In the past week from August 10 to August 16, 2020, the more prominent change in overseas markets was the rapid rise in US debt interest rates. against this background, gold plummeted and the value style of US stocks continued to take the lead. the main factors are the continued decline in the epidemic in the United States and the overall improvement in economic data.

On the one hand, as the "future tense" that affects asset prices, the logical chain of the epidemic peaking and falling is that the resumption of work is expected to resume gradually, economic data will then be repaired, so interest rates on US debt, market style, and even President Trump's approval rating are all highly related to its trend. On the other hand, the recent disclosure of the overall improvement in July data does not seem to have been too much of a drag on the resumption of work caused by the recurrence of the epidemic.

Overall, in the neutral context of monetary policy, the peak of the epidemic is a positive change in fundamentals and the margin of risky assets, which will provide new support if fiscal stimulus can be launched.

In terms of market capitalization, the current share of leading FAAMNG in the overall market is already as high as 23%, far exceeding the high point of 16% during the 2000 tech bubble. So does the market capitalization ratio that is much higher than during the tech bubble mean significant risk? After comparing the current leading stock FAAMNG with the fundamental situation of the valuation and income of the leading stock during the technology bubble in 2000, it is found that this conclusion is not completely true, and the market capitalization ratio alone can not reflect the whole picture.

Market focus: us bond interest rates are rising rapidly, gold is plummeting, and value style is leading.

One of the more prominent changes in overseas markets over the past week has been the rapid rise in US bond interest rates, with US Treasuries jumping to more than 0.7 per cent in 10 years, especially real interest rates. Against this backdrop, gold fell as much as 6 per cent on Tuesday. At the same time, the value style in the US stock market continues to lead the growth sector. While there are eventual catalysts such as Russian vaccine progress, these asset and style changes are driven by the continued decline in the epidemic in the United States and the continued improvement in economic data as a whole.

On the one hand, the epidemic in the United States as a whole continues to decline. Over the past week, the average number of new diagnoses has dropped to 52000, and the death toll, test positive rate and R0 have declined overall. The number of reversing states was flat at 10, while the number of suspended states increased to 14 from 13 last week. Spain and France rose particularly in Europe, as did California and Florida. As the "future tense" that affects asset prices, we believe that the logical chain of the peak of the epidemic is that the resumption of work is expected to be gradually resumed, economic data and then repair, so US debt interest rates, market style, and even President Trump's approval rating are all highly related to its trend.

On the other hand, the recent disclosure of the overall improvement in July data does not seem to have been too much of a drag on the resumption of work caused by the recurrence of the epidemic. For example, the number of initial applications last week fell below 1 million for the first time since March; CPI continued to pick up in July, with PPI turning positive and reaching a new high in October 2018; and retail consumption returned to pre-epidemic levels in July, which was lower than expected but still better than expected after excluding cars. In addition, the second-quarter results of US stocks have been basically disclosed, and 82% of the companies are better than expected. The overall market consensus has revised up EPS growth for the whole year, and the earnings adjustment mood has also improved significantly.

Therefore, on the whole, as we analyzed in the August monthly report "stable Market in August", under the neutral background of monetary policy remaining unchanged, the peak of the epidemic is a positive change in fundamentals and the margin of risky assets. if the fiscal stimulus can be launched, it will provide new support (it is still possible to break the deadlock under the pressure of an election year), and the uncertainty mainly comes from the general election and the variables of Sino-US relations. The rise of gold and growth stocks reflects more of the financial nature of easing and the dollar, so it is not difficult to understand that gold and growth stocks are falling together.

► asset performance: bulk > stocks > bonds; gold plummeted, interest rates rose rapidly, and the value style was leading.Over the past week, natural gas, Russia, European and Japanese stock markets, soybeans and copper have led in dollar terms, while gold, VIX bulls, REITs and US Treasuries have lagged behind. Driven by the decline in the epidemic and improved data, US bond interest rates rose rapidly by 15bp, especially real interest rates, which led to a sharp fall in gold. In style, US stocks continue to take the lead in value sectors, such as automobiles, transportation, capital goods and so on.

► emotional position: gold ended overbought, Put/call ratio fell to a new low; euro bulls hit new highs.The Put/call ratio of US stocks fell to its lowest level in 17 years last week, and RSI fell to a reasonable level after gold tumbled. Positions, gold bulls reduced, euro bulls hit a new high.

► capital flows: funds returned to U. S. stocks, interest rate debt outflow slowed.Us stocks and developed Europe turned into inflows, while Japan continued to flow in and emerging markets outflowed for the fifth week in a row. Interest-rate debt continued to flow out this week but narrowed slightly.

► fundamentals and policies: inflation continued to pick up in July and retail consumption returned to pre-epidemic levels.CPI in the United States rebounded faster than expected in July, with PPI reaching its highest level since October 2018. Retail consumption returned to pre-epidemic levels, falling below 1 million for the first time since March. In terms of earnings, the EPS of the S & P 500 index was revised up to-19.5% year-on-year in 2020 and 26.5% in 2021.

