Time: 2020-9-10 (Thursday) 19:30-20:30

Moderator: Dr. Hua Changchun (Global Chief Economist of Guotai Junan Research Institute)

Distinguished guests: Dr. Liao Minxiong (General Manager of TS Lombard (China), Senior Economist); Chen Xianshun (Chief Strategy Officer of Guotai Junan Research Institute)

The first step: Dr. Liao Minxiong shared the resuscitation of the epidemic and the discussion of some long-term problems.

Our core view is generally pessimistic. We don't think the epidemic will end soon.. In the first quarter of this year, Imperial University of Britain conducted a study on the future trend of the epidemic, believing that there would be many small peaks, each of which would be blocked and socially isolated, which would have an impact on the recovery of demand. At present, the first wave of the epidemic in the United States is not over, the second wave of the epidemic in Europe seems to be beginning, the global epidemic is not synchronized, problems in one region can have an impact on the movement of people, and there is a need to restrict the movement of people for a long time, all of which may adversely affect demand and economic recovery.

In terms of vaccines, we believe that even if vaccines are developed in some countries, they will not be widely used until at least the second half of next year, which will have a fundamental impact on the recovery of demand.

Caution and fear are the main reasons for curbing consumption.The University of Copenhagen has compared Sweden with Denmark. Sweden is freer and the government does not require home segregation, while Denmark is relatively strict in terms of controls and does a better job of home isolation. But consumption in both countries has been curbed to a considerable extent. Another example is a comparison of major states in the United States, and the results are similar. From these two examples, it can be seen that blockade and home isolation are not the main reasons for the suppression of consumer demand, but caution and fear of infection.

The recovery in the United States is now very divided.For example, the recovery of retail and automobile is better, but the recovery of service industry, such as entertainment and tourism, is not yet good. The service sector, which accounts for more than 70% of total consumption in the United States, has not yet recovered. So in the following time, consumer demand recovered very slowly. In addition, corporate investment is slow because, even with liquidity buffers, profit margins continue to be eroded in the face of insufficient demand and a widening income gap.

Policy intervention slows down the fluctuation of the credit cycle, but cannot reverse the credit cycle.The income gap of enterprises is increasing, profit margins are falling, and the government needs constant subsidies. But if the government later feels that it is not necessary to continue to bail out some unpromising enterprises, the wave of bankruptcy and default will be the next phenomenon.

At present, the good news is that the Federal Reserve continues to pursue loose monetary policy, but it cannot be said that monetary policy can completely avoid economic and market collapse.. On the financial side, financial subsidies make income rise instead of falling, but this is a race against time. The longer the time goes on, the larger the income gap will be, the financial burden will increase, and the deficit ratio will rise to wartime levels.

For the stock marketThe upside is that interest rates will be low for a long time; there are structural opportunities in the stock market that are clearer than before, such as tech giants. The disadvantageous factor is that the epidemic continues to worsen, such as the vaccine can not come out or can not be controlled in some areas, and enterprises accelerate default and bankruptcy, which will be disadvantageous to risky assets.

For the US general election, we have not judged who will win. Although Biden has a lead so far, there are still a lot of variables in the last two months.. If Trump does not win, he may have more extreme behavior, which is not necessarily good for the stock market.

For long-term problems, the market is mainly divided on inflation at present.. In the short term, there is noise in inflation, and due to the impact of the epidemic, the demand for some goods may be more than others, making prices fluctuate greatly. Demand recovery is much slower than supply-side recovery, so there is a risk of deflation in the economy. Medium-term inflation is still possible, which has something to do with the continued fiscal expansion that follows. Inflation is also related to supply-side damage, for example, there will be inflation after the war, because the war leads to casualties, material shortages and supply-side damage. Companies may face a wave of bankruptcies, increased deaths from outbreaks, and some people permanently withdraw from the labour market, and other factors are likely to damage the supply side and thus have an impact on inflation. In addition, inflation also requires the cooperation of the central bank. At present, the Fed is generally loose and its tolerance for inflation is increasing.

The second link: the communication between Dr. Liao Minxiong and Dr. Hua Changchun

Dr. Hua ChangchunWhat do you think of the momentum of the current US economic recovery? We see that the job market seems to recover quickly, retail sales have also achieved positive growth, and everything seems to be improving. What do you think brings about the improvement of economic indicators? To what extent does it rely on fiscal policy? If a new round of fiscal policy cannot be introduced, what do you think of the next US economic momentum?

Dr Liao Minxiong：The impact of the epidemic is not an ordinary periodic change, and the fear of infection has interrupted normal consumer demand.One is the physical hindrance of blockade, and the other is that fear suppresses consumption. Coupled with government and central bank intervention, there is a lot of noise in economic data, so it may take some time to see the trend. There are three main reasons for the recent improvement: first, both employment and retail sales have experienced unprecedented declines and are now rebounding reflexively. It is only natural that consumption of goods, which could not have been achieved, has rebounded sharply when some places have reopened. Retail sales (especially durable goods) have always been volatile because such goods (such as cars and home furnishings) can be delayed on a case-by-case basis. There may be two explanations for the rebound: some people may just postpone spending in the first half of the year and buy in the second half of the year, or because of the epidemic, vehicles such as cars are more popular, and some people move from the cities to the suburbs. There is an increase in demand for goods such as house decoration.

Similarly, as a result of the reopening, those who have left some of the unemployed will soon return to work.At present, as long as the enterprise has enough protective measures, employees can return to their posts and get back to work very quickly.

