Hong Kong stock market: Waiting for more policy details to land.

1) Hong Kong stock market rebound situation is on hold, and the pro-cyclical sector has a significant adjustment. From July 15 to 19, under the influence of the slowdown in economic growth in the second quarter and hawkish comments on China by the Republican Party in the United States, the bullish sentiment in the Hong Kong stock market was suppressed, and the Hang Seng Index and the Hang Seng Science and Technology fell by 4.8% and 6.5% respectively. In terms of style, major style factors have experienced a pullback, with significant declines in Chinese enterprises and value factors. In terms of strategy, the Shanghai-Shenzhen-Hong Kong Stock Connect AH Smart Index outperformed the Risk Control Index and Multi-Factor Strategy. In terms of industry, medical care is relatively resistant to decline, while pro-cyclical sectors represented by energy and raw materials continue their weakness and rank among the top decliners in the market. 2) The support of fundamental indicators for Hong Kong stocks is relatively limited. The year-on-year change of China's credit pulse has risen for two consecutive months, but it is still in the negative growth range. The long-term loan credit pulse index of enterprises with higher correlation with the Hang Seng Index has continued to fall since reaching its peak in May 2023. Although there was a period of rebound in the Hong Kong stock market during this period, it was still suppressed by the fundamental factors as a whole. From the perspective of index earnings, the far-term EPS growth rate of the Hang Seng Index remained at about 2%. Except for the sharp increase in profit expectations generated by the optimization of epidemic prevention policies at the end of 2022, the improvement in the far-term EPS growth rate of the Hang Seng Index has been limited in the past two years. The fundamental situation of Hong Kong stocks needs to be further solidified. 3) Looking ahead, the Hong Kong stock market has experienced a significant rebound amid the significantly improved sentiments of both domestic and foreign investors. The sustainability and upward potential of this trend will require more solid fundamental data and economic recovery verification. The cautious and optimistic attitude towards the market remains during the period of economic recovery validation. As for the allocation, on the one hand, sectors with high dividend yields, such as public utilities, energy, finance, and telecommunications, are expected to provide considerable relative returns even if market volatility rises in such an environment. On the other hand, the technology industry represented by semiconductors and the Internet will still be the main driver of industrial transformation, and is expected to benefit from government support and domestic substitution.

1) The trend of US stocks is differentiated with the technology sector leading the market decline. From July 15 to 19, the seven magnificent technology giants in the US stock market experienced a significant decline, which dragged down the S&P 500 and the Nasdaq, with declines of 2.0% and 3.6% respectively, while the Dow Jones hit a historical record high driven by the pro-cyclical sector. In the observation period, in terms of style, high dividend stocks and small-cap stocks performed well, while momentum and growth factors experienced significant adjustments. In terms of strategy, multi-factor combinations outperformed GARP and style rotation strategies. In terms of industry, energy (+2.0%) and real estate (+1.3%) led the market, while the information technology sector fell by more than 5%. 2) The short-term market characteristics of the "Trump trade" are not yet clear and it may have limited trend impact on the market. The two representative incidents of the US presidential assassination were the Reagan shooting in March 1981 and the Kennedy shooting in November 1963. After the assassinations, the US stock and bond markets experienced certain fluctuations, but they basically returned to stability in the following three weeks and major asset prices did not show obvious trend markets. Referring to the historical experience, it is expected that the intensity of the "Trump trade" may be relatively limited and short-term asset prices may be more emotionally impacted. 3) From the performance of major asset classes during the Trump administration, the US stocks rebounded and the price of gold fell, while long-term US bond yields and the US dollar index rose. One year later, only US stocks continued their strong performance. Trump was elected president of the United States on November 9, 2016, and in the short term, major asset classes experienced significant volatility due to the election results that exceeded expectations. Emotional trading made US stocks strong and gold prices significantly weaker.

Looking ahead, the Hong Kong stock market has experienced a significant rebound amid the significantly improved sentiments of both domestic and foreign investors. The sustainability and upward potential of this trend will require more solid fundamental data and economic recovery verification. The cautious and optimistic attitude towards the market remains during the period of economic recovery validation. As for the allocation, on the one hand, sectors with high dividend yields, such as public utilities, energy, finance, and telecommunications, are expected to provide considerable relative returns even if market volatility rises in such an environment. On the other hand, the technology industry represented by semiconductors and the Internet will still be the main driver of industrial transformation, and is expected to benefit from government support and domestic substitution.

US stock market: Short-term and long-term features of the "Trump trade".

