Hong Kong stocks experienced significant volatility in the first half of 2026, with the Hang Seng Index starting January at 25,500 and rising to 28,000 before declining below 23,000 by mid-year. The decline was driven by the Middle East conflict that erupted in late February, surging oil prices, rising inflation, and a reversal in US interest rate expectations from cuts to hike concerns. Despite underperforming global markets, investment experts note that Hong Kong stocks' current valuation, dividend yields, and policy environment have returned to reasonable levels suitable for medium-to-long-term accumulation.
Hang Seng Index Records 5,000-Point Volatility Range in First Half 2026
The Hang Seng Index demonstrated extreme volatility in the first half of 2026, with a trading range exceeding 5,000 points. The index began January at the 25,500 level and climbed to 28,000 before reversing course. By the end of the half-year period, the index had fallen below the 23,000 mark. Key events during this period included the Middle East conflict that erupted in late February, a sharp rise in oil prices, escalating inflation, and a shift in US Federal Reserve policy expectations from interest rate cuts to concerns about rate hikes.
Global Markets Reach Record Highs While Hong Kong Stocks Lag
While Hong Kong stocks continued their decline in June, overseas markets experienced strong rallies, creating a stark contrast. US stocks, Japanese stocks, Korean stocks, and Taiwan stocks repeatedly broke through previous highs. The Nikkei Average Index stabilized at 70,000 at the end of the half-year period. US stocks saw buoyant sentiment driven by the listing of mega-cap new stocks such as SpaceX, with the Dow Jones breaking through the 52,000 mark to reach new highs. However, overseas markets at elevated levels face increasing volatility and heightened risks.
Yi Li Investment's Sam Lam Recommends Medium-to-Long-Term Positioning at Current Valuation
Sam Lam, Managing Director and Chief Investment Officer at Yi Li Investment Management, identified three main reasons for Hong Kong stocks' underperformance in the second quarter compared to US stocks and Asia-Pacific markets including Japan, Korea, and Taiwan. First, Hong Kong stocks lack the semiconductor stocks that investors are enthusiastically trading. Second, US interest rates are trending upward, and Hong Kong stocks have high sensitivity to US interest rates. Third, China has strengthened capital controls, cracking down on illegal cross-border investment.
Lam noted in his second-quarter outlook that the Hang Seng Index should have decent support at the 22,000 to 23,000 level. With the index falling to that support zone at the end of last month, Lam believes there is no need for excessive pessimism. He pointed out that the Hang Seng Index valuation is not expensive, with an average dividend yield of 3.5% and an expected return rate of 3.7% for next year, which represents a reasonable level. For investors, this is already close to fixed-income investment returns. If there is no major negative news, the index should hold. Even if there is a deeper correction, a further 10% decline from current levels to around 21,000 would bring the dividend yield to 4%. Even at a 20% discount reaching the 19,000 level, these would be levels worth accumulating for medium-to-long-term positioning. The chances of the Hang Seng Index returning to 28,000 in the next two years are very high.
Regarding concerns about US interest rate hikes, Lam believes it will be difficult for the US to raise interest rates in the second half of the year, which is favorable for Hong Kong stocks. Furthermore, the US is effectively in a weak position on the Middle East situation and cannot sustain a prolonged standoff with Iran. With US midterm elections approaching, the Trump administration will certainly not want delays. The Strait of Hormuz will gradually resume navigation, and geopolitical risks are expected to continue cooling.
On China's crackdown on illegal cross-border investment, Lam noted that it is generally believed that "existing accounts" at three offshore internet brokers currently account for approximately 10% of their total customer base, with related account funds representing 13% to 18% of total customer assets. The estimated amount of financial assets that related existing accounts will need to sell over the next two years will be between 200 billion and 300 billion yuan, of which less than half is invested in Hong Kong stocks. This means the total passive selling of Hong Kong stocks over the next two years should not exceed 150 billion yuan, equivalent to only half a day's trading volume in the current Hong Kong stock market.
JPMorgan Asset Management's Tai Hui Advises Neutral Stance on Hong Kong Stocks
Tai Hui, Chief Market Strategist for Asia Pacific at JPMorgan Asset Management, stated that Hong Kong stocks' poor performance in the first half of the year was primarily due to a lack of surprises in macroeconomic aspects. AI-concept-related stocks actually performed well, with recently listed companies showing strong performance. However, because these stocks account for a relatively small proportion of the Hong Kong and China stock markets, they do not drive index gains as significantly as in Taiwan, South Korea, or the US, where they represent a larger index weighting.