► market valuation: the valuation level remains high.The dynamic valuation of US stocks remained at 22.4 times in December; the current static PE of 26.3 times is still lower than growth and interest rate implied levels (27.1 times).

FAAMNG vs. Technology Bubble: comparison of Market capitalization, profitability and valuation

Since the beginning of this year, especially after the epidemic, leading US stocks represented by FAAMNG have quickly repaired their lost ground and reached new highs. Instead of narrowing, the gap between US stocks and other sectors has further widened to multi-year highs; by contrast, other sectors of US stocks, such as industries heavily affected by the epidemic, and financial cycle sectors have continued to lag behind the market.

In terms of market capitalization, the current share of leading FAAMNG in the overall market is already as high as 23%, far exceeding the high point of 16% during the 2000 tech bubble. This situation has aroused the attention and discussion of many investors. In this regard, we will compare the market capitalization, fundamentals (income, profitability, operating cash flow) and valuation with the leading stocks during the technology bubble for investors' reference.

The reasons for the recent outperformance of ► 's leading stocks and the continuous expansion of its advantages are less affected by the epidemic and loose liquidity. After the epidemic, the reason why the US stock leader FAAMNG repaired quickly and reached a new high is mainly due to the fact that on the one hand, it is less affected by the direct impact of the epidemic, and even partly benefits from the increase in online demand caused by the blockade of the epidemic. On the other hand, the Fed's massive liquidity release and falling interest rates have also given a direct boost to the outperformance of growth stocks.

As we analyzed in "re-talk about the recent changes in the style of US stocks", the outperformance of growth leaders relative to the market depends on the liquidity environment. Using the size of the balance sheets of the world's major central banks as a measure of liquidity, we find that since the 2008 financial crisis, the valuation premium of leading FAAMNG over the S & P 500 is highly correlated with the size of the balance sheet. When the balance sheet expands sharply, the valuation premium of growth stocks to the overall market tends to rise sharply, similar to this round after the epidemic; conversely, when the pace of balance sheet expansion slows or even falls, the valuation premium will converge.

►, does it mean significant risk that it is much higher than the market capitalization ratio during the tech bubble?Although the current proportion of leading FAAMNG in the overall market is as high as 23%, far exceeding the high point of 16% during the 2000 technology bubble, it is found that this conclusion is not entirely true after comparing the current leading stock FAAMNG with the valuation and income of leading stocks during the technology bubble in 2000. The market capitalization ratio alone cannot reflect the whole picture. Specifically,

i. Current valuations are well below the tech bubble. Even taking into account the huge impact of the epidemic on most corporate profits similar to one-off gains and losses, the current dynamic valuations of FAAMNG and the market as a whole are significantly lower than they were during the tech bubble in 2000. With the gradual repair of profits after returning to work, we believe that the "abnormal value" of the current valuation is also expected to be initially "digested". There is no denying that the large-scale liquidity injection taken by the monetary authorities in response to the impact of the epidemic has indeed boosted valuations, but it is far from the level of the tech bubble in 2000.

ii. The concentration of fundamentals is much higher than at that time. Consistent with the current high share of market capitalization, the current share of income, profit and operating cash flow of the leading stock FAAMNG is as high as 9 per cent, 20 per cent and 12 per cent, respectively, much higher than that of leading stocks during the technology bubble; at the same time, the average income growth rate of 20.3 per cent since 2006 is also significantly higher than that of 7 per cent at that time. In addition, the two are opposite in the direction of the trend. Before the technology bubble, the proportion of leading stock fundamentals has begun to decline gradually. If you simply compare the share of market capitalization and income, the current market capitalization ratio of 23 per cent is about 2.6 times that of 9 per cent of income, compared with four times during the tech bubble, indicating that the relatively higher market capitalization share matches the share of income. it's not completely unsupported.

iii. A higher proportion of market capitalization may reflect more head concentration effect. Although the current US stock market leaders do have problems such as valuation and high positions, the higher proportion of market capitalization compared with the technology bubble in 2000 may also be related to the increasing concentration of the industry, especially the leading ones. Therefore, the simple comparison of market capitalization ratio does not really reflect the whole picture of the market, especially when there is still fundamental support.

For growth stocks, although their short-term outperformance over the market depends on the liquidity environment, in terms of absolute returns, the source of return mainly comes from earnings growth rather than valuation. The valuation of FAAMNG has expanded by about 3.0 times since the beginning of 2009, while EPS has increased by 5.9 times, which is much higher than that of the S & P 500 as a whole.

To sum up, in the short term, with the increase in the expectation of resumption of work and economic repair under the background of the peak of the epidemic, especially if the fiscal stimulus is launched, it may promote the relative outperformance of the value sector in the market style in the short term, similar to the situation in the past two weeks and the end of May, but the medium-and long-term prospects of growth stocks, especially leading stocks, still depend more on their own fundamentals. In particular, income growth and gross profit margin are two key indicators that determine the valuation premium of growth stocks.