The Ups and Downs of a Bull Market: A Historical Context Overview | Moomoo Research

During the National Day holiday, the Hong Kong stock market and Chinese concept stocks continued to surge, extending the strong performance from the last week of September, exceeding the expectations of many market participants. From September 30 to October 7, among the major indices, the Hang Seng Index rose by 12.0%, the MSCI China Index increased by 11.5%, and the Hang Seng China Enterprises Index climbed by 14.1%, while the Hang Seng Tech Index saw an impressive jump of 21.0%.

Looking back at this round of rebound, it was triggered by the Federal Reserve's interest rate cuts, which opened up policy space for China, leading to a resonant domestic easing policy. The future direction of the market will increasingly depend on policies, particularly the strength and speed of fiscal measures.

How long can this bull market be sustained, and how should we respond? By learning from history, we may find clues in past experiences.

Historically, the Hong Kong stock market has shown a pattern of "short bull markets and long bear markets." In terms of phases, the early stage of a bull market often sees the largest gains, followed by a weakening trend in the mid-stage, which may even experience corrections, while the later stage can also be robust, sometimes performing on par with the initial phase of the bull market.

Chart 1: Hang Seng Index Trends During Bull Markets (2000-2024)

Therefore, even if some investors miss the opportunities in the early stages of a bull market, they can still identify investment prospects during the adjustments or pullbacks in the mid-stage of the bull market. However, the risk of corrections in the later stages of a bull market is relatively high, and investors need to closely monitor changes in policies, capital flows, fundamentals, and the geopolitical environment to respond promptly.

Chart 2: Performance of Hong Kong Stocks During Bull Markets

Source: Bloomberg

Analyzing the past six bull markets, sectors such as finance, conglomerates, real estate, and consumer discretionary have shown relatively strong performance, while telecommunications services, consumer staples, and materials sectors lagged behind in growth. Clearly, the performance of different sectors varies significantly under different economic cycles and liquidity conditions.

Chart 3: Average Returns by Sector in Previous Bull Markets

Source: Bloomberg

The early stages of a bull market are typically driven by valuation recovery, while the mid to late stages may revert to the investment logic of core assets. During the initial phase, sectors such as finance, energy, and conglomerates lead the market. In the mid-phase, finance, information technology, and consumer discretionary sectors stand out, while conglomerates, real estate, information technology, and utilities continue to perform well in the later stages. It is important to note that the core assets and investment themes vary across different periods, resulting in potentially significant differences in sector rotation during this market cycle.

Chart 4: Average Returns by Sector in Different Periods of Previous Bull Markets

Source: Bloomberg

The relatively loose internal and external macro policy environment has created favorable conditions for the formation of a bottom in the Hong Kong stock market and subsequent upward movement. The emergence of a market bottom is usually closely related to the initiation of a period of easing policies, either domestically or overseas, or a temporary halt in tightening cycles.

This bull market can be divided into three phases. In the first phase, the continuous rise in market valuations benefited from liquidity easing and supportive policies, beginning with stock reform and currency reform, and ultimately pausing when signs of policy tightening emerged. The second phase saw a slight pullback in valuations, but performance began to recover, leading to an overall oscillating market. The third phase was characterized by economic prosperity and comprehensive performance improvements, with the mass listing of bank stocks serving as a catalyst for further market increases until the economic, liquidity, and policy environments began to deteriorate.

In 2008, the subprime mortgage crisis collapsed the U.S. financial market, dragging the global economy into turmoil. In response, China implemented a 4 trillion yuan economic stimulus package. Against this backdrop, the Hong Kong market began to form a bottom in early 2009. Although there were subsequent concerns about policy adjustments, the overall market in 2009 exhibited a pattern of bottoming out, followed by oscillation and then a moderate uptrend. However, as the economy recovered and inflationary pressures mounted, prices continued to rise, leading to a gradual withdrawal and tightening of the previous stimulus policies starting in the third quarter of 2009, which altered market expectations and led to a period of adjustment. Hong Kong's GDP rebounded sharply in 2010 to 6.8%, while China's GDP reached 10.6%.

The first half of this bull market, prior to June 2014, was underpinned by low U.S. Treasury yields and a rebound in Chinese industrial profits. The second half was resonated by expectations of a "reform bull" in the domestic A-share market, leading to a significant upward trend.

During this period, the Federal Reserve maintained a loose monetary policy, with U.S. Treasury yields remaining low, below 1%, and quantitative easing measures injecting liquidity into the market. The Hong Kong Monetary Authority followed the Fed's lead, keeping interest rates low. The Chinese government introduced various reform initiatives, such as the "Belt and Road" initiative and the establishment of the Shanghai Free Trade Zone, which boosted investor confidence in both China and the Hong Kong market. Additionally, the launch of the Shanghai-Hong Kong Stock Connect in 2014 strengthened the interconnection between the capital markets of mainland China and Hong Kong, bringing new capital inflows and a broader investor base to the Hong Kong market.

During this time, the People's Bank of China (PBOC) implemented six interest rate cuts and four reserve requirement ratio reductions, coupled with rapid growth in margin financing, which propelled the overall market upward despite the economic growth still showing signs of weakness and the Producer Price Index (PPI) remaining negative. However, the lack of fundamental support for growth stocks and ChiNext stocks allowed them to outperform significantly, becoming the main driving force of the market. Nevertheless, as policies tightened and investor sentiment shifted, the strong uptrend inevitably faced a correction.

