• Systematic Rebalancing Amidst Risk Aversion: Intensified volatility in global equity markets has led investors to systematically reduce exposure to high-beta and growth assets. Consequently, the tech sector has faced suppression from non-fundamental factors amidst a broader contraction in liquidity.

• Market Tussle at the Bottom: The recent drawdown has effectively cleared out the previously accumulated "optimism premium." Current pricing reflects a market retest of the valuation floor, rather than an irreversible structural deterioration of fundamentals.

• Strong Divergence in Capital Flows: Southbound capital has hit a two-week high in net buying. Domestic institutions have aggressively increased holdings in core heavyweight stocks, demonstrating the firm conviction of long-term capital to enter what they perceive as a "golden opportunity."

• AI Commercialization Entering Realization Phase: AI is shifting from a tool-based logic to a productivity-based logic. Top-tier internet giants are maintaining high levels of investment in computing infrastructure, with cloud-related revenue continuing to show robust triple-digit growth.

• Capitulation and Contrarian Entry Window: The deep correction of approximately 20% has completed a substantial clearing of positions, offering a highly attractive "left-side" (contrarian) entry window for long-term capital. We advise investors to look past short-term sentiment volatility and anchor their strategy on the long-term allocation value of the Hong Kong tech sector.

The Hong Kong equity market has remained under pressure recently. Investor sentiment has turned increasingly cautious, with markets reacting sharply to both macro headlines and sector-specific developments. As of 4 February 2026, the Hang Seng Tech Index fell 1.84% to HKD 5,366, marking another low in the current correction cycle. Sector heavyweight Tencent Holdings declined nearly 4% in a single session, weighing on overall technology sentiment and reinforcing short-term downside pressure.

Looking beneath the surface, the recent pullback reflects a combination of domestic and global factors. On the domestic front, weaker January PPI data pointed to a more gradual recovery in demand, while ongoing market speculation about potential adjustments to internet value-added taxes added to policy uncertainty. Externally, increased volatility across global markets and a broader shift toward risk-off positioning led investors to reduce exposure to higher-growth and more cyclical assets.

As an offshore market that is highly sensitive to global liquidity trends, Hong Kong equities were among the first to feel the impact, with high-beta technology stocks bearing the brunt of the selling. Importantly, much of the recent weakness appears driven by liquidity pressures and sentiment rather than a fundamental deterioration in the underlying business outlook of core technology companies.

At this stage, the correction has evolved into a full valuation reset and risk release. The Hang Seng Tech Index has fallen about 20% from its October 2025 peak, effectively removing the premium built up in early 2026 due to liquidity front-running and bringing valuations back to levels attractive for long-term allocation. We reiterate that the current price decline largely reflects pessimistic sentiment and liquidity-driven discounting under macro uncertainty, rather than any fundamental deterioration in core technology assets.

What triggered this pullback?

The recent correction in Hong Kong equities reflects a broader global repricing of risk assets, shaped by multiple internal and external factors.

On the external front, markets appear to have overreacted to perceived policy risks surrounding Kevin Warsh, a nominee for US Federal Reserve leadership. Initial concerns focused on a potentially hawkish stance that could strengthen the US dollar and tighten offshore liquidity. However, a closer look at his policy approach points to a greater emphasis on supporting export competitiveness and maintaining currency flexibility, rather than pursuing aggressive monetary tightening. This expectation-driven risk aversion, combined with Hong Kong equities’ high sensitivity to global liquidity, amplified reactions to headlines and contributed to elevated short-term volatility.

On the domestic front, market sentiment has moved noticeably ahead of fundamentals. Recent price action suggests investors have increasingly priced in worst-case scenarios linked to rumoured internet VAT adjustments and uncertainty around the competitive dynamics of large-scale AI development. However, the underlying policy direction of “anti-involution” measures is aimed at reducing destructive price competition and supporting healthier, more sustainable industry growth, not undermining corporate profitability.

In this context, the recent sell-off appears largely driven by short-term liquidity pressures and cautious positioning, rather than any clear evidence of structural weakness in the core business models of leading technology companies.

Remain bullish on Hong Kong technology shares

First, capital flows are already signalling a divergence ahead of price movements. Amid recent panic selling, southbound funds recorded a substantial net inflow of HKD 13.4 billion in a single day, near a two-week high, even as prices fell. This “price down, volume up” pattern indicates that long-term investors view the market as entering an attractive opportunity zone. Major Chinese institutional investors are actively accumulating core holdings, particularly in leaders such as Tencent, Alibaba, and Xiaomi, suggesting that “smart money” is strategically positioning at current valuation lows.

Second, a geopolitical “guardrail effect” is helping to reduce risk premiums. Recent high-level talks between China and the US have set a pragmatic tone for bilateral relations in 2026. Both sides signalled a commitment to managing differences and strengthening international cooperation at the outset of China’s 15th Five-Year Plan. The return of macro clarity provides an important defensive base for offshore assets and dampens the potential impact of extreme tail risks on market pricing.

Third, AI commercialisation in the technology sector is emerging as a key valuation anchor. The Hang Seng Tech Index now trades at attractive levels, while the industry transitions from research and development to tangible earnings. With Alibaba Cloud continuing to deliver triple-digit revenue growth and Tencent leveraging AI to improve profit quality, 2026 is expected to mark AI’s shift from an experimental tool to a core driver of productivity, unlocking scalable profits across advertising, autonomous driving, and edge hardware.

Our take: Buying the dip

We believe the recent correction has effectively cleared weaker hands, creating an attractive entry opportunity for long-term investors. We recommend investors looking beyond short-term sentiment swings and focusing on the long-term allocation potential of Hong Kong’s technology sector.

Our valuation framework indicates that the Hang Seng Tech Index currently offers a compelling risk-reward profile. With AI commercialisation supporting earnings recovery, we project index EPS to grow from 239.6 in 2024 to 334.4 by FY2027, representing a CAGR of approximately 11.7%. Applying a fair P/E multiple of 22.5X points to a target level of HKD 7,524, implying roughly 40% upside from current levels by the end of FY2027.

For practical allocation, we recommend low-cost, highly liquid ETFs:

1. Hong Kong brokerage accounts: iShares Hang Seng Tech ETF (3067.HK) as the primary choice.
2. Southeast Asia / SGX accounts: Lion-OCBC Hang Seng Tech ETF (HST.SGX).

	2024	2025E	2026E	2027E
PE Ratio	22.4	21.1	18.7	16.0
Earnings Growth	43.1%	6.1%	12.6%	16.8%
EPS	239.6	254.3	286.3	334.4
Projected Fair Price (Based on fair PE ratio of 22.5X)				7,524
Upside				40.2%
Source: Bloomberg Finance L.P., iFAST estimates Data as of 4 Feb 2026.