Source: Zhang Yidong Strategic World

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1. Benefit factors continue to accumulate, and risk appetite is gradually improving

1.1. Looking at the medium term, the negative impact of long-term interest rates on US bonds on the Chinese stock market will slow down, and it is even expected that there will be a positive impact

Since late September, the main reasons driving up long-term interest rates on US bonds are the imbalance between supply and demand for US Treasury bonds and the strong fundamentals of the US economy。 As of October 27, since October, the yield on US 10-year Treasury bonds has risen by 25bp to 4.84%.

Looking back, the main factors driving the rapid rise in long-term interest rates on US bonds in the previous period have all been mitigated. US bond yields are expected to fluctuate and fall. Even if they are affected by trading and other factors in the short term, they may still fluctuate and peak at high levels, but the impact on other global assets will slow down.

• According to the latest bond issuance plan issued by the US Treasury, from November 2023 to January 2024, the Treasury will slow the rate of increase in 10-year and 30-year US bonds.

• As of October 24, short positions on 10-year US Treasury futures were still at historically high levels. Subsequent bearish recovery is expected to drive interest rates on US bonds downward.

• The November FOMC meeting suspended interest rate hikes as scheduled. The possibility of subsequent interest rate hikes is still open, and interest rate cuts will not be considered yet. At the press conference after the meeting, Powell said, “We are not yet confident that we have reached a sufficiently restrictive monetary policy stance,” and that it is still too early to consider cutting interest rates. As the Federal Reserve maintains high interest rates for a longer period of time, the impact of high US interest rates on the economy will also gradually become apparent.

• In the fourth quarter, against the backdrop of depletion of excess savings, a slowdown in wage increases, and the end of student loan exemptions, consumer spending momentum may slow, so the US economy is expected to decline in a short period of time, so the momentum supporting the continued upward trend in US bond interest rates will also weaken. The US unemployment rate rose 0.1 percentage points to 3.9% in October; the number of non-farm payrolls increased by 150,000, far lower than the previous month's 297,000 and the 180,000 expected by the market. Furthermore, since July, the University of Michigan consumer confidence index has continued to decline; the US credit card delinquency rate in the second quarter has surpassed the level of early 2020.

1.2. China's economy is recovering naturally from the bottom. Previously, overly pessimistic expectations about recovery were constantly revised

Recent macro data show that China's economy is in the process of recovering naturally from the bottom, but the foundation for continued recovery still needs to be further consolidated. Overall, however, previous overly pessimistic expectations about China's economic recovery have been revised to some extent.

• In the third quarter, China's real GDP grew 4.9% year on year, higher than expected, and 1.3% month-on-month after seasonal adjustment. It is also higher than the average level from the 1st quarter of 2021 to the 2nd quarter of 2023. It has been confirmed that real GDP has rebounded steadily.

• Meanwhile, PPI and CPI have bottomed out one after another since June and July, and the year-on-year decline in the GDP deflator narrowed in the third quarter. Confirmation of the “bottom price” means that subsequent nominal economic variables will be the first to improve.

• The profit growth rate of industrial enterprises above the scale remained high in September, with a year-on-year increase of 11.9%, mainly driven by midstream raw materials and downstream consumer goods. Furthermore, the year-on-year growth rate of finished product inventories rebounded for two consecutive months to 3.1%, which may further confirm the improvement in the supply and demand environment of enterprises.

• In October, due to factors such as the “Eleventh” holiday and the early release of some pre-holiday demand, the manufacturing PMI level declined somewhat. The manufacturing PMI index for October was 49.5%, down from 50.2% in September, and fell to room for contraction. The National Bureau of Statistics said that the level of economic sentiment in China has declined somewhat, and the foundation for continued recovery still needs to be further consolidated.

1.3. The “favorable” policy for the fourth quarter, especially the “active capital market” policy, is expected to continue to gain strength and gradually bear fruit

Since the Politburo meeting in July, favorable policies have been intensively introduced, and the policy of issuing trillion-dollar treasury bonds in the fourth quarter has continued to gain strength. Further policy easing measures such as interest rate cuts, debt packages, urban village reform, and real estate relaxation are expected to continue to be implemented and support the market.

