Hong Kong embraced the long-awaited start of the US Federal Reserve rate-cutting cycle with a stock rally and lending rate cuts by local commercial banks.

Despite uncertainty about the future, strategists believe the city’s sagging equity and property markets may see the light at the end of the tunnel.

The benchmark Hang Seng Index rose 2 percent to cap a fifth straight session of gains on Thursday. Sectors including Chinese mainland property developers, home appliances manufacturers, domestic consumption stocks and big tech firms were among the top contributors to the advance.

“The Fed rate cut is believed to be the major contributing factor to the rally of Hong Kong stocks,” said Kevin Liu Gang, managing director and chief offshore China and overseas portfolio strategic analyst of CICC Research.

READ MORE: US Fed slashes rates by 50 basis points, first rate cut in four years

The US central bank announced the jumbo-sized interest rate cut of 50 basis points (bps) overnight Wednesday, the first since March 2020. The aggressive action was coupled with policymakers projecting another 50 bps reduction by year end and more rate cuts as high as 150 bps until 2026.

Known for its extreme sensitivity to external factors, the Hong Kong stock market has a story to unfold once the liquidity conditions improve, at least in the short run.

Liu noted that liquidity-sensitive sectors in Hong Kong like biotech and tech hardware should be favored to get a lift. Sectors with most of their liabilities denominated in US dollars can also benefit from the decreasing borrowing costs.

Moreover, Liu pointed out, local sectors including durable consumer goods, home appliances and house decorations may also benefit on the back of a tentative recovery in the US real estate industry.

And Hong Kong property stocks and high-dividend stocks are expected to get a boost, he added.

“The single factor of rate cut should have a marked and concentrated impact on Hong Kong stocks, generally in one to two months before more indicators show a clearer picture of the economic landscape,” Liu said.

But Lynn Song Lin, Hong Kong-based chief economist for Greater China at European bank ING, stressed that the long-term prospect for Hong Kong markets, generally in a window of three to six months or even longer, still hinges on the narrative around policies of the world’s second-largest economy and fundamentals of Chinese mainland companies, which account for 56 percent and 78 percent of the total listed enterprises and total market cap of the Hong Kong stock exchange.

The Fed will hold its remaining two scheduled policy-setting meetings in November and December.

The Hong Kong Monetary Authority, the city’s de facto central bank, cut its base interest rate on Thursday for the first time in four years in lockstep with the Fed.

READ MORE: HKMA cuts base rate to 5.25% following Fed move

The city’s largest commercial banks followed the suit, with Bank of China (Hong Kong) and HSBC trimming their prime lending rates for the first time in almost five years.

Standard Chartered and Bank of East Asia joined the fray, in a move that reduces funding costs to help local businesses and mortgage borrowers reboot.

Financial Secretary Paul Chan Mo-po warned on Thursday the pace of cuts in the best lending rate used by commercial banks “may be slower” than those in the US, and the public should brace for a time lag between their funding costs and the city’s base interest rate.

With the city’s currency peg to the greenback, the HKMA’s move had been widely anticipated. But the rate cut decisions from commercial banks is a multi-factor story involving population, rental yield, demand, household income and interest rate spreads, Liu explained.

“Higher-for-longer” interest rates stand as one of the twin headwinds weighing on Hong Kong since the Fed initiated the most aggressive tightening cycle in decades in 2022. “When rates come down, we could slowly be moving out of the most painful period for Hong Kong assets,” Song noted.

The big question remains whether the Fed cuts will be sufficient to achieve a soft landing, which would favor a return of funds to emerging markets with Hong Kong and Chinese mainland included, he added.

A larger-than-usual half-percentage-point reduction is a rarity in the Fed’s history. It usually happens in times of stress, such as the global financial crisis of 2007, the dot-com bubble of 2011 and the COVID-19 pandemic of 2020, according to Liu’s research.

“The Fed rate cut will certainly have a positive impact on Hong Kong’s stock and property markets,” Song said. “But a recovery will still take some time.”

Contact the writer at sophialuo@chinadailyhk.com