During this period, the People's Bank of China (PBOC) maintained a relatively loose monetary policy, providing ample liquidity to the market. The Federal Reserve raised interest rates only once in 2016, and its pace of rate hikes in 2017 was relatively slow, which supported liquidity for emerging markets. The AH share premium index during this time indicated a significant premium of A-shares over H-shares, prompting mainland capital to seek lower-valued H-shares through the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect mechanisms, thereby boosting the Hong Kong stock market. However, as the Federal Reserve accelerated its rate hikes in 2017 and global economic uncertainties increased, the Hong Kong market began to retreat after reaching historical highs in early 2018, with escalating U.S.-China trade tensions negatively impacting market sentiment.

Early in 2019, Powell clearly indicated a halt to rate increases, which sparked a strong rebound in both A-shares and Hong Kong stocks from January to March, rather than waiting for actual rate cuts in July to September. At that time, both U.S. Treasury yields and the exchange rate of the U.S. dollar against the renminbi weakened, opening the door for more flexible domestic policy adjustments. The PBOC implemented significant reserve requirement cuts, creating strong policy resonance that fueled market bullishness. However, after a period of valuation recovery, the central bank reiterated the concept of a "monetary policy total control" in its April monetary policy report, and the Fed's easing policies began to reverse, leading to a halt in the rebound after April and a subsequent phase of market consolidation.

The Federal Reserve lowered interest rates to near-zero levels in 2020 and launched massive quantitative easing measures. The Hong Kong stock market benefited from this liquidity easing, which significantly boosted market sentiment. During the pandemic, the Chinese economy became the only major economy in the world to achieve positive growth, enhancing investor confidence in both the Chinese economy and the Hong Kong market. Although the overall market exhibited a bull market trend, there was internal divergence, with new economy sectors, represented by technology stocks, performing particularly well, while some traditional industries lagged behind. As the economy gradually recovered, the market began to anticipate a gradual tightening of monetary policy, especially as the Federal Reserve started discussing tapering its bond purchases in 2021, putting pressure on the stock market.

In November 2022, optimism surrounding the reopening of borders in mainland China, the continuous rollout of supportive policies for the real estate sector, and expectations that the Federal Reserve would slow its rate hike pace collectively led to a robust rebound in the Hong Kong market, with the Hang Seng Index and the Hang Seng Tech Index rising by 26.6% and 33.1%, respectively. However, as 2023 began, the performance of Hong Kong stocks started to weaken, and the uncertainty surrounding the Federal Reserve's interest rate outlook, exacerbated by the regional banking crisis in the U.S., further eroded market confidence. Concerns regarding the state of the Chinese economy led to additional market declines.

Chart 5: Supporting and Restraining Factors for Hong Kong Bull Markets

Source: WIND

The driving force behind this round of market movements comes from a shift in policies and expectations, particularly the financial regulatory authorities' policies that directly encourage the private sector to leverage in the stock and real estate markets, as well as the political bureau's signals indicating a greater focus on consumption and people's livelihoods. Currently, this bull market exhibits the following characteristics:

1. The leading sectors are mostly non-banking financials, insurance, and real estate, which are high-elasticity cyclical industries. Their performance is strongly correlated with market sentiment rather than solely relying on fundamental logic.

2. From a technical perspective, the market is clearly overbought. For instance, as of October 2, the 14-day Relative Strength Index (RSI) reached 90.9, hitting a new high. Since the policy announcement on September 24, the Hang Seng Index has risen by 21.6%, with negligible contributions from earnings, while valuation expansion accounted for 21.5%. A deeper analysis reveals that the decline in risk premium contributed 19.8%, whereas the risk-free rate actually increased.

3. The "short squeeze" effect is driving the market rebound. In the early stages of this rebound, the short selling volume of Hong Kong stocks and its share of overall trading significantly increased, approaching 19.9%, reflecting some investors' skepticism about the sustainability of the rebound and their choice to short. However, with the arrival of the National Day holiday, the market rebounded strongly, and short selling volume and its share fell back below 14%, though it has recently increased again. Additionally, overseas active funds flowed into the market for the first time in 14 months, injecting new vitality into this rebound.

The rapid rise in the market is inseparable from the support of capital, making it crucial to identify the main inflowing funds. In emerging markets, the proportion of active funds is significantly higher than that of passive ETF funds, contrasting sharply with developed markets.

We can preliminarily conclude that in the early stages of this market movement, the main inflows were mostly from passive funds and trading-type funds, while overseas active funds continued to flow out. As the market continues to rise, passive funds remain dominant, and some trading-type funds adjust their positions through short covering, while the inflow of active funds primarily aims to hedge against potential underperformance risks.

Chart 6: Foreign Capital Inflow into Chinese Markets by Investment Type

Source: WIND

After two consecutive weeks of increases, the current short-term market sentiment is clearly overstretched. The risk premium of the Hang Seng Index has rapidly declined since September 11, falling below the historical average and reaching a new low for 2023. As of October 7, the trailing twelve months (TTM) price-to-earnings (P/E) ratio stood at 11.19, marking a new high since January 2023. Therefore, whether subsequent policies can meet or exceed market expectations will be crucial in determining the future market trajectory.

Chart 7: Historical PE-Band Comparison of Hang Seng Index, with the red line indicating historical valuation mean position

Source: WIND

If emotions further recover to the levels seen in early 2021, the Hang Seng Index is expected to challenge the 24,000 point mark. However, from a fundamental perspective, replicating the conditions of 2021 will be challenging: at that time, China's supply chain was quickly recovering, the real estate market was at a high, and the balance sheets of various sectors are not comparable to those of today.