Dropped over 20%! Is it time for Hang Seng Tech to jump on board? The latest analysis

There’s a joke in the market: “Hiding from a bull market in the Hang Seng Tech Index.”

Market data shows that from the October 2025 peak to now, the Hang Seng Tech Index has fallen over 20%, entering a technical bear market. Its performance since 2026 has been among the worst in global asset classes.

On February 26, the Hang Seng Tech Index dropped 2.87% in a single day, hitting a nearly one-year low. Market sentiment is subdued and has attracted widespread attention.

Is the Hang Seng Tech Index already at its bottom? When will a trend reversal opportunity occur? Which segments within the Hong Kong tech sector in 2026 are worth focusing on? To explore these questions, five fund managers were interviewed: Jin Huang, Fund Manager of Invesco Great Wall Hong Kong Stock Tech 50 ETF; Ran Linghao, Senior Fund Manager at Dacheng Fund International Business Department; Qu Shaojie, Deputy General Manager at Great Wall Fund International Business Department; Li Nian, Manager of Bank of China CSI Hong Kong Stock Connect Internet Index Fund; and Xie Yi, Fund Manager at Nord Fund.

According to these fund managers, the current adjustment of the Hang Seng Tech Index is a short- to medium-term structural correction, not a long-term downtrend. Currently, the valuation of Hong Kong tech stocks is at a relatively low historical level, pessimism has largely been priced in, and the valuation appeal is becoming clearer. The market may soon shift from a one-sided decline to a consolidation phase.

Looking ahead, they believe that the core investment theme for Hong Kong tech in 2026 will revolve around AI, including sub-sectors like semiconductors, autonomous driving, large models, and innovative drugs—areas capable of reshaping industry landscapes. As AI applications accelerate and earnings expectations improve, the sector may experience a trend recovery.

Technical correction driven by market sentiment, not a long-term weakening trend

China Fund News: The Hang Seng Tech Index has fallen over 20% in this correction. Do you see this as a technical adjustment or a sign of a weakening trend? What are the main reasons?

Qu Shaojie: The over 20% decline in the Hang Seng Tech Index is a short- to medium-term structural adjustment, not a long-term weakening. Fundamentally, internet giants need to significantly increase capital expenditure to develop AI, but the speed of translating this into revenue is uncertain, which suppresses profit expectations.

Structurally, the overall Hong Kong stock market is expected to rise in 2026, but the Hang Seng Tech Index has experienced a correction with clear internal differentiation: sectors like computing power and hardware benefiting from capital expenditure are relatively strong, while large internet platforms requiring heavy AI investment are under pressure. The core competitiveness and moat of quality Chinese tech internet companies remain intact. These factors are due to developmental uncertainties, not a long-term decline. The logic of AI-driven growth and the eventual benefits for tech internet companies are still valid.

Jin Huang: Influenced by profit-taking, geopolitical uncertainties, and macro liquidity concerns, the Hong Kong tech sector has declined over 20% since its October 2025 high. Overall, this correction is mainly driven by market sentiment.

From a global liquidity perspective, the market views the nomination of Federal Reserve Chair Kevin Woor as a hawkish signal. Under the “Woor trade” sentiment, the 10-year US Treasury yield has risen to 4.05%, coupled with further dollar depreciation, increasing valuation pressures. Meanwhile, leading Hong Kong-listed tech giants like Alibaba and Tencent announced high R&D spending plans, which some investors worry could impact profit stability, exerting downward pressure on asset prices.

Looking into the year, the tech sector remains a key long-term investment theme. After the correction, valuation pressures have eased, and with AI application acceleration, a rebound is possible. Additionally, the easing expectations have not fundamentally reversed, and supportive policies may continue. The current investment logic remains unchanged; the low valuation levels offer a good entry point.

Ran Linghao: Recently, Hong Kong tech stocks have cooled down collectively, mainly due to changes in US liquidity expectations, pressure from traditional internet giants’ fundamentals, and macroeconomic factors. The core reasons include tightening liquidity expectations, restructuring of AI narratives, and the need for policy-driven fundamental recovery. However, current policies are not strongly stimulative overall, focusing more on structure, timing, and efficiency.

Li Nian: This correction is not a fundamental trend weakening but more a “liquidity squeeze + emotional mispricing” resulting in a “technical deep squat.”

