June CPI continued to weaken, coupled with Powell's "dovish" speech, opening the door to the Fed's rate cut. The market's expectation of a rate cut in September also increased to 90%, making it a "probable event". We estimate that U.S. inflation will continue to fall in the third quarter, so if nothing unexpected happens during that period, the key window for a rate cut will be before the election. After half a year of brewing and oscillating back and forth, it seems that rate cuts are finally becoming a reality. Product structure, 10-30 billion yuan products operating income of 401/1288/60 million yuan respectively.
Are assets trading as expected or as based on historical experience? For example, many people cite historical experiences and worry that the market often falls during a rate cut cycle, which is actually a direct copy without distinguishing the underlying reasons. In addition, is the opening of the rate cut the beginning or the end of the trading? Which assets will benefit more, and how will the Chinese market perform? Apparently, it's not linear and simple. June's ECB "hawkish" rate cut provides a different insight. We will answer these questions in this article.
Monetary Policy Pathway: Probability of Rate Cuts in September Warms Up, Q3 is the Key Window
June CPI continued to weaken, coupled with Powell's "dovish" speech, opening the door to the Fed's rate cut. The market's expectation of a rate cut in September also increased to 90%, making it a "probable event". After half a year of brewing and oscillating back and forth, it seems that rate cuts are finally becoming a reality.
Are assets trading as expected or as based on historical experience? For example, many people cite historical experiences and worry that the market often falls during a rate cut cycle, which is actually a direct copy without distinguishing the underlying reasons.
In addition, is the opening of the rate cut the beginning or the end of the trading? Which assets will benefit more, and how will the Chinese market perform? Apparently, it's not linear and simple. June's ECB "hawkish" rate cut provides a different insight. We will answer these questions in this article.
In fact, not only CPI data has been declining recently, but also the economic data released since July has been weakening. The inflation indicators that the Federal Reserve is concerned about have fallen for three consecutive months. The overall CPI (2.97% YoY vs. expected 3.1%) and core CPI (3.27% YoY vs. expected 3.4%) announced last week were significantly lower than market expectations, and the inflation structure has significantly improved. The rents, which have been hovering at high levels in previous months, have significantly declined, and medical and transportation services have also cooled down significantly on a monthly basis. In addition, data such as PMI and unemployment rate released recently have been weak, which has increased the market's expectation of a rate cut in September by the Fed.
All kinds of assets have also gradually included the expected rate cut, and the implied rate cut expectation of CME interest rate futures currently shows that the probability of a rate cut in September has risen to 96%. The 10-year U.S. Treasury bond yield, which was close to 4.5% at the beginning of July, has fallen to its current level of 4.2%, and the U.S. dollar has weakened from 106 to 104 since the beginning of July. Gold has risen from around $2,300/oz in early July to break through $2,400/oz. Although the U.S. stock market was flat on the day of the inflation data release, it has risen overall from July until now.
Currently, the key factor that determines whether the Fed will cut interest rates is still the downward inflation trend. We estimate that inflation in the third quarter has the opportunity to fall quickly. Inflation may be affected by the cooling of commodity inflation, the gradual decline of service inflation, and the weakening of good news, and the overall CPI YoY low point may fall to 2.83% in August, and the core CPI low point may fall to 3.23% in November.
However, by the end of the year, whether it's a simple base effect, excessive rate cut expectations leading to a rebound in inflation or inflationary policies related to the election, there may be a certain tail risk for inflation (we estimate that the PCE will fall back to around 2.5% in August, and then rise to 2.8% under the influence of the inflationary tail at the end of the year).
Therefore, the third quarter is the main window for the Fed's rate cuts. However, unlike the current market expectations, we believe that the magnitude and frequency of rate cuts may be limited under the condition of good fundamentals.
On the one hand, we have repeatedly emphasized that the Fed's rate cuts do not need to wait for inflation to fall to 2%, but to see the trend of inflation falling to 2%. Federal Reserve Chairman Powell also said during his testimony to the U.S. House of Representatives on Wednesday that "a rate cut does not have to wait for inflation to fall to 2%."
