Stimulated by the unexpectedly strong policy mix, the Hong Kong stock market continues to show strong performance, with a year-to-date increase exceeding the S&P 500. Following the large cap rally, the Hong Kong Stock Exchange surged by 27.73% this week, reversing the downturn of nearly 5 months.

On September 27, the latest research report from Goldman Sachs pointed out that after briefly reaching a new high at the beginning of 2021, the Hong Kong Stock Exchange entered a long period of low stock prices. This time, due to improved sentiment in the Chinese stock market, the resurgence of Hong Kong stock IPO activities, and other factors, the recent rise of the Hong Kong Stock Exchange is different from before.

The Hong Kong Stock Exchange's nearly 30% increase this week has not only become the focus of the market, but also reflects the unusually active trading activity in the Hong Kong stock market in the recent period. The turnover of the Hang Seng Index has exceeded 400 billion Hong Kong dollars, breaking the historical record of the Hong Kong stock market. The Hang Seng Index rose by 21.03% this week, while the Hang Seng Tech Index rose by 20.23% this week.

Goldman Sachs explains this recent rise with five main reasons, not just a "flash in the pan":

1. The ratio of market capitalization of Chinese listed companies to GDP is currently at a historically low level not seen in this downturn cycle.

2. Earlier this year, the real interest rates in the Hong Kong stock market were at their highest level in twenty years, and the Fed's rate cuts / HIBOR declines have begun to reduce this level. The decline in real interest rates may have a positive impact on the trading volume of Hong Kong stocks.

The Hong Kong IPO market activity has rebounded from the extremely low level since the peak in 2021 to the third quarter of (this year).

The business volume of the London Metal Exchange (LME), a subsidiary of the Hong Kong Exchange, is on the rise, accompanied by a cost increase starting in the 2024 fiscal year, driving LME revenue growth by about 30-40%. In the 2021-2022 fiscal year, LME's contribution to the growth of the Hong Kong Exchange Group was negative.

The market's consensus expectations for the earnings per share of the Hong Kong Exchange are decreasing, and the stock's valuation premium relative to the index is currently at a mid-cycle level.

Goldman Sachs further explains that the Hong Kong Exchange's stock price is primarily driven by trading volume in the Hong Kong stock market, with this business contributing approximately 40% to revenue. With improved sentiment in the Chinese stock market, declining real interest rates, and a rebound in IPO activity, trading volume in the Hong Kong stock market may further increase.

The bank confirms a buy rating for the Hong Kong Exchange and raises the company's 12-month average target price from HK$306 to HK$318, implying a further 14% upside potential for the stock.

CITIC Securities stated that the rate cut by the Federal Reserve and the significant boost to market confidence from the domestic policy combination on September 24 are expected to drive foreign capital and local Hong Kong funds back into Hong Kong stocks. Since August, the bottoming characteristics of the Hong Kong stock market have become more apparent, and after nearly two weeks of valuation adjustment, the current valuations of the Hang Seng Composite Index, the Hang Seng Index, and the Hang Seng Tech Index are still at historical lows.

CITIC Securities believes that the valuation recovery trend in the Hong Kong stock market since early August is expected to continue until early November, while growth styles are expected to continue to outperform dividend strategies.