I have always been optimistic about Hong Kong stock assets because, from the overall quality of listed companies on the Hong Kong stock market, whether it is the emerging growth companies representing private enterprises such as the internet, technology, and innovative drugs, or the traditional blue-chip companies representing state-owned enterprises such as the four major banks and companies with "China" in their names, they all demonstrate, under extremely low valuations, potential growth and dividend rates that point to one thing: the investment opportunities in Hong Kong stocks are systemic.

Among the many sectors of Hong Kong stocks, I place the most emphasis on innovative drugs. The innovative drug industry is one of the sectors most sensitive to interest rates, which means it will fully benefit from the new round of global interest rate cuts initiated by the Federal Reserve.

Firstly, innovative drugs are likely to significantly benefit from the start of the Federal Reserve's loose monetary policy.

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Innovative drug companies, due to their long research and development cycles and large initial capital investments, cannot achieve stable cash flows through sales before industrialization and landing. This model makes innovative drug companies extremely dependent on financing activities to support the company's cash flow.

Previously, as the Federal Reserve continuously raised interest rates, there was a significant withdrawal of foreign capital; however, capital is profit-driven. If Hong Kong stocks turn around and enter an upward phase, a sustained short squeeze will attract foreign capital to re-enter and significantly increase their holdings in Hong Kong stocks. The originally liquidity-constrained Hong Kong stocks, with the inflow of hot money, will be more likely to experience a sharp rise.

In fact, looking at historical patterns, after each round of interest rate cuts initiated by the Federal Reserve, U.S. Treasury rates tend to fall, and both A-shares and Hong Kong stocks in the innovative drug sector have seen opportunities for price increases and have achieved excess returns.

Secondly, the performance and valuation of innovative drugs in Hong Kong stocks are both repaired.

On one hand, there are many growth-oriented innovative drug companies in Hong Kong stocks, which are highly valuable for investment. Especially those that have made significant breakthroughs in cutting-edge technologies for innovative drug research and development, and companies that are leading globally in the field of innovative drugs and can carry out overseas business development (BD); or companies with rich resources and strong teams in the field of cooperative research and development and commercialization of innovative drugs, with broad market space for their products and avoiding excessive competition, thus being able to generate continuous cash flows.

On the other hand, due to the previous "valuation killing," the potential for valuation repair in innovative drugs in Hong Kong stocks is substantial. To stimulate economic growth, the Federal Reserve has initiated interest rate cuts and implemented quantitative easing (QE), with low financing costs and abundant liquidity. While meeting the financing needs of innovative drug companies, the warming of market risk preferences has also significantly supported the expansion of innovative drug valuations. The former "valuation trap" will be transformed into a "low valuation safety margin," and it is more likely to stage a spectacular valuation repair rally.

Thirdly, in the field of innovative drugs, policy dividends continue.Since 2024, there has been a continuous stream of policies to further support the innovation drug industry. In April, Beijing, Guangzhou, and Zhuhai released draft opinions on several measures to support the high-quality development of the pharmaceutical industry. In early July, the State Council reviewed and passed the "Implementation Plan for Supporting the Development of Innovation Drugs Throughout the Entire Chain." Subsequently, Shanghai issued several opinions on supporting the innovation and development of the biopharmaceutical industry throughout the entire chain, continuously promoting the healthy development of the industry.

From a short-term perspective, it is possible for the Hong Kong stock market to continue its outstanding performance. However, considering the sustainability of the market trend, it may be more appropriate to make some adjustments to cool down the somewhat overheated market sentiment. As investors, we must remember our original intention from the moment we enter the market and invest for the long term.