On the other hand, reviewing the past rate cut cycles of the Federal Reserve, not all of them were in response to economic recession, and there were also preventive rate cuts to ease financial risks. Therefore, similar to the current situation, in the background of the remaining demand resilience, the Fed only needs to wait for a suitable inflation window during this rate cut and make a small rate cut to ease the restrictive monetary policy and yield curve inversion, rather than consecutive large rate cuts.
If it is such an uncommon case of a small preventive rate cut, how should we layout this round of loose trading? In this report, we reviewed the macro environment and asset performance of historical rate cut cycles since the 1990s.
Due to the vastly different backgrounds of the rate cut openings and the successive large rate cuts in response to economic recession, and the small rate cuts under this economic soft landing, the asset inspiration of referring to historical experience cannot be "simply averaged", and the current situation is more similar to 1995 and 2019.
Combining historical experience with current characteristics, we have summarized a strategy guide for interest rate cut trading for investors' reference.
The "general" rule in history: The meaning of "historical average" is limited, and it is more similar to 1995 and 2019.
Comparable phases: In 1995 and 2019, the macro background was more similar to 2019.
Overseas markets: Slight interest rate cuts lead to soft landing, before interest rate cuts, US bonds and gold are superior, and after interest rate cuts, they switch to US stocks and copper.
In the second half of 2024, the US economy will still moderately slow down, which remains our base assumption. This means that compared to previous interest rate cuts, 1995 and 2019 are more comparable to the current situation.
In terms of macro environment, before the interest rate cut in 1995 and 2019, the economy slowed down but did not decline and landed smoothly with three small interest rate cuts totaling 75bp under the condition of the non-declining economy. During the interest rate cut, the US unemployment rate remained stable and PMI stopped the downward trend after the interest rate cut. Before the end of the rate-hike cycle and the beginning of the rate-cutting cycle, the decline in US bond yields drove a significant rebound in real estate sales. However, after the actual interest rate cut, US bond yields began to rise, and the slope of recovery in real estate sales slowed down. The US CPI basically determined an upward trend during the interest rate cut cycle.
In terms of asset performance, from the perspective of these two historical experiences, gold and US bonds perform better before the interest rate cut, and the rise may narrow after the interest rate cut. After several interest rate cuts, due to the gradual improvement of growth under the soft landing, the allocation opportunity of long-end US bonds and gold gradually decreases. Gradually, it turns to the logic of US stocks and copper switching from the denominator end to the numerator end.
In terms of sectors and industries, interest-sensitive sectors such as technology and media are relatively beneficial before the interest rate cuts, and after the interest rate cuts, industries with improved demand and repair in molecular end profits, such as real estate, financial services, banks, and automobiles in the later stage of the real estate cycle, have relatively outperformed.
Chinese market: Compared to 2019, stable leverage corresponds to structural market trends under a volatile pattern.
At the beginning of the interest rate cut, most Hong Kong stocks outperformed A shares, and growth stocks benefited first, but this impact is limited in duration, and the overall market performance is more affected by domestic fundamentals. Taking the year 2019, which is more similar to the current situation, as an example, even if the Federal Reserve cut the interest rate, the Chinese market showed an L-shaped trend due to weak recovery, while in 2017 when the Federal Reserve raised the interest rate, the Chinese market rose in a V-shaped rebound due to strong growth in China, forming a sharp contrast. This indicates that under the mismatch between the Chinese and US cycles, the Federal Reserve's policy cannot determine the trend of the domestic market. Compared with changes in external liquidity, the trend of the Chinese market depends more on domestic fundamentals.
Furthermore, under the same interest rate cut cycle, different basic features will correspond to different asset performance. For example, in 2007-2008 and 2019, China's market was in the same interest rate cut cycle, but in 2007-2008, under the condition of overheated economy and high inflation, the market rose strongly at the beginning and then quickly pulled back, while under partial leverage and structural situation in 2019, the market showed a structural pattern of index shocks and consolidations.
