(Bloomberg) -- Hong Kong stocks are on their longest winning streak since 2018, with a growing chorus of market watchers saying the worst of a years-long selloff is probably over.

The benchmark Hang Seng Index rose 1.5% on Friday to cap a ninth straight session of gains. Chinese technology giants Alibaba Group Holding Ltd. and Tencent Holdings Ltd. were among the top contributors to the advance.

Stock gauges in the financial center have all entered into bull territory in recent weeks, with Chinese money and global funds lured by cheap valuations, Beijing’s supportive policy stance, and the city’s currency peg to the dollar. If the inflows persist, it would allow Hong Kong’s markets to regain some footing after the Hang Seng Index plunged almost 40% in the prior four years.

“The strong performance in the past two weeks is probably attracting more fund inflows for fear of missing out,” said Vey-Sern Ling, managing director at Union Bancaire Privee. “Even after the sharp rally, valuations for the China tech stocks are still well below historical average as well as when compared with global peers.” 

The Hang Seng Tech Index trades at 15.9 times forward earnings, compared with 26 times for the Nasdaq Composite Index. The advance in Chinese tech firms in particular suggests growing optimism. The Hang Seng Tech Index had plunged almost 75% from a 2021 high to October 2022 amid a Beijing regulatory crackdown.  

Similarly, the uncertainty over China’s economic growth and geopolitical tensions had spurred global funds to reduce their allocations to Chinese and Hong Kong stocks. The chief investment officer of Goldman Sachs’ wealth-management business in March had said investors should avoid the market. 

The multiple de-ratings and worst of the fund outflows from Chinese markets “should be behind us, at least for 2024,” Bank of America Securities strategists including Winnie Wu wrote in a note dated Wednesday. Still, investor conviction remains low and the rally may be derailed by factors such as geopolitical tensions, weaker macro data and policy disappointment, they wrote.

 

The positive message from the Politburo meeting earlier this week, where China’s top leaders vowed to explore new measures to tackle a protracted housing crisis and hinted at possible rate cuts ahead, is also seen as a catalyst to drive near-term sentiment. Similarly, a stronger dollar is boosting the appeal of Hong Kong over other markets with its currency pegged to the greenback.

“I think the latest round of policy support that was seen earlier this week seems to suggest that more is underway,” said Zhikai Chen, head of Asian and global EM equities at BNP Paribas Asset Management, in a Bloomberg TV interview. “That’s kind of anchored people’s expectation and prevents a further vicious cycle downwards.”

The focus now will turn to corporate earnings, which have shown incremental improvements in the first quarter despite remaining tepid overall. A clear upward trend for earnings, alongside further share buybacks and more dividend payouts, is needed to boost investor confidence, analysts say.

Still, some caution is warranted.

The buying spree has pushed several of the city’s key gauges into overbought territory. The 14-day relative strength index for the Hang Seng Index and the Hang Seng China Enterprises index have all surpassed the 70 level seen as indicating that the recent gains may be excessive.

The put-to-call ratio for the Hang Seng Index, based on total open interest, has also surged to the highest level since August, suggesting more traders are seeking downside protection amid the recent gains.

Markets in China will resume trading on Monday, having been shut since Wednesday.

(Updates with closing prices, more comments.)

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