Due to the repeated expectations of Fed rate cuts, Hong Kong stocks, as offshore markets, are sensitive to global liquidity, facing short-term pressure. Additionally, the narrative around large internet companies in the Hang Seng Tech Index has recently weakened. On one hand, AI is reshaping internet business models, with high CAPEX maintained; on the other, battles for traffic through delivery wars and red envelopes during festivals raise concerns about profit consumption, though these are necessary for future moat building. Also, the process of understanding new things during transformation—such as debates over AI bubbles and AI’s impact on software—is more emotion-driven. Overall, the underlying demand and policy foundation for the sector’s long-term growth remain intact, and current sentiment may be overly reactive.

Xie Yi: These changes may be more related to fundamental factors. The main weights in the Hang Seng Tech Index are major domestic internet giants, with core businesses in online retail, food delivery, and instant retail. In the early industry stages, market space was broad, with differentiated positioning among companies, each focusing on niche areas.

As the industry matures, growth pressures push companies to cross into competitors’ domains, attempting to establish new advantages through large-scale capital expenditure. However, due to industry characteristics, such efforts often have limited success. The market may see such investments as eroding intrinsic value, leading to downward pressure on stock prices.

Valuations at low historical levels, clearer allocation value

China Fund News: Is the current adjustment of the Hang Seng Tech Index already sufficient? Have valuations fully reflected pessimistic expectations?

Jin Huang: Currently, the valuation of Hong Kong tech stocks is below the 20th percentile over the past five years, at a relatively low historical level. Asset prices are less than 20% away from the peak in April 2025. We believe that at this valuation level, pessimism has been largely priced in. From the numerator perspective, leading Hong Kong tech companies are expected to see an inflection point in profitability, with consensus forecasts of over 40% EPS growth in 2026 (Wind, as of February 26, 2026). This trend should gradually be reflected in rising asset prices.

Meanwhile, top companies have announced high R&D investment plans, providing strong momentum for profit improvement.

Finally, consistent with the 2025 trend, southbound funds and Hong Kong tech ETFs have shown a “buy more as it falls” pattern. Since the start of the year, net inflows from southbound funds have exceeded HKD 120 billion, continuously providing liquidity for Hong Kong tech assets.

Ran Linghao: After the adjustment, the valuation of the Hang Seng Tech Index is increasingly attractive. Currently, the PE-TTM is 21.0x, indicating high cost-effectiveness. In the long run, the index still represents the core direction of China’s new productive forces.

Li Nian: The six-month correction has largely priced in negative factors like “policy uncertainty,” “deteriorating competition,” and “profit decline.” Panic sentiment has been gradually released. The current PE ratio of the Hang Seng Tech Index has fallen to the 15th percentile of its historical range, with some core leaders’ valuations at historic lows. Based on historical patterns, the current level may have strong support, with limited downside.

Qu Shaojie: The adjustment of the Hang Seng Tech Index may be largely complete. The recent decline was driven by concerns over uncertainties in AI strategy implementation, not a deterioration in fundamentals. The overall operation of companies remains stable. The index’s valuation is at a historically low level, more attractive than US, Japanese, and Korean tech stocks. As 2026 approaches, with hardware tech in the US, Japan, and Korea on the rise, the Hang Seng Tech Index has been adjusting since October last year, contrasting sharply with global tech sectors. Valuations likely already reflect pessimism, increasing attractiveness.

Xie Yi: If disorderly competition among giants does not stop, the downward trend may continue. Only when companies invest in truly promising fields with growth potential and establish sustainable competitive advantages beyond domestic and international rivals can market pessimism be reversed. Usually, stock prices react before such shifts.

Clear long- and medium-term logic, short-term concerns do not alter the upward trend

China Fund News: What do you see as the key catalysts for the Hang Seng Tech Index’s trend recovery? What risks could hinder this recovery?

Li Nian: Looking ahead, the Hang Seng Tech Index may exit its one-sided decline and enter a consolidation and trend recovery phase. In 2026, the Hong Kong market is likely to shift to a “profit-driven” stage, presenting structural opportunities. Key factors to monitor include global liquidity and quarterly earnings reports. Risks include geopolitical issues, market sentiment swings, and the performance of global tech stocks.