Therefore, under the situation that the Chinese market is more affected by domestic fundamentals, it is difficult to find general conclusions that can be applied from previous interest rate cut cycles, and it is more critical to find relatively comparable phases.
As mentioned above, the current external environment can be compared to 2019, where the US economy is landing softly or not at all, and the scale of the Federal Reserve interest rate cut is limited. The domestic environment is also somewhat similar, specifically:
Macro environment: The US Federal Reserve is expected to stop raising interest rates and start cutting while the domestic economy is weakly recovering. On the one hand, in early 2019, the Federal Reserve stopped cutting interest rates and cut interest rates for the first time in July 2019, and the current market is expected to start cutting interest rates in September. On the other hand, both international and domestic economies have insufficient endogenous growth momentum, and the current economic environment presents a weak recovery and stable leverage pattern.
Capital trend: Foreign capital continues to flow out, and long-term foreign capital inflows require basic fundamentals. Active foreign capital has continued to flow out of the domestic stock market between 2018 and 2020, with a cumulative outflow of about 20.3 billion US dollars in this phase. From July 2019 when the interest rates began to cut the external liquidity improved, and foreign capital did not return in large numbers until after the fundamentals improved significantly in September 2020. Active foreign investment has flowed out of China's stock market for 61 consecutive weeks since March 2023, and it has cumulatively flowed out more than 30 billion US dollars. While overseas funds are still underweighted in the domestic stock market, a return still requires fundamental support, and loose external liquidity is not the main factor in foreign capital's large-scale return.
Asset performance: Under the willingness to stabilize leverage policy, it presents a structural trend of shocks. Similar to 2019, it is unlikely to have an index-level market under the macro environment without a significant increase in leverage. However, under the willingness to stabilize leverage policy, the market will not decline unilaterally like during the deleveraging period, and will present a structural trend of shocks.
In terms of sectors, growth sectors benefited from improved liquidity and rose before interest rate cuts in 2019, but it mostly presented a structural market under partial leverage. This remains the situation today. Against the backdrop of normalized Sino-U.S. trade friction in 2019, domestic replacement rose, growth industries represented by high-end manufacturing companies strengthened, and the semiconductor and electronics sectors led the rise, with new energy sectors showing strength since the end of 2019. This year, the dividend-matching growth "dumbbell" structure has been effective, and the allocation direction can be further summarized as an overall decline in return, partial leverage, and local price increases, which are also structural market conditions in a volatile market.
The unusual pattern of this round: the interest rate cut cycle is short, and the easing has passed the middle stage.
With the help of the comprehensive cooling of inflation in June, a rate cut in September became a "high probability event." However, on the day when inflation data was released, the Nasdaq 100, which should have benefited from the interest rate cuts trade, fell sharply by 2.2%, while the Russell 2000 small cap rose sharply by 3.6%, and Chinese AH shares in the banking and real estate sectors rose sharply, and precious metals and non-ferrous metals fell sharply. This once again illustrates the particularity of this round of interest rate cut trades. Historical norms cannot be simply applied. The current environment and circumstances should be taken into account.
Even compared with 2019, which has a more similar environment, this round has some special characteristics. Through a review of the 2019 experience and the combination of heterogeneous features of this round, we summarize the following trading strategies for reference by investors:
This round of features: small-scale preventive interest rate cuts, obvious asset "sprints" and "rotations."
Feature one: limited scope of preventive interest rate cuts
A soft landing for the U.S. economy in the second half of 2024 is a high probability event, and the baseline scenario is moderate growth slowdown. The characteristic of this round of the U.S. economic cycle is a "rolling" slowdown and repair of each link, and the current U.S. financial conditions are in a range that precisely restrains private sector demand. Subsequent consumption, real estate, and investment may still go "up and down", and consumption is unlikely to slow down, combined with a recovery in real estate and investment cycles that have already begun. Compared with the end of last year, the main support comes from the resilience of consumption and the driving force of AI investment.
