Why could this earnings season test sentiment?

  • During the peak reporting week following the report’s publication, approximately 26 companies were scheduled to release results, together accounting for about 53% of the market capitalization of the Hang Seng Index and the Hang Seng China Enterprises Index. JPMorgan believes this will test whether market sentiment is nearing a low amid a weak macroeconomic environment.
  • The breadth of three-month earnings forecast revisions for both indices has remained negative throughout the year and is currently around -13%. Financials and industrials have held up relatively well, while communication services, consumer sectors, real estate and materials are weaker, so the bank favors selective positioning.
  • The bank is watching for two signs of a turn: clearer stabilization in consumption and AI monetization beginning to appear in results or guidance. Positive surprises on these fronts amid cautious positioning could restore sentiment.

How much volatility is the options market pricing in for earnings?

  • In a sample of liquid Hong Kong stock options, the market-cap-weighted implied earnings-related share-price move is 3.3%, above the historical implied level of 2.9% and the median historical actual move of 2.1%, reflecting investors’ greater sensitivity to earnings events.
  • Relative to their respective historical actual volatility, earnings volatility is priced most expensively in industrials, materials and health care; consumer discretionary, real estate and financials are relatively cheaper. JPMorgan therefore emphasizes differentiating between sectors and individual stocks rather than making a uniform bet on an earnings rebound.

What could unlock upside for HKEX and Tencent?

  • HKEX’s share price has lagged continuously rising earnings forecasts, and its forward price-to-earnings ratio is at a multi-year low. However, Hong Kong stock turnover has fallen to its lowest level since February 2025, and the timing and extent of a recovery in turnover remain uncertain.
  • JPMorgan places greater emphasis on an improvement in the macroeconomic backdrop and liquidity toward year-end: stabilization in consumption or AI monetization could improve sentiment toward platforms, potentially attracting capital and boosting turnover. It recommends buying call options expiring at year-end; HKEX’s two-month at-the-money implied volatility is around 19%, close to a five-year low.
  • Tencent has fallen approximately 37% year to date, while the Hang Seng China Enterprises Index has fallen approximately 14% over the same period. AI investment costs are incurred upfront, and the market is focused on when the investment will translate into observable usage and revenue; southbound holdings account for 17.5% of free-float shares, and buying has paused compared with previous years.
  • The bank believes that if the 18 November earnings release reduces these concerns through results and guidance, it could trigger a rebound in sentiment. Given relatively high option volatility, it favors using a call spread to control premium costs.

Why is Lenovo’s high volatility both an opportunity and a constraint?

  • Lenovo’s share price has retreated approximately 42% from its September peak, while the Hang Seng Index fell 7.8% over the same period. The stock had previously risen more than 20% after the company’s August results beat expectations, but has now fallen back to its level before that gain.
  • JPMorgan analysts maintain an overweight rating and expect the infrastructure solutions business to drive earnings upside. Traditional servers are the near-term driver, while the AI project pipeline continues to extend beyond the second half of 2027.
  • The options-implied earnings-day move is 13.5%, above the median actual move of 3.9% over the past three years. However, the two most recent actual moves were close to 20%, showing that high premiums still come with substantial tail volatility.
  • The bank proposes selling put options or using an accumulator structure to capture pricing associated with higher volatility. Selling a put earns a premium, but exposure to further declines remains if the share price falls below the strike price.