The Hong Kong/China markets have softened in recent months, as concerns over an AI-related capex bubble and a less favorable outlook for Fed rate cuts triggered sharp global equity pullbacks, affecting Hong Kong/China, the US, South Korea, and Taiwan. The HSI fell -3.5% in October and -0.2% in November, though YTD November it remains up 28.9%. The CSI 300 was largely unchanged in October but declined -2.5% in November, with YTD gains at 15.0%.
Weak macro momentum also contributed to market selling in November. October data showed broad-based economic slowdown, with growth decelerating across industrial production, consumer spending, investment, and exports. This weakness likely continued into November, as the official manufacturing PMI remained in contraction at 49.2% (October: 49.0%) despite easing trade uncertainties. Meanwhile, the official non-manufacturing PMI fell below 50.0% to 49.5% (October: 50.1%), marking its first contraction since the post-pandemic reopening.
At the time of writing, the market is patiently awaiting the policy window—namely, the December Politburo meeting and the Central Economic Work Conference—for further signals on the government’s policy direction. We believe China’s policy support should remain pro-growth, and officials are likely to keep the 2026 GDP target near 5% (matching 2025’s goal) while maintaining a roughly 4% deficit ratio. The government will likely emphasize “steady growth” and more proactive fiscal and monetary easing, as in last year’s guidance.
On a separate note, investors should watch for signals from the Dec 13–14 FOMC decision. At the time of writing, the futures market is pricing in an 87% probability of a Fed rate cut. Further Fed easing could provide China with additional policy flexibility, as we saw in September 2024, such as lowering interest rates. This could benefit broad market sentiment, with sector-specific gains in areas such as Property and Consumer.
Looking ahead, 2026 is the first year of the 15th Five-Year Plan – a “pivotal bridge” in China’s century-long modernization. The US–China trade war is likely to keep China focused on industrial upgrading and tech breakthroughs rather than purely boosting consumption. With great-power rivalry intensifying, policymakers emphasize “protecting national interests” while injecting long-term certainty into the economy. In practice, this means more support for advanced manufacturing and strategic industries (from EVs and green energy to semiconductors) even as domestic demand is nurtured. In sum, with external uncertainties rising, China will lean on its “historic initiative” of state-guided planning to find stability amid volatility.
Our outlook for HK/China equities remains cautiously optimistic, with investor sentiment closely linked to policy developments both within the domestic economy and global (especially the US). While opportunities exist—particularly in sectors benefiting from structural tailwinds—a cautious and selective approach is warranted as markets navigate the uncertainties of 2025. Following the recent correction, valuations are now back to a more reasonable level. As of 30 November 2025, the HSI Index is trading at a 2026 P/E of 11.4x, compared with 12.5x for MSCI China and 14.5x for the CSI 300 Index, all notably below MSCI USA’s 22.4x.
Source: Bloomberg, 30 November 2025
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