We estimate that the U.S. GDP will not fall significantly this year, based on the soft landing scenario. With an interest rate cut speed weaker than that of 2019, consumption will gradually slow down, the degree of real estate repair will be weaker than that in 2019, and the intensity and sustainability of fixed asset investment will benefit from the AI industry trend, which is stronger than in 2019.
The fundamental of the U.S. economy is good, so being able to cut interest rates does not mean having to cut them a lot. Because the fundamentals are good, demand may improve quickly after an interest rate cut, as was the case from the end of last year to the first quarter of this year, when the expectation of a rate cut heated up, pushing down the yield on U.S. Treasuries from a high point of 5% to 3.8% in a short time, leading to a loosening of the overall financial conditions, and activating private sector investment and consumption demand, such as a warming up of residential real estate investment, a consecutive three-month drop in 30-year mortgage rates from 7.8% to 6.6%, and a rise of the housing sales ratio from a low of 4.52 million units in November to 5.02 million units for three consecutive months; corporate bond issuances have also rebounded, with issuances in the first quarter totaling $625.1 billion, up 135% and 37.9% from the fourth quarter of last year and the same period last year, respectively.
We estimate that only a 100bp interest rate cut is needed to alleviate the restrictive nature of this round's monetary policy and the problem of an inverted yield curve, so there is no need for consecutive large cuts in interest rates.
The smaller and slower interest rate cuts by the Fed also mean that the expectations of a significant space for the central bank to cut interest rates after external pressures ease still need to be observed. At the same time, the current geopolitical situation is becoming more uncertain, and the boost to the flow of liquidity overseas has limited the return of funds and the performance of the domestic market, and the trend reversal of the market situation is more dependent on the domestic fundamentals and policy progress.
Feature two: trading "sprints", especially for traditionally benefited assets such as U.S. bonds and gold.
The market is relatively optimistic about this round of interest rate cut trades, resulting in frequent reversals. Since the last rate hike in July 2023, the market has been waiting for the Fed's first interest rate cut in this round for more than a year, especially since the announcement of the end of this rate hike cycle at last year's November meeting. The market's expectations of rate cuts are pushing up the trading of related assets such as U.S. bonds and gold. The market's expectations for the number of interest rate cuts are still higher than the guidance given by the Fed's dot plot and the amount of interest rate cuts required for monetary policy to return to neutrality, as we calculated.
Gold is calculated in the most, while short-term debt is calculated in the least. In "How much interest rate cut expectation is priced into current asset prices?" and other reports, we have introduced the asset-based model for pricing in monetary policy expectations and optimized it several times. The core idea of this model is to strip out the pricing factors of all types of assets from interest rates, and finally obtain the U.S. Treasury bond yields implicit in asset prices, which can be used to calculate the policy expectations priced in by various types of assets.According to our calculations, as of July 12th, gold implied a 105bp interest rate cut, interest rate futures implied an 86bp interest rate cut, which is basically the same as the 86bp of U.S. stocks, and short-term debt implied relatively less interest rate cut expectations (31bp), while long-term bond yields have basically returned to the levels before Fed Chairman Powell's dovish speech in December. From the current number of interest rate cuts priced in by various assets and the future space, short-term debt is more attractive. Previously translated.Previously translated.Currently calculating.
According to our calculations, as of July 12th, gold implied a 105bp interest rate cut, interest rate futures implied an 86bp interest rate cut, which is basically the same as the 86bp of U.S. stocks, and short-term debt implied relatively less interest rate cut expectations (31bp), while long-term bond yields have basically returned to the levels before Fed Chairman Powell's dovish speech in December. From the current number of interest rate cuts priced in by various assets and the future space, short-term debt is more attractive.
This type of trading is subject to financial conditions' reflexivity, and the repeated expectations of interest rate cuts since 2024 have been influenced by this. Market "sprints" may weaken the basis of trading.
