Why was the October sell-off concentrated in technology stocks?

  • China and Hong Kong equities fell for a third consecutive month. In US dollar terms, the MSCI China, Hang Seng Index and Hang Seng Tech Index declined 7.2%, 5.3% and 11.7%, respectively, in October; the ChiNext Index and STAR 50 Index fell 22.4% and 23.5%, respectively.
  • Investors increasingly questioned the global AI narrative: annual recurring revenue growth was slowing, earnings expectations were high, free cash flow was limited and financing needs were rising. Chinese AI-related stocks bore the brunt, with the MSCI China Information Technology sector falling 21.4%.
  • J.P. Morgan believes the unwinding of crowded positions among domestic institutions exacerbated the decline; daily A-share turnover fell to 45% of its peak for the year. Third-quarter results at some index heavyweights, including optical module companies and CATL, were also weak, while state-owned banks and CXO companies beat expectations.

Where did capital move, and how visible was policy support?

  • As growth and momentum trades were unwound, defensive and under-owned sectors outperformed. The MSCI China consumer staples, energy and utilities sectors rose 5.9%, 3.8% and 1.2%, respectively, in October.
  • The policy response strengthened at month-end: the China Securities Regulatory Commission said it would make every effort to stabilize the market and expectations, and state-backed funds resumed buying. From 15 October to the 30th, average daily inflows into A-share ETFs reached 25 billion yuan, compared with just 1.4 billion yuan per day in September; J.P. Morgan believes the policy backstop consequently became more visible.
  • Cross-border flows also weakened: southbound funds recorded net outflows of 28 billion Hong Kong dollars in October, compared with net inflows of 61 billion Hong Kong dollars in September; average daily turnover in Hong Kong fell from 202 billion Hong Kong dollars in September to 181 billion Hong Kong dollars in October.

Can signs of economic stabilization ease market pressure?

  • China's September activity data showed initial signs of stabilization: retail sales rose 0.4% month on month on a seasonally adjusted basis, the year-on-year decline in fixed-asset investment narrowed to 7.2%, and industrial value added rose 5.5% year on year. Real GDP grew 4.5% year on year in the third quarter, above 4.3% in the second quarter and the market consensus of 4.4%.
  • Credit rebounded, but demand remained weak: new loans in September amounted to 1.08 trillion yuan, compared with just 60 billion yuan in August. J.P. Morgan's quantitative macro indicators also showed that both China and Hong Kong were in the slowdown phase of the economic cycle.
  • China's central bank governor proposed using the overnight repo rate DR001 as an effective operational target and discussed shifting from seven-day to overnight operations. J.P. Morgan views this as a reform of the monetary policy framework and believes clearer interest-rate pricing would help monetary policy transmission.

Why did the local Hong Kong market perform differently?

  • The MSCI Hong Kong Index rose 0.4% in US dollar terms in October, diverging from the technology-led decline; utilities rose 3.7% and real estate gained 2.1%.
  • J.P. Morgan expects Hong Kong residential prices to rise 10% to 15% in 2026. The year-to-date gain had reached 12% as of the report, stronger than expected, but the bank believes gains may slow in the second half and is watching two policy uncertainties: controls on capital outflows and Federal Reserve rate hikes.
  • Hong Kong exports grew 64.9% year on year in September, up from 53.0% in August, supported by demand for AI-related electronics and growth in re-exports; however, unemployment rose to 3.9% for July to September, from 3.8% in the previous statistical period, indicating a slight weakening in employment momentum.

Where do valuations and institutional targets stand after the correction?

  • At the end of October, MSCI China's forward 12-month price-to-earnings ratio was 9.2 times, 1.3 standard deviations below its ten-year average; IBES consensus forecasts year-on-year earnings per share growth of 12.9% in 2026 and 13.6% in 2027.
  • MSCI Hong Kong's forward price-to-earnings ratio was 13.1 times, 0.8 standard deviations below its ten-year average; consensus forecasts earnings per share growth of 20.4% in 2026 and 3.0% in 2027. J.P. Morgan's base-case target for the MSCI Hong Kong Index at the end of 2026 is 16,500 points, implying potential upside of approximately 17%.