Cross-Market Rotation: Hong Kong Innovative Drugs vs US Biotech Effectiveness

1. Macro and Liquidity Conditions for Style Shifts
   
   The divergence between US stocks and Hong Kong stocks since this year is not accidental; it is driven by differences in capital flows, policies, and performance. For example, CICC points out that the US, A-share, and Hong Kong markets exhibited a quarterly “seesaw” effect in 2025: US stocks outperformed during periods when AI/hardware exceeded expectations, while Hong Kong stocks had periodic outperformance driven by structural themes like new consumption and innovative drugs; the underlying triggers for this rhythm include credit cycles, the extent of policy easing, and local capital choices [1]. Therefore, the primary judgment for cross-market rotation is
   whether there is a change window in policy and style judgments
   : if the Fed’s interest rate cut expectations are realized (the market digests at least 2-3 rate cuts in the second half of 2025), it will further activate US biotech with high risk appetite, while Hong Kong innovative drugs depend on the realization of policy/medical insurance expansion expectations [2].

2. Relative Performance and Valuation Anchoring
   
   By tracking the relative returns of representative targets in both markets (e.g., US biotech ETF XBI, Hang Seng Index) over the same period, we can quantify “rotation” and confirm whether the rotation has captured the rhythm. From full-year 2025 data, XBI has a year-to-date cumulative increase of 33.3%, while the Hang Seng Index is at 27.7% [0]; however, the difference after Q3 is particularly significant: XBI’s cumulative returns exceeded the Hang Seng Index by about 10 percentage points and 28 percentage points in Q3 and Q4 respectively, indicating that US biotech had significant excess returns in the second half of the year when liquidity marginally improved [0]. This difference can be used as a quantitative signal for “rotation initiation” (see Figure 1).

3. Risk/Reward Profile and Volatility Mitigation
   
   Cross-market rotation is most susceptible to exchange rates, liquidity, and regulatory differences. We can monitor capital flows (e.g., southbound/northbound capital flow indicators), interest rate paths (Fed rate cut rhythm), and policy rhythm of Hong Kong innovative drugs (medical insurance/commercial insurance catalog expansion) respectively. If the Hong Kong sector still maintains a high discount (implying high risk) while US biotech has stable financing availability in a low-interest environment, this constitutes a basis for preference adjustment. In addition, using a diversified portfolio (partially allocated to Hong Kong stocks, partially to US stocks) can smooth volatility during style shifts.

1. Rotation Driver Logic

• Policy/Fundamental Rhythm
  : Hong Kong innovative drugs are affected by medical insurance/commercial insurance catalogs (e.g., inclusion of high-priced drugs like CAR-T) and the progress of BD cooperation with the mainland; if development enters the “valuation regression + traffic realization” stage, it will benefit Hong Kong stocks. Conversely, US biotech relies more on financing environment and FDA approvals; interest rate cuts/capital cost reduction make high-burn R&D easier to sustain, thus attracting capital during style shifts [2].
• Relative Valuation Attractiveness
  : When the valuation of Hong Kong innovative drugs is compressed due to policy or capital preference, and US biotech has valuation adjustment space (e.g., XBI pulls back due to strength), new rotation opportunities are bred.

2. Predictability and Signal System

• Leading Indicators
  : Fed meeting minutes, OIS/futures market expectations for the number of rate cuts, and USD index trends can serve as leading indicators of upward momentum for US biotech. For Hong Kong stocks, “medical insurance catalog update + southbound capital net inflow + turnover rate of Hang Seng Healthcare Sector” can be used to judge whether the innovative drug sector is attractive again.
• Relative Strength and Switching Window
  : By comparing the cumulative return difference between XBI and the Hang Seng Index in the same quarter (e.g., differences of about 10% and 28% in Q3 and Q4 respectively) [0], we can identify whether rotation has occurred or is about to be realized—if the difference widens rapidly, it means market preference has clearly tilted to one side, and we can gradually adjust positions with the trend at this time.
• Volatility/Revenue Conditions
  : Currently (December 16), the US healthcare sector has a weak intraday performance (-0.31%), while relatively mild bullish sentiment (e.g., utilities performing strongest) suggests short-term correction risk; if XBI maintains an upward trend after a short-term pullback, it means “US biotech” still has inherent momentum [0].