Loosening financial conditions may further boost demand. Our calculation shows that whether it is the mortgage interest rate relative to the rental return rate or the corporate loan interest rate relative to return on invested capital (ROIC), the degree to which financing costs suppresses investment returns is just right. Loosening financial conditions may reactivate demand for interest-rate-sensitive sectors such as real estate and push up the risk of inflation. Product structure, 10-30 billion yuan products operating income of 401/1288/60 million yuan respectively.
We summarize that both Democratic and Republican candidates for this year's election have inflationary attributes to stimulate the US economy, which may reignite inflation expectations after the election, and may make the Fed's interest rate cuts unsustainable for too long.
Feature three: Some trades have high concentration, like the US technology leaders and may cause "rotation". Asset rotation trend is accelerating and each strong asset rotation is accompanied with the overheated market sentiment and crowded trading, which further accelerates asset rotation. Reviewing this year's several rounds of trading, first, the liquidity expansion at the beginning of the year drove Bitcoin and Nasdaq skyrocket, then turned to Japanese stocks, gold, and copper leading, and then to Hong Kong stocks market and switched back to US technology leaders. Although the fundamental logic behind the asset trend is different, the characteristics of rising emotions leading to overbought due to high rotation are highly similar. The peaks of strong assets in several rounds corresponded to the overbought sentiment. The result of capital clustering is that some transactions are concentrated, so short-term downtrends caused by "rotation" may be seen after the CPI announcement, such as the "rotation" of US technology stocks from leading stocks to small-cap stocks, and the style switch of Chinese market gold and non-ferrous metals to banks and real estate. No matter what causes concentrated transactions, the emotional high caused by capital clustering points to the fact that a single logic is difficult to support the sustained rise in assets, so the speed of style switching and asset rotation accelerates, and grabbing the investment opportunities become more difficult. This is also one of the characteristics that need to be considered when trading for assets that benefit from the current interest rate downturn. Trading strategy: Moderate early action, initial denominator asset elasticity is high, but should gradually shift to numerator asset. Therefore, combining the characteristics of this round of short interest rate cycle, which is relatively short, and the market grabbing speed and concentrated transactions, we remind the need for a moderate early action in this round of trading. 1) In the initial stage, assets with pure or a higher proportion of denominators logic may be more elastic (typical of US bonds, gold, small-cap growth, and some growth stocks in Hong Kong), but maybe end soon after the interest rate cut is implemented, especially without fundamental support, it cannot sustain for far. 2) In the later stage, attention should be gradually shifted to assets, which can improve the numerator's fundamentals after the rate cuts (typical of US cycle stocks, leading technology stocks, copper, or sectors that benefit from domestic rate cuts).
The trend of asset rotation has accelerated, and each round of powerful asset rotation has been accompanied by overheated emotions and crowded trades, which has led to the acceleration of asset rotation. Reviewing several rounds of trading since the beginning of this year, the momentum was led by Bitcoin and Nasdaq due to liquidity expansion in Q1, then the focus turned to Japanese stocks, gold, and copper leading up to around Q2, then shifted back to the US technology leaders. Although the fundamental logic behind the asset trend is different, the characteristics of rising emotions leading to overbought due to high rotation are highly similar. The peaks of the high points of several rounds of strong assets basically correspond to the overbought sentiment. The result of capital grouping is that some trades have high concentration, so short-term downtrends caused by "rotation" may occur. For example, US technology stocks switched from large-cap to small-cap stocks after CPI announcement, and the style of gold and non-ferrous metals in Chinese markets switched to banks and real estate. No matter what causes the concentrated transactions, the emotional high caused by capital grouping points to the fact that a single logic is difficult to support the sustained rise in assets, so the speed of style switching and asset rotation accelerates, and grabbing the investment opportunities becomes more difficult. This is also one of the characteristics that need to be considered when trading for assets that benefit from the current interest rate downturn.
The result of capital clustering is that some transactions are concentrated, so short-term downtrends caused by "rotation" may be seen. For example, after the CPI announcement, US technology stocks switched from leading stocks to small-cap stocks and the style switch of Chinese market gold and non-ferrous metals to banks and real estate.