Regarding the external macroeconomic environment, Tai pointed out that the Middle East war has increased inflationary pressures. Many officials at the June Federal Reserve meeting believed rate hikes were necessary. However, his view is that if the Strait of Hormuz can reopen in the short term and oil prices have already started declining, although there is basically no chance of rate cuts this year, the Federal Reserve may not rush to raise rates. The current outlook is that US interest rates remaining flat in the second half is the most likely scenario.
For Hong Kong stocks, Tai believes a relatively neutral attitude is appropriate. He explained that AI-related stocks in Hong Kong and China that performed well in the past six months have limited ability to drive the index. Traditional technology leaders are still integrating AI into their ecosystems. Therefore, the second half depends heavily on whether companies such as e-commerce and internet firms can demonstrate cost savings or business expansion through AI, which would give Hong Kong stocks better prospects in the second half.
He added that China's economic data over the past two to three months has been average. Industrial production and export data remain acceptable, but domestic demand is weaker. Government spending growth has been slower, even showing negative growth. At the same time, the People's Bank of China and the Chinese government have not shown a clear willingness to strongly stimulate the economy. He estimates that China's economy will remain flat in summer without major surprises.
Tung Kei Fund's Pang Po Lam Identifies 20,000-Level Support with Peak Risk in US Stocks
Pang Po Lam, Managing Director of Tung Kei Fund Management, stated that China and foreign countries have different focuses in AI. Foreign markets concentrate on computing power and infrastructure, leading to hot trading in chip and storage stocks. Mainland China emphasizes large models and application scenarios, which is the main reason Hong Kong stocks underperformed last quarter. In the second quarter, chip stocks surged significantly, with TSMC alone driving the entire Taiwan stock market. South Korean investors have stronger speculative tendencies, as evidenced by the high leverage in exchange-traded funds (ETFs). At the same time, investors hedged by selling Hong Kong stocks such as Tencent (00700), Alibaba (09988), Xiaomi (01810), and Meituan (03690), creating a zero-sum situation.
Pang believes that the global investment market faces considerable risks in the second half, with increasing risk of US stocks peaking and declining. The US S&P margin debt ratio is currently 0.57 times, with corporate financing already higher than the 0.5 times level before the 2000 dot-com bubble burst and the 2008 financial crisis. Based on past experience, levels above 0.5 times indicate the peak is not far away. Furthermore, AI applications have triggered layoffs at multiple large US companies, which will have some impact on consumer spending power.
For Hong Kong stocks, recent rebounds have been weak. Pang does not rule out further downside testing of support levels. He expects the Hang Seng Index's major support in the second half to be at the 20,000 level, with rebound resistance correspondingly moving down to the 24,000 to 25,000 level. He explained that mainland fiscal spending is cautious, new energy vehicle subsidies have ended, fixed investment has declined, and although the Middle East situation has eased, its impact on investment markets has not dissipated, all affecting investment sentiment.
He believes northbound capital remains an important factor dominating Hong Kong stocks' future performance. China's recent crackdown on illegal cross-border capital investment has caused some market turbulence. He estimates that while this factor's negative impact on Hong Kong stocks in the second half will weaken, there will still be some aftershocks. On the other hand, according to his understanding, China's approach still supports capital inflows into Hong Kong stocks. Many Chinese brokers report receiving numerous inquiries from investors originally on cross-border trading platforms who wish to transfer funds to Chinese brokers, representing a shift from "dark water" to "clear water." He believes northbound capital will remain an important support for Hong Kong stocks going forward.
FAQ
What caused Hong Kong stocks to decline below 23,000 in the first half of 2026?
Hong Kong stocks declined below 23,000 in the first half of 2026 due to the Middle East conflict that erupted in late February, surging oil prices, rising inflation, and a reversal in US Federal Reserve policy expectations from interest rate cuts to concerns about rate hikes. The Hang Seng Index started January at 25,500, rose to 28,000, then fell below 23,000 by mid-year.
What is the current dividend yield for Hong Kong stocks according to investment experts?
According to Sam Lam from Yi Li Investment Management, the Hang Seng Index currently has an average dividend yield of 3.5%, with an expected return rate of 3.7% for next year. He considers this a reasonable level that is already close to fixed-income investment returns for investors.
What support levels do experts identify for the Hang Seng Index in the second half of 2026?
Sam Lam from Yi Li Investment identifies support at 22,000 to 23,000, with potential deeper support at 21,000 (dividend yield of 4%) and 19,000 as accumulation levels. Pang Po Lam from Tung Kei Fund expects major support at the 20,000 level in the second half, with rebound resistance at 24,000 to 25,000.
