capital recorded a net outflow of HKD 6.329 billion this week, a sharp reversal from the net inflow seen last week. Over the past seven days as of March 18, global active foreign funds recorded a net outflow of USD 128 million from Hong Kong-listed Chinese stocks, while global passive foreign funds saw a net outflow of USD 204 million.
Valuation and risk preference indicators: As of March 20, 2026, the Hang Seng Index traded at a PE ratio of 12.38x and a PB ratio of 1.27x, placing it at the 81st and 63rd percentiles, respectively, relative to levels since 2010. The yield on the 10-year U.S. Treasury note rose 11 basis points from the previous Friday to 4.39%. The risk premium of the Hang Seng Index stood at 3.69%, which is 1.82 standard deviations below its three-year rolling average, at the 2nd percentile since 2010. The yield on the 10-year Chinese government bond increased 2 basis points to 1.83%. The Hang Seng Index's risk premium was 6.25%, 1.73 standard deviations below its three-year rolling average, at the 37th percentile since 2010. The Hang Seng Shanghai-Hong Kong Connect AH Premium Index fell 2.36 points to 119.81, at the 16.6th percentile since 2014.
Looking ahead, if the U.S. and Iran enter a protracted conflict, the Hong Kong stock market is expected to evolve through three phases: short-term sentiment shock, medium-term fundamental transmission, and long-term structural divergence. Despite a challenging macro backdrop of low growth, high interest rates, and sticky inflation, Hong Kong stocks retain relative resilience among non-U.S. assets due to their attractive valuations, high dividend yields, and support from southbound capital. Investors should focus on three strategic themes: 1. Cyclical sectors: Global manufacturing recovery combined with expanding AI-related capital expenditure is systematically reshaping supply-demand dynamics in cyclical industries. Strategic resources such as crude oil, natural gas, coal, precious metals like gold, and critical metals related to defense and hard technology are worth attention. Additionally, chemicals with cost-pass-through capabilities and agriculture with improving fundamentals are also key areas. 2. Financial and discretionary consumption sectors near valuation lows: Financial stocks currently trade at historically low valuations, offering ample margin of safety and significant rebound potential once tensions ease. Discretionary consumption leads in earnings growth and profitability, positioning it as a core beneficiary of consumption recovery and a defensive growth segment amid geopolitical uncertainties. 3. Technology sectors, particularly hard tech with self-sufficient and controllable logic: The core investment theme in Hong Kong tech stocks in 2026 revolves around AI, driven by the emergence of open-source large models, improved reasoning capabilities, and accelerated commercialization. The rise of open-source platforms like OpenClaw may mark a transition from conversational AI to autonomous execution. Global capital currently shows a clear preference for upstream tech hardware, and the trend of favoring hardware over software is expected to persist in the first half of the year. Investors should focus on hard tech segments with strong industrial trends and self-sufficient capabilities, particularly semiconductor equipment, electronics, and communications, which have demonstrated resilience amid external uncertainties.
Risks to consider include potential shortfalls in domestic policy effectiveness, slower-than-expected overseas interest rate cuts, and unstable market sentiment.