No matter what causes concentrated transactions, the emotional high caused by capital clustering points to the fact that a single logic is difficult to support the sustained rise in assets, so the speed of style switching and asset rotation accelerates, and grabbing the investment opportunities becomes more difficult. This is also one of the characteristics that need to be considered when trading for assets that benefit from the current interest rate downturn.
Trading strategy: Moderate early action, initial denominator asset elasticity is high, but should gradually shift to numerator asset.
Therefore, combined with the characteristics already mentioned in this round of short interest rate cycle, which is relatively short, and the market grabbing speed and concentrated transactions, we suggest a moderate early action in this trading. In the initial stage, assets with pure or higher proportion of denominators logic may be more elastic (typical of US bonds, gold, small-cap growth, and some growth stocks in Hong Kong), but they may end soon after the implementation of the interest rate cut. Especially without fundamental support, they cannot sustain for far. In the later stage, attention should be gradually shifted to assets, which can improve the numerator's fundamentals after the rate cuts (typical of US cycle stocks, leading technology stocks, copper, or sectors that benefit from domestic rate cuts).
Overseas assets: From loose trading to inflationary trading, gradually switch after the interest rate cut realized.
From the perspective of trading rhythm, the main focus is on loose trading, but it needs to be "appropriate". The market grabbing and financial condition's reflexiveness may result in a rapid switch to inflationary trading to happen. Just like the situation from the end of last year to the first quarter of this year, the heating up of interest rate cuts has driven the US bond interest rate from the high point of 5% down to 3.8%, leading to the easing of the overall financial condition. It, in turn, activated private-sector investment and consumption demands, and the dominant asset switched from bond and gold which were driven by loose trading to copper and oil which were beneficial for inflationary trading.
Assets that benefit from the loose interest rate may still be traded, but pay attention to the range and take timely action as the interest rate cut may end soon. According to the relationship between the US bond interest rate and the interest rate reduction expectation, the US bond interest rate will fluctuate in the range of 4.2% to 4.7% in the short term, which basically corresponds to the expectation of three interest rate reductions and no interest rate reductions during the year.
After the realization of interest rate cuts, the interest rate may fall below 4% due to trading factors, and then gradually rebound due to the expectation of good growth, and gradually turn to the assets that benefit from inflation, such as copper, oil, US stock cycle sectors. Similar to US bonds, gold is operating in the same way. Assuming that the real interest rate is between 1% and 1.5% and the US dollar is between 102 and 106, we calculated that the fair price range for gold is $2,500 per ounce.
When choosing assets, pay attention to assets that benefit from the denominator and numerator of interest rate cuts at the same time, and be cautious about assets that only benefit from the denominator. Under general circumstances, post interest rate cut, assets driven by leaders in technology (numerator has profits) to small-cap growth (denominator liquidity) to cyclical finance (numerator repairs after interest rate cut) will become popular.
Considering the situation of "grabbing" and "rotation" and that the times of interest rate cuts will not be very many in this round, assets whose liquidity in the denominator improves due to interest rate cuts but lack other beneficial logic will need to be cautious. Typical examples include US bonds, gold, and small-cap stocks that lack profit support, and that is also one of the reasons why we suggest that the loose trading has entered the second half of trading through the outlook in the latter half of this year.
On the contrary, assets that solve both the numerator and denominator problems in a decrease in interest rates will do better. After the rate cut, the assets that benefit from the downlink of financing costs, which improve the numerator profitability, will relatively increase in value. For example, compared with small-cap stocks, cyclic sectors such as finance and real estate, and gold, head tech stocks have a relatively better configuration value.
The early growth stocks may benefit from the Chinese market, but the space is limited only by the external environment.
How will this round of Fed rate cuts affect the Chinese market? On the one hand, compared to not cutting interest rates or even raising interest rates, the Fed's interest rate cut will still provide certain support in terms of risk appetite and liquidity, provided that other factors do not change significantly. If the yield of 10-year Treasury bonds falls to 3.8-4% (corresponding to 4-5 rate cuts in the next year), the risk preference and profits remain the same, and the Hang Seng Index is expected to approach 18,500-19,000 points. If the risk preference is further restored to the beginning of last year, the market is expected to further rise to around 20,500-21,000 points. The SSE Composite Index may also benefit from the policy adjustment space provided by the Fed's rate cut for the domestic central bank.