• The central government plans to issue an additional 1 trillion yuan in treasury bonds to support post-disaster recovery and reconstruction and enhance disaster prevention capabilities。 On October 24, the central government will issue an additional 1 trillion yuan of 2023 treasury bonds in the fourth quarter of this year, all of which will be arranged to the local authorities through transfer payments, focusing on supporting post-disaster recovery and reconstruction and making up for shortcomings in disaster prevention, mitigation and relief, and improving China's ability to withstand natural disasters as a whole. After issuing additional treasury bonds, the national fiscal deficit will increase from 3880 billion yuan to 4880 billion yuan, and the deficit rate is expected to rise from 3% to about 3.8%.

• On October 25, when the Chief Executive of the Hong Kong Special Administrative Region, Li Jiachao, published the “Chief Executive's 2023 Policy Address”, he stated that he accepted the recommendations of the Task Force on Promoting Liquidity in the Stock Market,Reduce the stock stamp duty rate to 0.1% from the current 0.13% paid by the buyer and seller according to the transaction amountThe goal is to complete the legislative process by the end of November. Furthermore, in order to promote liquidity in the stock market, Li Jiachao also proposed a number of reform measures in his policy report, including reviewing stock trading price spreads, reducing market information costs, and reforming the GEM market.

1.4. The market's expectations for a phased improvement in Sino-US relations in November may heat up, which is conducive to cooperation in the fields of finance, economy, trade, climate, etc., and boosting the risk appetite of A-shares and Hong Kong stocks

Recently, there has been frequent interaction between China and the US, and the APEC summit in November is worth looking forward to.

• On October 25, the China-US Financial Working Group held its first meeting. The meeting was co-hosted by deputy department officials from the People's Bank of China and the US Treasury. The meeting was attended by relevant financial regulators such as the China Financial Supervisory Authority, the China Securities Regulatory Commission, the Federal Reserve, and the US Securities and Exchange Commission. The two sides had professional, pragmatic, frank and constructive communication on topics such as monetary and financial stability, financial regulation, sustainable finance, anti-money laundering and anti-terrorist financing, global financial governance, and other key concerns of both sides.

• From October 26 to 28, Foreign Minister Wang Yi visited the US at the invitation of US Secretary of State Brinken. During his visit to the US, Foreign Minister Wang Yi met with US President Joe Biden, held two rounds of talks with US Secretary of State Brinken, had strategic communication with US President Sullivan, assistant to the US president for national security affairs, and held discussions with people from all walks of life, including the US strategic community and business community.

• Recently, US White House spokesman Pierre claimed that the two sides have agreed in principle to hold the first meeting between China and the US during the APEC summit. Chinese Foreign Ministry spokesman Wang Wenbin pointed out in this regard on November 1 that both countries intend to facilitate the first meeting between China and the US.

2. Hong Kong stock market outlook and investment strategy: The golden rebound of Hong Kong stocks has begun, and it is worth participating actively

In the October 2 “Time for a Resurgence” report, we suggested, “The short to medium term variables faced by Hong Kong stocks, the domestic short-term economy, stock market environment, external geopolitics, and risk-free returns have all changed positively and are expected to continue. The golden rebound in Hong Kong stocks may have begun, so it's worth participating on dips.”

Currently, the upward trend in domestic fundamentals is gradually being verified, and market sentiment is expected to gradually pick up under the continuous introduction of policies. Especially in the context of the misalignment of the economic cycles between China and the US in the medium term, once US bond yields decline, foreign investors will speed up the allocation of Chinese assets, while Hong Kong stocks are expected to take the lead in benefiting. Judging from the recent market environment, the short to medium term variables facing the Hong Kong stock market have all changed positively and been verified, and a golden rebound in Hong Kong stocks has already begun.

• Hong Kong stock valuations are at historically low levels. As of October 27, the Hang Seng Index predicted PE (Bloomberg's unanimous estimate) to be 8.8 times, close to the lowest quartile level since 2015.

• The AH premium index is at an all-time high. As of October 27, the Hang Seng AH share premium index was 144.87, which is at the 92.9% quartile level since 2014.