1) The trend of US stocks is differentiated with the technology sector leading the market decline. From July 15 to 19, the seven magnificent technology giants in the US stock market experienced a significant decline, which dragged down the S&P 500 and the Nasdaq, with declines of 2.0% and 3.6% respectively, while the Dow Jones hit a historical record high driven by the pro-cyclical sector. In the observation period, in terms of style, high dividend stocks and small-cap stocks performed well, while momentum and growth factors experienced significant adjustments. In terms of strategy, multi-factor combinations outperformed GARP and style rotation strategies. In terms of industry, energy (+2.0%) and real estate (+1.3%) led the market, while the information technology sector fell by more than 5%. 2) The short-term market characteristics of the "Trump trade" are not yet clear and it may have limited trend impact on the market. The two representative incidents of the US presidential assassination were the Reagan shooting in March 1981 and the Kennedy shooting in November 1963. After the assassinations, the US stock and bond markets experienced certain fluctuations, but they basically returned to stability in the following three weeks and major asset prices did not show obvious trend markets. Referring to the historical experience, it is expected that the intensity of the "Trump trade" may be relatively limited and short-term asset prices may be more emotionally impacted. 3) From the performance of major asset classes during the Trump administration, the US stocks rebounded and the price of gold fell, while long-term US bond yields and the US dollar index rose. One year later, only US stocks continued their strong performance. Trump was elected president of the United States on November 9, 2016, and in the short term, major asset classes experienced significant volatility due to the election results that exceeded expectations. Emotional trading made US stocks strong and gold prices significantly weaker.

2) The short-term market characteristics of the "Trump trade" are not yet clear and it may have limited trend impact on the market. The two representative incidents of the US presidential assassination were the Reagan shooting in March 1981 and the Kennedy shooting in November 1963. After the assassinations, the US stock and bond markets experienced certain fluctuations, but they basically returned to stability in the following three weeks and major asset prices did not show obvious trend markets. Referring to the historical experience, it is expected that the intensity of the "Trump trade" may be relatively limited and short-term asset prices may be more emotionally impacted.

3) From the performance of major asset classes during the Trump administration, the US stocks rebounded and the price of gold fell, while long-term US bond yields and the US dollar index rose. One year later, only US stocks continued their strong performance. Trump was elected president of the United States on November 9, 2016, and in the short term, major asset classes experienced significant volatility due to the election results that exceeded expectations. Emotional trading made US stocks strong and gold prices significantly weaker.

After one year of employment, some assets did not perform as strongly as expected according to expansionary policies, specifically: U.S. stocks continued to soar due to relaxed regulations and anticipated tax cuts, combined with impressive profit growth for listed companies throughout the year; the Federal Reserve officially began raising interest rates at the end of 2016 and completed its final hike at the end of 2018, leading to a slight decrease in the yields of 10-year U.S. Treasury bonds due to expectations of economic cooling; regarding the U.S. dollar, Trump stated in the same year that "a strong dollar will kill America," making the suppression of the dollar to promote exports one of its main political platforms; amidst the backdrop of weak U.S. Treasury rates and a weak U.S. dollar, gold showed a trend of volatile growth.

4) The small cap style of U.S. stocks may benefit from Trump's fiscal stimulus policy by showing excess returns. From the end of 2016 to the middle of 2018, the small cap index of U.S. stocks was a dominant strategy compared to the large cap index. In terms of driving forces, the sentiment index of the National Federation of Independent Business (NFIB) in the United States showed that small businesses' concerns about tax burdens, government rules, and official procedures continued to decrease. At the same time, the U.S. economy also performed quite well, with the ISM manufacturing new orders index continuing to rise, providing small companies with more performance flexibility. If Trump is successfully re-elected and vigorously promotes tax cuts and exemptions, the positive effects on the macro economy are expected to be transmitted to the profits of the small cap style, and the small cap may potentially outperform the large cap.

5) Harris is the Democrats' best option at the moment. Although Harris is currently the Democratic candidate with the highest support and the only one able to use Biden's campaign funds, former President Obama, Senate Majority Leader Schumer, and others did not immediately express support. Potential candidates Whitmer and Newsom may not want to waste their chance to run in 2028 by running at the moment, and there is still some hesitation within the Democratic Party. For the current election, Biden's withdrawal may not change the power dynamics between the two parties. RCP data shows Trump with a lead of about 1.7 percentage points over Harris nationwide, and although state polls have not been released, Trump is still expected to maintain a lead in critical swing states.

Risk warning: Rapid tightening of overseas liquidity; Risk of a hard landing in the US economy; The international situation is becoming more complex.

Edited by Jeffrey