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The Hong Kong stock market has long been trapped in a state of stagnation, a situation that can be attributed to both external economic conditions and internally imposed high trading and dividend tax costs. An essential aspect of this conundrum is the significant burden presented by the elevated transaction fees and taxes, which dissuades many investors from pursuing long-term investments or making substantial capital commitments.

Let’s take the stamp duty as a prime example. Currently, investors encounter a double-sided stamp duty rate at 0.1% on the total trade value, reversing an increase implemented in August 2021. In contrast, looking at the A-share market, one notices a stark difference. Here, a single-sided approach results in a much lower stamp duty rate of merely 0.05%. This indicates that the stamp duty costs in the Hong Kong market far exceed those applicable to A-shares, making it a less appealing arena for investors.

Similarly, the treatment of dividend tax provides another layer of complexity for investors considering Hong Kong equities. For those investing directly through channels other than the Stock Connect, there is a typical dividend yield of about 10%. However, for investors utilizing the Hong Kong Stock Connect for investments, the dividend tax burden notably escalates.

For instance, mainland individual investors who utilize the Stock Connect to purchase H-Shares incur a hefty 20% dividend tax. If these investors shift their interest towards red-chip stocks, this tax can jump as high as 28%. Given these figures, high dividend-yielding stocks lose much of their attractiveness when investors are obliged to navigate these tax complexities.

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Additionally, when considering long-term investments in high-dividend Hong Kong-listed companies, investors using Stock Connect will face substantial annual dividend tax costs, which crimp the benefits of value investing over time. The heightened tax burden significantly detracts from the allure of investing in high-dividend stocks within the Stock Connect framework.

If there were to be a tax exemption for dividends under the Stock Connect, the most immediate beneficiaries would likely be Hong Kong core assets yielding dividends over 5%. This demographic would become much more enticing, adding to the potential for capital appreciation.

In light of these challenges, it is noteworthy that recently, many high-dividend Hong Kong core assets saw a marked increase in their stock prices. The relationship between stamp duty and dividend tax from the Stock Connect has surfaced as a crucial factor influencing the attractiveness of the Hong Kong stock market. Sustained high costs in both areas have undoubtedly stifled the entrance of institutional long-term capital, which typically evaluates time, transaction costs, and projected returns of investment—any misalignment with these considerations can deter such large-scale investment participation.

In the wake of a nearly 30% rise from this year's lows, the Hong Kong market has entered a technical bull market—a transformation that has prompted a shift from bearish to bullish sentiment. Investor enthusiasm and the overall profit potential have seen a refreshing activation across the board.

The overall improvement in policy conditions, the gradual enhancement of profitability in the stock market, and increasingly fluid capital operations have fostered a positive feedback loop in this bull market. Often, when the market is in a bull run, it amplifies positive news while downplaying negatives, leading to an overarching optimistic outlook.

Conversely, in bearish environments, markets tend to exaggerate negative developments and undervalue positives. Presently, with the profit-generating capacity becoming more pronounced and daily trading volumes rising from below a thousand billion to over 1.7 trillion, the market is exhibiting readiness and resilience.

Historically, the valuation premium for Hong Kong stocks has not seen a notable uplift; they have often remained undervalued relative to their A-share counterparts, largely due to long-standing liquidity constraints that fail to meet market needs adequately. These liquidity conditions directly influence stock valuation and the market's overall profit-generating efficiency.

Should the dividend tax under the Stock Connect be waived, it could enhance investor sentiment significantly across the Hong Kong market, thus bolstering overall market confidence. Under the prevailing atmospherics of improving policy conditions, bullish funds are currently dominating the investment landscape. This is complemented by an ongoing liquidity enhancement, which fosters a more favorable valuation environment and proffers an adjustment mechanism for core asset valuations towards A-share standards.

The extent to which this current round of valuation restoration can progress hinges on shifts within the policy landscape, the volume of IPOs, and the prevailing level of liquidity in market operations. These elements will ultimately shape the vertical limits of Hong Kong stock performance. If the dividend tax abatement appears on the horizon, it could serve as a powerful catalyst facilitating sustained market growth.