Source: China Fund News
Reporter: Zhang Yanbei

The inflection point of the Fed's interest rate hike has come to an end, and here is the interpretation of public funds.

The current interest-rate meeting made an overall statement of bias. Some fund companies have expressed their views on market concerns such as the reasons for the Fed's “relinquishment” this time, the probability and pace of future interest rate cuts, the impact on assets such as US stocks and A shares, and investor action suggestions.

According to public funding agencies, the Fed's attitude is biased, and interest rate hikes have basically come to an end. Looking at the short term, it is expected that the US dollar index and US bond interest rates will fluctuate weakly, and US stocks may continue to rise. As interest rates on US bonds decline in trend, it is beneficial to A-shares.

Improved inflation pushes the Fed from a hawk to a dove

Early this morning, Beijing time, the Federal Reserve continued to stop raising interest rates at the December FOMC meeting. The benchmark interest rate remained at 5.25-5%. This is the third time interest rate hikes have been suspended since the July rate hike.

Stimulated by this news, the three major US stock indices all rose by more than 1%; among them, the Dow reached record highs, and the Nasdaq and S&P 500 hit new highs since the beginning of last year.

Morgan Asset Management believes that the Federal Reserve kept the interest rate target range unchanged at the last meeting of this year, and made clear dovish adjustments in the wording of the statement, which suggests that this round of interest rate hikes has come to an end. The statement pointed out that compared to the booming growth data for the third quarter, the pace of economic activity has now slowed somewhat.

Second, the statement emphasized that inflation “has abated over the past year,” indicating that it has been effective in curbing inflation, but it still believes that the current level is still high. More notably, it added the word “any” to the phrase “determine the extent of any additional policy tightening”, which almost indicates that there will be no interest rate hikes in this cycle.

According to Morgan Asset Management, the dovish shift in current policy expectations is clearly driven by improved inflation. Although the committee may still be uneasy about the current level of inflation, they seem to believe that the downward trend in inflation will continue until next year, enabling the Fed to keep interest rates stable.

In response, Tianhong Fund fund manager Hu Chao said, “The Fed's core is to control inflation, so Powell's statement is hawkish to suppress market expectations, but this time the Fed's statement has exceeded expectations. We judge that the Fed is already confident that inflation will continue to decline smoothly next year.”

“The released bitmap shows that this round of interest rate hikes has been completed. Officials expect interest rates to be cut by 75 basis points in 2024, that is, interest rates will be cut three times next year. The interest rate cut is higher than expected in September; the market expects interest rates to be cut 5 times next year, as early as March. We don't think investors need to bet too much on time to cut interest rates, but the Fed's attitude is a very positive sign.” Hu Chao went further.

When will interest rates be cut? Probably a little later than expected. Morgan Asset Management, on the other hand, determined that the timing of interest rate cuts in 2024 may be delayed from the first quarter currently anticipated by the interest rate futures market.

At the press conference after the meeting, Federal Reserve Chairman Powell stressed that the committee believes that the current policy interest rate is restrictive and that inflation should return to the trend over time. If economic growth remains strong and the labor market remains tight, the Commission will remain cautious about cutting interest rates prematurely.

According to Morgan Stanley Fund analysis, after the Fed's interest rate meeting ended, the 10-year US Treasury yield fell by 15 bps to 4.02% overnight, breaking through 4.0% at one point. The 1-year SOFR OIS fell by about 25 bps to 4.85%, the decline in the US index broke through 103, and the market further raised interest rate cut expectations. It is expected that interest rate cuts will begin in March next year, and 150 BP for the whole year.

Regarding the probability and pace of future interest rate cuts, Fu Beijia, fund manager of HSBC Jinxin's Shanghai-Hong Kong-Shenzhen Fund and Hong Kong Stock Connect's dual-core fund, said that the optimistic scenario for next year's interest rate cuts is that the US economy will decline, inflation falls faster than expected, and the Fed will carry out preventive interest rate cuts in the first half of the year; the pessimistic scenario is a crisis model, where the global recession resonates and raises a large level of risk. The Fed is forced to cut interest rates in the second half of the year but the market will experience significant turbulence.

When it comes to US inflation, fund companies recommend focusing on uncertainty about its future. According to the Morgan Stanley Fund, the Fed's attitude is biased. The interest rate hike has basically come to an end. The forecast for interest rate cuts is more optimistic than the forecast for inflation to cool down, but expectations of three interest rate cuts are not necessarily stable. A few officials may fluctuate in the number of interest rate cuts, and the market is likely to continue to trade in the short term, and US bonds may continue to decline. There is an opportunity for the yield curve to become steeper in the first half of next year, but we also need to pay attention to the possibility that subsequent inflation will cool down less than expected.

Huatai Berry Fund also said that at present, the US's inflation management has indeed achieved some results. Overall PCE inflation in the US has fallen from 7% in June last year to 3% in October this year, and is getting closer to the 2% inflation target. (Data source: “CICC: Will the Federal Reserve Cut Interest Rates Early?” 2023-11-30) However, the Federal Reserve is not yet able to “rest easy”. Because after all, the past does not represent the future, whether US inflation will continue to decline over the next 3 to 5 months is still unknown.

Gold and US stocks ushered in an allocation window

So, if the Federal Reserve actually cuts interest rates in March next year, which assets might we be able to focus on in advance?

Some fund companies believe that in the context of interest rate hikes ending and shifting to interest rate cuts, the future may be a window period for allocating major asset classes.

