Hong Kong 2026 Investment Outlook: Embracing Reflation and Technology Growth

In our Hong Kong 2H25 outlook, we expected the Hang Seng Index’s valuation to recover toward historical levels, supported by improving expectations for China’s economic recovery and policy stimulus. In the second half of the year, the index’s valuation rebounded as anticipated, reflecting a clear improvement in market sentiment amid stronger global liquidity conditions and sustained policy support.

2026 Investment Outlook

Hang Seng Index Valuation and Earnings

The index’s valuation increased significantly in 2025. However, as valuation expansion typically provides only short-term momentum, the longer-term trajectory of the index will continue to depend on corporate earnings.

Figure 1: Hang Seng Index Forward PE

The top three industries in the Hang Seng Composite Index by 2026 earnings growth forecasts are consumer discretionary, materials, and information technology (Figure 2). Growth expectations for these sectors exceed the market average, reflecting strong momentum in the recovery of corporate earnings. Investors may focus on earnings upgrades and valuation re-rating potential in these industries to capture structural growth opportunities.

Figure 2: 2026 sectoral earnings growth forecasts

Consumer Discretionary: Look Beyond Delivery Price War

In the consumer discretionary sector, e-commerce platforms are actively exploring new growth engines to address challenges such as market saturation and soft consumer demand. For example, JD.com and Alibaba’s expansion into food delivery has triggered industry-wide price wars. While this boosted order volumes, it also put pressure on profitability.

The three major platforms now enjoy high market penetration, and competition is gradually shifting from order volume to service quality and user experience. Over the long term, competitive advantage will depend on operational efficiency, technological innovation, and ecosystem collaboration. Prolonged price wars are likely to hurt profitability, whereas differentiated services, such as fast delivery and personalized offerings, remain core strengths.

Regulators have also issued guidance urging platforms to avoid vicious price competition. While currently more advisory than enforceable, this is part of broader anti-involution policies. Against this backdrop, we expect the food delivery price war to ease in 2026, supporting earnings recovery and more sustainable growth.

Table 1: Earnings estimates for leading consumer companies

Data Source: Bloomberg and iFAST Financial Compilation

Alibaba has delivered strong performance this year, supported by a diversified business portfolio and AI-driven growth momentum. In the first half of fiscal 2026, the Cloud Intelligence Group’s revenue rose 30% year-on-year, while AI-related product revenue recorded triple-digit growth for nine consecutive quarters, reflecting strong demand for cloud services fueled by AI development. However, the food delivery price war led the company to increase investments in retail, user experience, and technology, causing e-commerce EBITA to drop nearly 50% year-on-year. Despite short-term profit pressure from higher subsidies and R&D costs, these investments are aimed at strengthening Alibaba’s long-term market position.

Meituan, meanwhile, has faced intensified competition in food delivery, with marketing expenses rising sharply. Its core local commerce segment recorded a Q3 operating loss of RMB 14.1 billion. The company also accelerated overseas expansion, increasing losses from new initiatives. To ease funding pressures, Meituan issued over RMB 20 billion in bonds, one of the largest issuances since its founding. Looking ahead, operating losses are expected to continue next quarter, though the scale may have peaked. The company plans to maintain its market leadership through necessary investments rather than engaging in indiscriminate price wars.

Materials: Anti-Involution Drives Reflation and Rising Corporate Earnings

Anti-involution, one of the most important policies this year, aims to curb destructive price competition in industries through measures such as production cuts and corporate mergers, thereby supporting overall industry profitability. Since the second half of 2025, commodity prices have been rising. For example, lithium carbonate, a key raw material for EV batteries, is up more than 30% year-to-date for futures contracts.

Rising raw material prices tend to lead China’s Producer Price Index (PPI) by around three months, reflecting their impact on production costs (Figure 3). Recently, both domestic and international commodity prices have surged due to global supply chain restructuring and geopolitical factors, suggesting that China’s PPI is likely to continue its recovery in the coming period.

Figure 3: Commodity Prices and PPI

Data Source: Bloomberg and iFAST Financial Compilation

Xiaomi has delivered strong performance this year, with Q3 revenue up over 20% year-on-year and operating profit rising 150%. Vehicle deliveries reached a record high, while the company’s open-source voice model helped the smart EV, AI, and new initiatives segment achieve record revenue and positive operating income for the first time in a single quarter. Meanwhile, Xiaomi’s smart home solution, Miloco, enables natural language interaction to orchestrate and execute a wide range of household tasks.

SMIC also reported stable results in Q3, with output and capacity utilization both rising. Revenue increased nearly 10% year-on-year, and EPS grew over 40%. Monthly capacity expanded 17.8% year-on-year. Although Q4 is traditionally an off-season, the company expects electronics chip demand to remain robust due to strong electronics and export demand. Revenue guidance for Q4 is flat to 2% month-on-month, with production lines continuing to operate at full capacity.

Improvement in Market Liquidity

Beyond corporate earnings, liquidity has become a key driver supporting the Hong Kong stock market. In a context of heightened global market volatility, strong capital inflows help deepen the market and boost investor confidence. Using half of the daily total trading volume through Southbound Stock Connect as a reference, Figure 7 shows that year-to-date net inflows have exceeded HKD 1,300 billion, accounting for over 20% of total transactions, highlighting mainland investors’ enthusiasm for Hong Kong stocks.

At the same time, policies encouraging mainland leading companies to list in both markets have supported IPO activity, with Hong Kong raising over USD 36 billion this year, ranking first among global exchanges.

Figure 7: Cumulative Southbound Net Inflows and Transaction Proportion