Jin Huang: As pessimism largely dissipates, market volatility may gradually decrease, strengthening the valuation and trading appeal of Hong Kong tech stocks. Liquidity-wise, macro easing expectations have not changed significantly; southbound funds continue to flow in, and valuation pressures remain modest. Earnings are forecasted by Bloomberg to grow 41.4% in the next year and 20.0% over two years, with continued realization of profit growth. After the early-year correction, the index’s margin of safety is higher. Policy support for various tech segments continues, fostering innovation breakthroughs.

Potential risks include changes in the above favorable factors, such as delayed Fed rate cuts or earnings falling short.

Qu Shaojie: The space for recovery of the Hang Seng Tech Index is ample. With global AI accelerating, domestic tech internet companies are key players. The main catalysts are AI implementation and cost control. If AI capabilities can be converted into revenue under reasonable investment, it could drive a trend reversal. Major risks include slow AI R&D progress and excessive capital expenditure eroding profits, but these are temporary issues in development. These companies have strong traffic access, stable cash flow, solid fundamentals in advertising, e-commerce, and gaming, with continuous revenue and profit growth. Coupled with expanding domestic AI applications, the long-term logic is clear. Short-term worries are unlikely to change the upward trend.

Ran Linghao: Looking forward, as external risks diminish, the focus should return to endogenous growth within the industry. Profitability remains the key driver of long-term trends. Based on consensus forecasts, the index is expected to achieve solid profit growth by 2026. As the industry matures, with the phased exit of delivery subsidies and internal growth of tech companies, profits of constituent stocks are also expected to grow well. Therefore, profit recovery remains the main investment theme.

Additionally, the commercialization of AI applications and traffic entry positioning may become core themes. For tech giants, whether they can precisely meet real user needs within their AI ecosystems is crucial for linking ecosystems and achieving business cycles. Among Hang Seng Tech constituents, hardware companies may become the most eye-catching sub-sector.

Xie Yi: The catalyst for recovery may be a easing of competition among internet giants, but this is challenging. Under the slowdown of industry growth, maintaining growth in the short term likely depends on market share battles. Moreover, external variables such as Middle East developments, the upcoming Fed chair change, and US midterm elections could pose obstacles. In the short term, these events may hinder index recovery.

AI as the core investment logic, tech hardware may become the most dazzling sub-sector

China Fund News: In 2026, what will be the main investment theme for Hong Kong tech? Which segments are you more optimistic about?

Jin Huang: Looking ahead to 2026, we see the main investment theme in Hong Kong tech as AI segments capable of reshaping industry landscapes, including semiconductors and infrastructure, autonomous driving, large models, and innovative drug R&D and services. We focus on internet giants, smart vehicles, chip manufacturers, and innovative medicine.

Xie Yi: We are more optimistic about companies with a larger AI business share, including hardware (optical communication, PCB, fiber optics) and software (large models or industry-specific models). These companies represent future industry directions to some extent. From a valuation perspective, hardware firms are relatively reasonably priced with high cost-effectiveness; software firms tend to have higher valuations and early-stage business models with less visibility and greater uncertainty.

Li Nian: The 2026 investment theme for Hong Kong tech may be driven by AI industrialization, platform economy revaluation, and the shift to domestic substitution of high-tech. Sub-sectors to watch include AI applications and computing power chains, such as large model commercialization, cloud services, and AI hardware leaders; leading platform economy companies; and high-tech beneficiaries of domestic substitution and industrial upgrading like semiconductors, smart EVs, and consumer electronics.

Qu Shaojie: The biggest investment theme in 2026 is the entire AI industry chain. Focus on two types: one, platform companies with strong AI technology and implementation ability; two, upstream “water sellers” benefiting from AI capital expenditure, including AI chips, manufacturing, computing infrastructure, and database connectivity. AI-driven technological upgrades and performance realization will be core investment logic.

Ran Linghao: The main investment theme in 2026 is profit recovery. In 2025, the index’s profits actually declined, mainly due to delivery subsidies; in 2026, as subsidies are phased out, other tech companies are expected to maintain good endogenous growth. Profit recovery remains the key theme.

Furthermore, commercialization of AI applications and traffic positioning may become core themes. For tech giants, whether they can accurately meet real user needs within their AI ecosystems is crucial for linking ecosystems and closing business loops. Among Hang Seng Tech stocks, hardware may become the most dazzling sub-sector.