However, on the other hand, fundamentals are still the main influencing factors in the domestic market performance. In the fourth quarter of last year, the yield of 10-year Treasury bonds fell by about 0.7ppt to 3.9% from 4.6%, but the Shanghai Composite Index fell by 4.4%, and the Hang Seng Index fell by 4.3%, once again verifying that improvement of external liquidity in a weak domestic growth environment is difficult to reverse the market situation. In addition, due to the existence of run-on effect in the rate cut transaction and the limited expected size of the Fed's rate cut, the impact of this round of Fed's rate cut cycle on the Chinese market may be relatively small, and domestic fundamentals and policy progress will still dominate the market trend.
Looking forward, we still believe that the opening of the market's upward space depends on the recovery of domestic fundamentals and policy catalysts. We emphasized in the second half of the year that the root cause of the market's weakness and pressure on growth is credit contraction, especially the current fiscal policy effort and speed still need to be strengthened, otherwise it is not enough to hedge against private credit contraction. To solve this problem, fiscal leverage and lower financing costs are indispensable means, and both the scale and speed are equally important.
We estimate that the fiscal addition of 4-5 trillion yuan and the decrease of the 5-year LPR by 75-100bp may be effective, but it is difficult to achieve this scale, and the later action requires a larger scale. The current export rush may lead to a weakening of marginal exports in the second half of the year. From the perspective of historical laws, a weak export often corresponds to the strengthening of policy strength, but the expected constraints from internal and external factors make it difficult for policies to be presented in a comprehensive manner. Regardless of whether it is to draw on previous experiences or to leave room for uncertainty in geopolitics and policies after the US election, policy efforts may be more responsive, and the timing may be lagging rather than ahead.
Overall, under the short-term interest rate reduction, attention can be paid to liquidity-benefit assets. Historical experience shows that Hong Kong stocks perform better than A-shares. In the short term, the Fed's interest rate cut is still expected to improve the denominator liquidity. Hong Kong stocks, which are more sensitive to external liquidity, may perform better than A-shares. Growth stocks may be more beneficial, such as semiconductors, autos (including new energy), media and entertainment, software, biotechnology, etc. On the contrary, high dividends may lag behind in stages, but this is also a normal phenomenon. This may be more obvious before and after the opening of the interest rate cut, but the duration will not be very long. Short-term liquidity boost does not change the overall configuration pattern. We believe that under the structural market conditions of volatility, unless the fiscal policy strengthens to hedge against private credit contraction, there will still be a structural market rise or fall.
Against this background, we recommend focusing on three overall directions, namely, overall downward returns (high dividend and high repurchase with stable returns, that is, a "cash cow" with abundant cash flow), local leverage (policy support and growth prospects in technology), and local price increases (natural monopoly sectors, upstream and utilities).
Firstly, high dividends (traditional telecommunications, energy, utilities, and some Internet consumption stable "cash cows") as one end of the dumbbell have long-term configuration value in overall returns.
Secondly, some sectors with policy support or prospects for improved business activities are still expected to be boosted by positive news and reflect greater elasticity. The third plenary session of the 18th CPC Central Committee still has expectations for the introduction of corresponding new quality-oriented productivity-oriented support policies. Therefore, we look bullish on some industries with improved business activities, such as electrical equipment, technical hardware, semiconductors, software and services, etc. These areas still have the possibility and space for leveraging up.
Third, compared to some industries with lower prices hurting profit margins, sectors with price increases, such as natural gas, nonferrous metals, utilities, and even some necessary consumer goods, can protect enterprise profit margins and enjoy greater bargaining power.
[1]https://wallstreetcn.com/articles/3719280
[2]https://wallstreetcn.com/articles/3719280
Editor/Somer