Huaan Fund is particularly optimistic about the allocation opportunities for gold and US stocks. Furthermore, AH shares will also benefit from valuation recovery due to the Fed's policy. First, gold remains optimistic. At the level of monetary attributes, the central bank of China continues to buy gold, supporting the performance of gold prices. At the level of financial attributes, the current biased Fed interest rate meeting continues to drive a pullback in interest rates on the US dollar and US bonds.

Second, the Nasdaq sector will benefit from the Fed's monetary policy relaxation at the valuation level, and will focus on the resilience of economic fundamentals later. The valuation pressure on Hang Seng Technology and the Hang Seng Internet sector is expected to ease.

The main risk of concern in the future is that inflation will not decline smoothly, and it is necessary to continue tracking based on high-frequency data. The recent decline in oil prices has made an important contribution to the CPI decline for two consecutive months.

Based on his judgment that “inflation will fall, no recession,” Hu Chao remains optimistic about the US stock market. He believes that the rise in US stocks may be a long-term trend.

“At this point, we tend to think: the process may fluctuate, but there is still room for US stocks to rise in the long run.” Looking ahead to the future market, Hu Chao said, “For this kind of mature capital market, there is no need to worry too much about whether the market entry point is high or low. Assets are mainly rewarded through time appreciation. We recommend that everyone reap the benefits of long-term growth in US stocks through fixed doses and long-term holdings.”

As far as specific beneficiary assets are concerned, Huabao Fund fund manager Zhou Jing believes that looking ahead to next year, the US stock technology sector still deserves the focus, especially small and medium capitalization technology stocks. This year, the US technology stock market is mainly concentrated on the seven leading technology stocks. In the future, the US technology market may spread from leading stocks to non-leading stocks.

“In the interest rate hike cycle, the valuation of small and medium-sized technology stocks has been severely suppressed. When interest rate cuts exceed expectations, the rebound of small and medium-sized companies may also be stronger than animal husbandry.” Zhou Jing's judgment.

According to Morgan Asset Management, the Fed's willingness to be more flexible in monetary policy means that the possibility of avoiding a sharp recession has increased, which is beneficial to investment-grade and high-yield corporate bonds; the peak of the Fed's interest rate hike may also benefit US stocks and Asian stocks. The potential decline in cash yield next year may prompt investors to turn more attention to high-dividend stocks.

Huatai Berry Fund, on the other hand, suggested that judging from previous interest rate cut cycles, the performance of US stocks depends on whether the US economy will decline in the process of cutting interest rates. There is currently no conclusion on whether the US economy will have a “soft landing” after the interest rate hike. Furthermore, the current valuation of US stocks is not cheap, so we may still have to be cautious about the future performance of US stocks.

As for gold, Huatai Berry Fund believes that in the historical performance of the interest rate cut cycle, there is no outstanding US debt, but in the long run, there may still be some allocation value. The tense geographical situation and the wave of de-dollarization may become a catalyst for gold's long-term rise.

The investment value of A shares and Hong Kong stocks is expected to be revalued

According to fund companies, with the gradual shift of the Federal Reserve, it will also have a certain boosting effect on A-shares.

Huatai Berry Fund pointed out that if the US cuts interest rates, the spread between China and the US is expected to gradually narrow, which is good news for RMB assets. The pressure on the outflow of foreign capital is expected to abate, and the chances of A-shares next year may outweigh the risks.

In terms of domestic assets, Huaan Fund also said that as the Fed's policy shifts to easing, the pressure to depreciate the RMB is reduced, which is expected to bring about valuation recovery at the domestic index level. Under the combination of weak domestic economic recovery and easy overseas liquidity, it is recommended to focus on investment opportunities in indices related to the Shanghai Stock Exchange 180, Shanghai and Shenzhen 300, and GEM 50, which has high growth elasticity. At the industry level, it is recommended to focus on the field of science and innovation chips that are driven by the economy and expected to improve valuations.

As far as A-shares and Hong Kong stocks are concerned, Baoying Fund believes that expectations for the end of the Fed's interest rate hike cycle are significantly beneficial to the A-share and Hong Kong stock markets. This means that the strong “currency tap” of the US dollar is no longer being tightened.

When the Fed's interest rate hike ends, and interest rate cuts begin in the future, US bond yields cannot remain high, and the US dollar index will no longer continue to be strong. On the one hand, capital may return to the equity market to find opportunities; on the other hand, the trend of the US dollar flowing back to the US will also be curbed, and China, as a representative of emerging markets, is expected to revalue the investment value of A-shares and Hong Kong stocks.

Fu Beijia pointed out that interest rate cut expectations have become less sensitive to US stocks, Hong Kong stocks, and A shares in turn. We emphasize that the pace and slope of economic recovery determines the direction of the market, the cycle and pace of interest rate cuts by the Federal Reserve affects market amplitude, and geopolitical risks amplify disturbances. Long-term interest rates peaked, and the decline in the interest rate center next year is a definite trend, so it is directly beneficial to US stocks and Hong Kong stocks in terms of direction.

However, in terms of rhythm, Fu Beijia bluntly stated that he is more concerned about whether expectations of interest rate cuts are running out. “This will amplify the phased amplitude of the market. For A-shares, the stronger directional effect is that domestic interest rate space can be expected to open up further after the Fed cuts interest rates, so there will be a slight delay in transmission.”

Editor/Somer