In the first half of 2026, led by the tech sector, major Asian indices in Japan, South Korea and Taiwan performed strongly, repeatedly hitting record highs.

Heading into the second half, however, market sentiment shifted noticeably. Renewed expectations of a Fed rate hike pushed up global valuation pressure, compounded by re-escalating geopolitical tensions and profit-taking after the earlier rapid run-up, sending most major Asian markets into a correction.

Surprisingly, HSI—which had lagged behind previously—embarked on a rally decoupled from the rest of the world starting in late June. The Hang Seng Index has gained more than 10% cumulatively, making it one of the best-performing major global benchmarks over the period.

A key reason behind the Hang Seng's outperformance is that capital has begun reassessing the value of Chinese AI assets. Still, even as they eye further upside, traders should keep an eye on several key variables that could sway capital flows.

Looking at the HK50 daily chart, the index was in a sustained downtrend from early May, bottoming out near 22,500 in late June. It has since staged a pronounced V-shaped recovery and has now reclaimed the psychologically significant 25,000 level.

Meanwhile, the RSI is approaching overbought territory, suggesting the near-term rally has moved quickly and the index could enter a consolidation phase.

Should bullish momentum extend further, the 26,300 level—a key technical zone tested multiple times earlier in the year—may act as the next major resistance on the way up. Even if prices pull back modestly, the medium-term rebound structure remains intact as long as support around 25,000 holds. Should that level break, the next support may be found near 23,960.

One of the core drivers behind this rally is that global traders have begun reassessing the growth potential of China's AI industry chain.

Earlier this month, Chinese startup Moonshot AI unveiled its next-generation flagship model, Kimi K3, whose performance is seen as approaching a world-leading standard. Shortly after, Alibaba launched a preview of Qwen3.8 Max and became a technology partner for Apple Intelligence in China, sending a further positive signal on the commercialization of AI. CXMT's strong debut on its listing day also drew renewed market attention to the growth potential of China's AI and semiconductor supply chain.

China's rising AI prowess is prompting a broader reassessment of the industry's competitive landscape, and fueling debate over whether some overseas AI leaders' lofty valuations can hold up.

At the same time, policy support has also provided an important backdrop for the AI sector's valuation reset. The STAR 50 Index, which carries the heaviest AI weighting on the STAR Market, saw regulators, long-term institutional investors and insurers step in after a period of correction. Combined with the continued rollout of the "AI+" initiative and rising policy expectations tied to the 15th Five-Year Plan, the AI investment theme has received further support.

As such, this rally looks more like a broad reallocation of capital into Chinese AI assets than a conventional valuation recovery.

This round of the global sell-off in semiconductor stocks stems partly from pressure on overseas peers from China's progress in advanced-node chipmaking, and partly from growing market doubt over whether Nvidia's roughly $750 billion in AI infrastructure deals is sustainable—should AI monetization fail to keep pace, financing risk could ripple across chipmakers, cloud providers and model developers alike.

By contrast, the Hang Seng Index and the Hang Seng Tech Index, given their comparatively limited weighting in semiconductors, have held up relatively well amid this "hardware repricing."

There are also reports that Moonshot AI is preparing for a Hong Kong listing within the next six months, at a valuation that could exceed $30 billion. In the near term, a wave of IPOs from Hong Kong-listed tech firms could divert some capital and amplify market volatility.

Whether this edge can be sustained, however, remains to be seen. Should concerns over the sustainability of AI spending spread from hardware to the application layer, the Hang Seng Tech Index—which also includes a large number of AI-concept names—may not be able to stay fully insulated either.

On the whole, the Hang Seng's outperformance this round largely reflects the combined effect of global capital reassessing China's AI competitiveness, continued policy support, and a structural reallocation of capital—rather than a simple valuation recovery.

In the near term, though, Hong Kong stocks' resilience relative to Japanese and Korean markets also owes something to the index's comparatively low weighting in semiconductors—a structural advantage, not evidence that capital has broadly rotated from AI hardware into AI applications.

Over the coming weeks, the market faces several notable risk events.

First, the FOMC meeting coincides with the US "super earnings week," which could further amplify global market volatility. Meanwhile, Chinese internet giants including Tencent and Alibaba are expected to report second-quarter results around mid-August, and progress on AI commercialization and profit delivery will be a key metric for whether this round of valuation reappraisal can be sustained.

Looking out over a longer horizon, US-China trade relations remain a key variable for Hong Kong stocks. Should tensions between the two sides escalate further around AI and advanced technology, the valuations of related AI companies could face near-term pressure. On the other hand, this could also further reinforce market focus on domestic computing power, chip self-sufficiency, and the long-term development of China's homegrown AI supply chain.

For traders, then, rather than trying to call whether the Hang Seng will keep rallying in a straight line, it may be more useful to focus on whether AI earnings delivery continues to validate the current valuation logic.

Ahead of a cluster of risk events, the Hang Seng is likely to remain fairly volatile—keeping an eye on key technical levels, managing position sizing sensibly, and using risk-management tools to guard against potential drawdowns may still be the more prudent trading approach.