The Hong Kong stock market has been under persistent downward pressure recently, with the technology sector bearing the brunt of the sell-off. A key factor driving this weakness is the renewed market speculation that the US Federal Reserve may resume its interest rate hiking cycle, posing fresh challenges for investors weighing their next move.
Last week, Fed Chair Warsh adopted a hawkish tone once again during his speech at the global central bank symposium. Rather than offering clear forward guidance, he provided market participants with observable indicators while signaling the possibility of further rate increases. Following this announcement, Hong Kong stocks, as a typical offshore market, have responded more sensitively compared to A-shares, given their greater exposure to global liquidity conditions.
As expectations for Fed rate hikes continue to climb, US Treasury yields are likely to rise and the US dollar is expected to strengthen, which would significantly impact liquidity in the Hong Kong market and dampen overall risk appetite among investors.
Where to begin
Historical precedent offers valuable perspective. During the Fed's aggressive tightening cycle in 2022, high-valuation technology stocks, growth shares, biopharmaceutical companies, and innovative drug developers all faced substantial pressure. That year, the Hang Seng Tech Index recorded a staggering annual decline of 27%.
In contrast, dividend-paying sectors including banks, energy companies, and utilities served as safe havens for capital, with these defensive segments outperforming the technology track by a significant margin. More recently, major Chinese banks have demonstrated remarkable resilience in Hong Kong, with Bank of China, China Construction Bank, Agricultural Bank of China, and ICBC all posting notably strong performances and reaching new highs.
Why a hawkish Fed isn't necessarily bad news
Interestingly, domestic Chinese institutions have adopted a relatively optimistic stance toward the prospect of renewed US rate hikes. CICC believes that even short-term rate increases are not necessarily detrimental. The market recognizes that accepting near-term hawkishness in exchange for long-term stability makes sense, with stability in longer-dated yields being more critical than short-term rate movements.
Furthermore, the medium-to-long-term trajectory of Hong Kong stocks will ultimately be determined by domestic Chinese fundamentals, with Fed policy acting more as a short-term disturbance rather than a structural headwind. Soochow Securities also points out that domestic policymakers have already introduced new property market measures, which should help stabilize macroeconomic expectations.
Practical defensive plays through dividend ETFs
Even though the downside for Hong Kong's technology sector may be relatively limited in the short term, adopting proactive defensive strategies remains prudent. The most direct approach is to pivot toward dividend-paying stocks and sectors through cross-border ETFs, which offer convenient capital flows and eliminate the risk of selecting individual underperforming stocks.
The primary advantage of deploying capital via ETFs is their flexibility — investors can easily enter or exit positions and quickly switch back to technology shares once they show signs of stabilizing. Specific options include the Hong Kong Stock Connect Financial ETF for bank exposure, the Hong Kong Central SOE Dividend ETF which provides diversified allocation across banks, insurance, energy, and utilities, and the Hong Kong Dividend ETF which spreads investments across high-dividend stocks in sectors such as gold, textiles, apparel, and consumer goods.
Disclaimer: This article is for reference purposes only and does not constitute investment advice. Please verify all information before making investment decisions. You assume all risks associated with any actions taken based on this content.