Hong Kong’s equity market could see a modest recovery in the second half of this year, driven by hopes of easing interest rates, supportive market valuation, greater capital inflow, and an improved corporate earnings outlook.

The cautiously optimistic picture is painted by Indosuez Wealth Management -- the wealth management arm of France-based Crédit Agricole Group.

In an interview with China Daily, Winnie Chiu – IWM’s executive director and senior equity investment advisor of wealth solutions – says she believes the Hang Seng Index has bottomed out this year.

As of July 28, the city’s benchmark stocks gauge had dipped 1.24 percent from its close on Dec 31 last year, and has been lagging behind the United States’ S&P 500 Index and NASDQ, Japan’s Nikkei 225 Index, the KOSPI Index in South Korea, and Taiwan’s TWSE Capitalization Weighted Stock Index.

According to Chiu, the HSI’s relative underperformance is largely due to the index compilation factor. “The HSI lacks artificial intelligence infrastructure shares, undermining its ability to attract capital as effectively as other indices in the region.”

“I do not see the situation (Hong Kong stocks trailing their regional peers) reversing in the short term period,” she says.

Based on IWM’s analysis, consumer discretionary, internet and e-commerce shares make up about 25 percent of the HSI’s total constituent stocks, while the other 75 percent are stocks of traditional financials, property developers, consumer staples and energy enterprises.

Although a significant market turnaround looks slim in the second half of 2026, Chiu believes a modest recovery in the local equity market is still on the cards.

“The Hong Kong stock market may benefit from positive factors, such as easing competition in the e-commerce sector, stable net interest margins for banks, and increased capital inflows resulting from a surge in large-scale initial public offerings,” she says.

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Any market improvement would hinge on earnings growth improvement, the US interest-rate trend, and supportive policies on the Chinese mainland.

For a start, investors need to watch out for positive earnings reports by listed companies next month. Chiu says lower international oil prices since earlier this year could weaken the impact of cost increases and improve public companies’ profit margins by slashing the costs of transportation and raw materials.

Another point is that the HSI’s price-to-earnings ratio is relatively low, while dividend yields are relatively high. Therefore, any positive change in market sentiment would give the market a boost.

“A US interest-rate cut or a decision to keep rates unchanged will be good for Hong Kong’s stock market as it will reduce or maintain the equity risk premium. When the risk premium decreases, it will lift investor confidence and drive market growth,” Chiu says.

Equity risk premium compensates investors for taking on the higher risk associated with equity investments compared to risk-free assets, such as government bonds. It represents the excess return that investing in the stock market provides over a risk-free rate.

Chiu explains the equity risk premium argument by citing the launch of Kimi -- an AI chatbot -- and series of large language models developed by Chinese firm, Moonshot AI.

“The launch reminds investors that China’s AI development is still robust despite US levies of export controls. This may make investors focus more on Chinese AI-related shares. As a result, it will help to cut the equity risk premium required for the Hong Kong stock market. Once the premium falls, it will spur the local market.”

Another question is whether the mainland authorities will come up with favorable policies, such as slashing property inventory, expanding the housing provident fund usage to accelerate destocking, and boosting consumer confidence, as well as economic growth momentum.

With Hong Kong’s equity market poised to post a modest recovery in the second half of this year, Chiu advises investors to look for undervalued stocks with good fundamentals and improving corporate earnings. “Biotechnology, technology hardware and consumer services like platform companies would benefit from an improved earnings outlook.”

As the AI investment super cycle is far from over, Chiu expects Hong Kong-listed AI-related hardware companies, such as those involved in peripheral businesses in memory chips, data centers, optical fibers and laminates, to benefit from the AI investment boom.

As to whether investors can absorb Hong Kong-listed technology shares, Chiu says it would depend on whether these companies’ profit margins have improved, whether they can monetize their AI tools, and whether they plan to spin off their subsidiaries.

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In her view, Hong Kong-listed bank stocks also look interesting with high dividend yields as they will benefit from sector rotation, while being cautious about Hong Kong-listed mainland property developers.

Although the local stock market is poised to stage a modest recovery in the second half, investors should absorb shares incrementally as the market is expected to be volatile along the way, Chiu advises.