• The share of short selling of Hong Kong stocks is at a relatively high level in history. As of October 30, the share of outstanding short sales in the Hang Seng Composite Index in the number of issued shares was at the 70% quartile level since 2020.

Investment advice: Cues surrounding positive internal and external changes to participate in the rebound.

Stock selection logic 1: Focus on the export industry chain. On the one hand, China's trade momentum is shifting from developed economies to emerging economies, and products from the traditional old three to the new three, bringing growth opportunities for export companies; on the other hand, Sino-US relations are expected to improve in stages, boosting export-related expectations, especially industries that have been hit hard by the imposition of tariffs previously.

• construction machinery: Construction machinery has entered the internationalization stage, benefiting from the development of the “Belt and Road” region and the return of US manufacturing. Furthermore, the overseas competition pattern is better, profit margins are higher than in the domestic market, and the industry is expected to benefit deeply in the context of improved international relations.

• consumer electronics: Consumer electronics bottomed out and rebounded. On the one hand, the global mobile phone market is expected to return to growth next year; on the other hand, new products represented by wearable devices indicate that consumer electronics will enter the era of spatial computing, and the consumer electronics cycle has reached a bottom-bottom recovery stage.

• Home appliances and light industry: Furniture and appliances benefit from US inventory replenishment. The year-on-year sales growth rate in the US showed signs of bottoming out and rebounding in July and August, driving a recovery in total nominal inventory. The furniture and home appliance industry is nearing the end of its inventory removal, and is expected to take the lead in entering the inventory replenishment stage in the future, boosting export benefits.

• Pharmaceuticals: On the one hand, the pharmaceutical sector can expect policies such as negotiations on innovative drugs and the collection of high-value consumables to be implemented; on the other hand, the innovative pharmaceutical sector has catalysts such as follow-up industry meetings and progress in overseas travel, and superimposed valuation shifts will bring flexibility to the sector.

Stock selection logic 2: favorable domestic policies continue to gain strength, expectations for economic improvement are further strengthened, and focus on opportunities that benefit from policy drive, opportunities where fundamentals can be improved, and sectors that continue to be booming.

• non-ferrous metals: On the demand side, economic fundamentals have been steadily restored, and an inflection point is approaching. The completion area in January-September is +19.8%. The moderate positive trend in real estate completion is expected to continue for the next 1-2 years; on the supply side, domestic production capacity is currently approaching the ceiling of the production capacity policy, and aluminum will be a more resilient product in the procyclical period under policy impetus.

• smart car: According to the judgment of Dai Chang of Xingzheng Automobile's team, it is expected that the monthly passenger car boom in 10/11/12 will continue to improve, and the three main lines of “advanced intelligent driving+autonomous high-end, and Tesla's three new cycles” will participate in the automobile market.

• education: As the regulatory policy environment for the industry becomes clear, leading companies with complete licenses and compliant operations will benefit. In addition, some companies have begun to explore businesses such as cultural tourism, which is expected to become a new growth point.

Stock selection logic 3: Overseas risk-free returns are expected to decline. As risk appetite improves, seize the Internet short cover opportunity.The Internet has entered a new stage of standardized development. In the short term, the fundamentals of the Internet benefited from improvements in China's economy in the fourth quarter; in terms of capital, China and the US have entered a period of phased easing, and interest rates on ten-year US bonds are expected to weaken, which is expected to bring risk appetite to the allocation of capital to Hong Kong stocks and special sectors of the Internet.

Stock selection logic 4: Low-volatility dividend assets continue to be revalued. Among them, high-quality central state-owned enterprise value stocks are the target of the medium- to long-term core allocation of Hong Kong stocks。 On the one hand, Hong Kong stocks of central enterprises, state-owned enterprises, and Hong Kong stocks have the characteristics of undervaluations and high dividends, and the “bond-like” allocation is highly attractive; on the other hand, they benefited from economic improvements in the fourth quarter, leading cyclical profits. It is recommended to allocate high-quality central state-owned enterprise leaders in the fields of energy (oil, coal), telecom operators, high-quality banks and insurance, real estate, transportation, utilities, etc.

Risk warning

The big power game is risky; the Fed's policy tightening has exceeded expectations; the global economic downturn has exceeded expectations.

Editor/Jeffrey