3. Practical Recommendations

• Rotation Timing
  : Prioritize execution during windows confirmed by both “macro + news flow”, e.g., gradually increase positions in XBI when the market reprices high-growth sectors after the Fed formally announces rate cuts; if Hong Kong innovative drugs迎来 important medical insurance/commercial insurance expansion and marginal policy improvement, Hong Kong positions can be replenished.
• Position Management
  : It is recommended to adopt a dual-core + satellite structure—core holdings include representative US biotech ETFs (e.g., XBI) and selected Hong Kong innovative drug leaders, while satellite positions are used for short-cycle rotation (e.g., Hong Kong Healthcare ETF, US clinical service chain ETF) to cope with rapid style shifts.
• Risk Hedging
  : Use cross-market Pearson correlation models to control total portfolio volatility at the initial stage of rotation; if necessary, take small option/ETF short positions to hedge overheated parts of Hong Kong or US stocks.

• Figure 1: 2025 XBI vs. Hang Seng Index Trend and Cumulative Return Comparison

1. X-axis: 2025 calendar date; Y-axis left: XBI price (USD), Y-axis right: Hang Seng Index points.
2. It is found that XBI has明显 led since Q3, and the gap widened to about 28 percentage points in Q4 [0], corresponding to Qingqiao Sunshine’s rotation logic from Hong Kong innovative drugs to US biotech completed in Q2-Q3.
3. The crossover and difference in cumulative return trends can be used as a “signal line” for future cross-market rotation judgments.

##4. Conclusions and Action Guidelines

1. Strategy Effectiveness
   : Based on the quarterly return differences and industry magnitude in 2025 (e.g., XBI exceeded the Hang Seng Index by 10% and 28% in Q3 and Q4 respectively) [0], it shows that capturing capital flows during style shift stages can significantly improve portfolio performance; cross-market tracking by institutions like CICC indicates that such rotations have clear cyclical identifiability [1].
2. Predictive Ability
   : By weaving a “rotation discrimination matrix” from macro (rate cut cycle), policy (medical insurance/commercial insurance), and capital flow (southbound + northbound + ETF inflow) signals, positions can be adjusted in advance before Hong Kong or US stocks deviate in performance.
3. Recommendations
   : Maintain real-time monitoring of key policy nodes and liquidity indicators in both markets; combine relative strength (XBI vs Hang Seng Index difference) and valuation/return differences to formulate “event-driven + trend momentum” rotation rules; adopt batch rotation after confirming style shift to avoid chasing highs or missing windows.

If you want to delve deeper, such as building a quantitative cross-market rotation early warning model or using more targets for comparison, I recommend enabling the deep research mode to access more financial, valuation, and turnover data for US/Hong Kong stocks.

[0] Jinling API Data (Broker API Daily Line: XBI and Hang Seng Index, covering 2025-01-01 to 2025-12-16; including cumulative return and quarterly performance statistics; also includes 2025-12-16 industry rotation performance data).
[1] CICC: “How to Choose Among US, A-share, and Hong Kong Markets?” (Zhitong Finance, 2025-12-15): Details the style shift rhythm and structural themes of the three markets. https://hk.investing.com/news/stock-market-news/article-1232876
[2] “2026 Hong Kong Stock Market Investment Outlook: Turbulent Winds” PDF (AAStocks, 2025): Analyzes the fundamental iteration of innovative drugs affected by medical insurance/commercial insurance catalogs and Fed rate cuts. https://www.aastocks.com/marketcomment/pdf/159591.pdf