Recently, the Hong Kong stock market has experienced significant fluctuations. The unstoppable upward momentum accumulated during the "National Day" period has led to a buildup of downward momentum, and after the "National Day" holiday, with the help of Northbound Capital, the market has shown a wave-like trend.

See the chart below, the Hang Seng Index (HSI.HK) soared from 17,000 in mid-September to 23,000 on October 7th, rising by 35.85% in less than a month, and then quickly fell from 23,000 to around 20,000 now.

The Hang Seng Technology Index (HSTECH.HK), which covers many large-cap listed companies, has also shown a roller coaster trend, see the chart below.

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In the midst of the market's significant fluctuations, the average daily transaction volume of the Hong Kong stock market has also rarely increased significantly, see the chart below, since late September, the average daily transaction volume of the Hong Kong stock market has more than doubled compared to the past.

It is worth noting that during the "National Day" holiday, the Hong Kong Stock Connect was suspended, so the significantly increased transaction volume during this period may come from local and overseas investors, as well as new market funds, and this volume has obviously exceeded the usual level, reflecting that since mid-September, the country has begun to introduce favorable policies, which has attracted some overseas funds back to the market.

After the "National Day" holiday, the Shanghai-Shenzhen Hong Kong Stock Connect resumed, and the trading activity of the A-share market has significantly increased, attracting capital to the north. On the other hand, the recent volatile market conditions have also attracted a lot of southbound funds into the Hong Kong stock market. The Hong Kong stock market has not performed well after the "National Day", but the transaction volume remains active.

New investors who opened A-share accounts during the holiday will not be able to open the Hong Kong Stock Connect until at least 20 trading days later, which means that this part of the incremental funds will not be able to support the Hong Kong stock market for at least another month.

The most benefited from the active Hong Kong stock market is undoubtedly the Hong Kong Exchanges and Clearing (00388.HK).

The performance of the Hong Kong Exchanges and Clearing in the third quarter is expected to improve.

In the first half of 2024, the revenue performance of the Hong Kong Exchanges and Clearing was not ideal, with a year-on-year increase of only 2.6% to HKD 8.062 billion, plus a net investment income of HKD 2.521 billion and other miscellaneous income, the total revenue of the Hong Kong Exchanges and Clearing in the first half of the year was HKD 10.621 billion, almost the same as last year. With flat revenue and a year-on-year increase of 7% in operating expenses, the EBITDA of the Hong Kong Exchanges and Clearing in the first half of the year decreased by 2.52% year-on-year to HKD 7.661 billion; the profit attributable to shareholders also decreased by 2.96% year-on-year to HKD 6.125 billion.It should be noted that in the first half of 2024, the average daily turnover of equity securities on the Stock Exchange was only about 100 billion Hong Kong dollars, and since late September, this average daily turnover is equivalent to only one day's trading volume of the Hong Kong Stock Connect. The overall trading volume has more than doubled.

Based on rough estimates from Wind data, since September 20th, the average daily turnover of Hong Kong stocks should be at least 150 billion Hong Kong dollars. During the "National Day" holiday, the turnover of Hong Kong stocks was above 200 billion Hong Kong dollars, and on the first trading day after the holiday, October 8th, the single-day turnover reached 50 billion Hong Kong dollars, significantly higher than the average level in the first half of the year.

The significant fluctuations in the stock market naturally attract a surge in transactions in the derivatives market and ETFs. It is foreseeable that the turnover in the derivatives market in the second half of the year is expected to increase significantly.

The revenue of the Hong Kong Stock Exchange depends on the market's trading situation. The larger the trading volume, the higher its income from service fees, transaction fees, clearing fees, custody fees, data service fees, etc. It is worth noting that its operating costs are mainly relatively fixed expenses such as bandwidth and servers. Therefore, the more active the market trading, the higher the income, the lower the cost per unit of income, and the higher the profit.

It is worth noting that the more active the market, the more derivatives or financing transactions there are, all of which involve margin. The Hong Kong Stock Exchange usually invests customers' margin in assets that can be liquidated immediately, have low risk, and can earn general interest, such as bank deposits, foreign exchange fund bills, etc. Since the Hong Kong dollar is a linked exchange rate system, interest rates generally follow the Federal Reserve's interest rates.

Although the Federal Reserve has recently cut interest rates, U.S. dollar interest rates are still at a relatively high level. Therefore, the margin of the Hong Kong Stock Exchange's customers can earn higher interest income. In addition, the Hong Kong Stock Exchange will also use its own funds and settlement funds for the above investments, but the margin is the largest source of its investment funds.

As trading becomes more active, the base of its investment funds is larger, and the interest income is higher. After returning a certain amount of interest to margin customers, the Hong Kong Stock Exchange can earn the remaining interest. This part of the income is cost-free and can be said to be earned for free. It is foreseeable that as the trading volume increases, the investment income of the Hong Kong Stock Exchange will also increase, and these positive factors will be reflected in the performance of the Hong Kong Stock Exchange in the second half of the year.

Where are the opportunities for the Hong Kong Stock Exchange?

The stock price trend of the Hong Kong Stock Exchange is consistent with the performance of the Hang Seng Index, as shown in the figure below.

In other words, after the Hang Seng Index fell sharply, the stock price of the Hong Kong Stock Exchange also fell significantly. During the "National Day" period, the stock price of the Hong Kong Stock Exchange once followed the market from 241.60 Hong Kong dollars on September 20th to 393.80 Hong Kong dollars on October 7th, surging by more than 63% in half a month, while the Hang Seng Index rose by 27% during the same period. After the "National Day" holiday, the stock price of the Hong Kong Stock Exchange also fell from a high level, now reporting 322.00 Hong Kong dollars, a decline of 18% from the high on October 7th, while the Hang Seng Index fell by 11% during the same period.It should be noted that while the performance of the Hong Kong Stock Exchange (HKEX) is indeed related to the performance of the Hang Seng Index, the relationship is actually more closely tied to market trading volume. Despite the decline in the overall market, as mentioned earlier, the trading volume of Hong Kong stocks has significantly increased, which implies that the outlook for HKEX's performance is actually positive.

Of course, a decline in the market index may indicate a decrease in attractiveness to capital, potentially leading to capital outflows and affecting future trading performance. The main reason for the poor performance of Hong Kong stocks in the past two years has been the uncertainty of economic prospects and the high interest rates set by the Federal Reserve, which have drawn away funds.

The main reason for the significant increase in Hong Kong stocks during the "October 1st" holiday period was the market's confidence in the outlook for China's multiple economic stimulus measures announced just before the holiday, along with the Federal Reserve's entry into a rate-cutting cycle, causing funds to seek the potential high returns from riskier assets.

The significant drop in Hong Kong stocks after the "October 1st" holiday was mainly due to the delayed implementation of the expected economic stimulus measures. However, these measures will definitely be implemented, and the Federal Reserve will definitely cut interest rates; it's just that the timing will not be too hasty. This means that the positive factors expected by the market do exist, but the implementation time is uncertain. The stock market's sensitivity to this good news has also been verified (the market fluctuations before and after the "October 1st" holiday are clear evidence). Therefore, once the expectations are realized, the stock market is expected to make a comeback, and HKEX will follow suit.