We can comprehensively analyze the investment logic of the Hang Seng Index from four dimensions: the future trend and potential of the index based on actual earnings, valuation adjustments based on expected earnings, inflection points in market trends based on trading sentiment, and short-to-medium-term volatility based on risk appetite.

From the first dimension, historical data shows that the actual earnings of the Hang Seng Index largely determine its trend, and the valuation of the Hong Kong stock market is heavily dependent on earnings itself. When earnings rise, the Hong Kong market has a higher probability of experiencing a "Davis Double Play." Over 70% of Hong Kong stocks' profits come from mainland China, making the trend of the mainland's economic fundamentals one of the main factors determining the Hong Kong market's performance. The inflection point in economic fundamentals often marks the turning point for Hong Kong stocks, with the Caixin PMI being an important reference indicator.

From the second dimension, expected earnings guide valuation adjustments. Hong Kong stock investors generally demand higher risk premiums and place greater emphasis on earnings certainty. Looking back at historical trends, when Hong Kong stocks' year-on-year earnings growth rises, the market has consistently been in a bull phase. This is partly due to the direct boost from earnings and partly because the Hong Kong market, as a highly institutionalized offshore market, only attracts higher valuations when earnings fundamentals show a definite recovery. As shown in the chart below, according to Bloomberg consensus forecasts, the Hang Seng Index's return on equity (ROE) over the next three years is expected to outperform other mainstream broad-based indices in Hong Kong. Currently, the Hang Seng Index's rolling P/E ratio is only 8x, below the 5th percentile since Wind's valuation records began in 2002, placing it at a historical bottom. The strong expected profitability of its constituents is likely to drive a recovery in the index's valuation.

The third dimension is trading sentiment. Due to the unique nature of the Hong Kong market, investors employ more diverse trading strategies, with institutional players playing a larger role. Thus, short-to-medium-term trading indicators can serve as investment references, such as trading volume and turnover rate, which are good proxies for short-to-medium-term sentiment. Additionally, the put/call trading volume ratio and position ratio of the Hang Seng Index are important indicators that can signal market stabilization. An excessively high short-selling ratio (short sales as a percentage of total market turnover) typically reflects extreme pessimism, where even minor marginal changes—such as unrealized negative news—can trigger a reversal in sentiment, leading to short-covering, pushing stock prices higher, and forcing more short sellers to cover their positions, further driving prices up. Thus, extreme short-selling ratios often correspond to technical bottoms in the market.

Finally, from the perspective of risk appetite, the overall market's risk preference affects short-to-medium-term volatility, and capital flows are a clear reflection of Hong Kong investors' risk appetite. On one hand, global fund flow data from EPFR can be monitored: during periods of rising risk appetite, overseas capital tends to flow into offshore financial markets, and southbound capital behaves similarly. On the other hand, increased risk appetite is also reflected in higher borrowing demand and increased foreign exchange demand from institutional investors, which correspondingly boosts HKD M2 supply. Historically, the year-on-year growth rate of HKD M2 has shown a strong correlation with the performance of the Hang Seng Index.

Currently, whether measured by the A/H-share premium or the ERP (equity risk premium), the Hang Seng Index holds long-term allocation value. The Hang Seng A/H Premium Index is around 150, at historical extremes, such as in March 2009, October 2011, and November 2022. Moreover, even with U.S. Treasury yields remaining high at around 4.3%, the Hang Seng Index's current equity risk premium is about 8%, nearing 10% at the end of January—touching the +2 standard deviation mark of its 3-year average. Against the backdrop of expected Fed rate cuts, investors can consider factors such as actual earnings, expected earnings, trading sentiment, and risk appetite to identify investment opportunities in broad-based Hong Kong market indices represented by the Hang Seng Index.