The world is entering a period of stagflation.

Although U. S. stocks have fallen sharply in the first half of this year, we still can't bet on a shift in Fed monetary policy. The reason: this round of inflation is wide in scope, sweeping the entire western world, reaching a 40-year high.

We analyze three causes of inflation in the United States:

1、The rent goes up. The loose monetary policy in the past two years led to a sharp rise in real estate and building materials, coupled with a very low housing stock, house prices are expected to rise, while rents lag behind prices, and will continue to rise rapidly in the second half of this year.

2、Rising labor costs. At present, there are two problems with the population structure of the United States: a large proportion of the elderly and a small number of young people. Immigrants once helped the United States fill the labor gap, but the shrinking immigration of the Trump administration has led to a serious shortage of young labor force today. at present, there is a net labor gap of nearly 6 million in the United States. it is difficult to improve the relationship between supply and demand without a recession. therefore, wages in modern service industries will continue to rise rapidly.

3、The impact of commodities. The Capex of crude oil companies has fallen sharply in the past two years, and production capacity cannot be released today and next year. Combined with the situation in Russia and Ukraine, it may be very difficult for energy prices to fall back to a lower level.

The domestic wide currency awaits the recovery of credit.

Monetary easing in the first half of the year, M2 hit a new high since the epidemic, so credit will gradually recover with monetary easing. We sorted out the positions of different sectors in the economic cycle. The all-A ROE peak was in Q2 last year, but different industry highs have been before and after.

Industries that tend to see the top ahead will also be the first to hit bottom this year, while as far as all An is concerned, ROE lows are expected to be Q4 in 2022 to Q1 in 2023. Innovative drugs / agriculture / new energy / big finance / food and beverage is the sector that we think will focus on in the second half of the year.

The offensive and defensive strategy of Hong Kong stocks: take growth as the attack and ROE as the defense.

There are four reasons for Hong Kong stocks to look forward to in the second half of the year: 1, the falling time and space is sufficient; 2, the Internet policy is already at the bottom; 3, the valuation has obvious advantages compared with A-shares; 4, the buyback of listed companies increases confidence.

Strategically, the overfall of Hong Kong stocks is the main contradiction. Tactically, we cannot ignore the new risks brought about by the possibility of overseas recession. Therefore, we formulate a configuration strategy with both attack and defense: to find elasticity in the overfall-growth matrix and to obtain stability in the oversell-ROE matrix. The combination of the two forms our recommended priority:

1. Top recommendations: pharmaceutical biology (especially biopharmaceuticals, medical devices and CXO), Hang Seng Technology (local life, Internet tourism, pharmaceutical e-commerce, SAAS software, semiconductors, knowledge belt goods of online education companies, social networking, e-commerce), Macau gaming, as well as some catering enterprises affected by the epidemic in the future.

2. Important recommendations: food and beverage (meat processing, beer), textile and clothing (sporting goods).

3. Configuration recommendation: real estate (central enterprises / low leverage and related property companies) / banks, telecom operators, public utilities.

4. Follow closely: the energy industry (especially oil and gas).

We believe that the opportunities for Hong Kong stocks in the second half of the year will come from some of the above sectors rather than large-scale general gains, maintaining the standard allocation rating of Hong Kong stocks.

Risk Tips:The uncertainty of the development of the epidemic, the risk of the global economic downturn, the uncertainty of the development of the situation in Russia and Ukraine, and the risk of the Federal Reserve raising interest rates.