The financial help is indeed great. The income level after government subsidy even exceeds the previous wage level, so that personal income still keeps growing.. This has led to serious differences between personal income and wages. The tax cuts of Ford and Reagan in the 1970s and 1980s had a similar effect, but not so exaggerated.

Therefore, the important problem should be that there is still a gap of 1 trillion yuan in service consumption, which accounts for 70% of the total consumption, compared with that before the epidemic. In the short term, this gap is not caused by income, but by the epidemic itself.. But then the impact of income may be greater (including the consumption of goods), financial subsidies to personal income and enterprises may stop, financial subsidies are a race against time, the longer the time, the larger the gap, and the need for subsidies will also be controversial. for example, enterprises themselves are unprofitable, which is not necessary to save, which may also lead to a wave of bankruptcy and an increase in unemployment. So the final income still needs to be supported by employee wages and corporate profits, rather than government subsidies.

On the financial front, the two parties have not yet reached a final conclusion, and we think there is still the possibility of renegotiation within this month.It is only a matter of time before the two parties are deadlocked, and the deterioration of the economy and the epidemic can finally bring the two parties together. The downside is that the government is highly leveraged, with a deficit of $3 trillion, public sector debt exceeds next year's GDP, and the subsequent addition of new debt as a result of the new stimulus package will reach its highest level since the second world war. Finance improved after World War II because of post-war recovery, but now the situation is different from that after World War II in two ways: first, welfare spending cannot be reduced, which is part of the rigid spending that gradually developed after World War II; second, there is no post-war reconstruction. How to achieve fiscal balance after that is a big problem, but this is a long-term problem later, not the main problem facing now.

Dr Hua Changchun:Now there have been voices in the market that the epidemic is different from the financial crisis, for example, after the vaccine comes out, the economy will recover soon. Do you agree? Do you think there is a high probability that the Fed will withdraw from the crisis monetary policy early?

Dr Liao Minxiong：This epidemic is unprecedented, unlike the financial crisis and previous outbreaks (such as Spanish flu), so this crisis has no history to compare.. Some industries, at least in the short term, will recover quickly, such as retail, which did not have online stores during the Spanish flu and can now shop online, at the expense of offline retailing. There are some industries that have not been greatly affected, such as those that can work from home, such as ours. There are even better prospects for some industries, such as technology companies. Some industries are greatly affected by social isolation and other factors, such as services, leisure and entertainment, but these industries absorb about 10% of jobs, and most of them are low-income people. The service industry is also the leading industry in the US economy, accounting for 69% of total consumption, so the epidemic is not so easy to recover, and there is little chance that the Fed will withdraw from its current policy. The Fed's assessment of the economy is also pessimistic. The Fed's new framework is to worry about deflation and wants the government to continue to loosen its finances. From the perspective of monetary policy, there is more certainty this year and next year, and it will remain loose.

Dr. Hua ChangchunIn the US election, the polls still seem to favor Biden, but the gap between the two sides has narrowed. Do you think Trump can be re-elected? If different parties come to power, what will happen to the US economy and China policy?

Dr Liu Man-hung:Now the polls and odds are changing all the time, but the data seen at this point in time doesn't mean it will be the same in the next two months.. At present, Biden polls and odds are in the lead. Now that the ideological divide in the United States is at an all-time high, traditional Republican and Democratic states will be more supportive of their own parties, and swing states are more critical. We apply the error between 16 years of polls and actual voting results to the current poll data and find that Biden is now ahead in swing states with the exception of North Carolina and Wisconsin, which is not good for Trump.

Historically, the confidence index of the election year has improved, and the candidates of the incumbent president's party are more likely to win.There are only three exceptions in history. Nixon in 1968, Gore in 2000 and Obama in 2008. Nixon called for an end to years of unrest, and now Trump is following suit, but the unrest took only a few months. There was a vote dispute during Al Gore's time. Obama experienced the global financial crisis, but he is the most popular president in American history. This Trump has nothing to do with it. He is the most unpopular general manager. Now the confidence index is deteriorating, so Trump is handing the epidemic to China. But of course, it remains to be seen whether Trump will be re-elected.

Trump's attitude towards China when he came to power is clear that China and the US are likely to enter the second phase of trade negotiations, which will involve the most difficult technical part and continue the previous US policy towards China.

Biden wants to support green infrastructure with taxes on the rich and businesses, mainly to cater to progressives and trade unions in the party.But this is problematic. The economy will still be weak in 2021 and it will be difficult to tax. Although infrastructure spending is good for the economy, it may eventually have to rely on the fiscal deficit, so it may be relatively late to launch. Current opinion polls show that the Democratic Party is also in the lead in the Senate election, which may help. But even if the Democrats win the Senate, tax increases will not happen immediately in 2021. Biden's ambiguous attitude towards China shows that the camp behind him still supports confrontation, and the only ones who want to reverse the trade war are some downstream private companies. Coupled with the traditional ideological confrontation, it should still be unfriendly.

The third link: the chief communication between Dr. Liao Minxiong and Chen Xianshun

Chief Chen XianshunIntuitively, what do you think of the market that US stocks are worried about their valuation bubble?

Dr Liao Minxiong：Now the valuations of not only Fang but also ex-Fang of US stocks are very high, which is very high in history.Many people use low interest rates to explain high valuations, which can also be explained. When we compare with corporate bonds and deduce from the decline in interest rates, they are also risky assets. this round of interest rate cuts will only increase stock valuations by two to three times at most, but the current valuations are much higher than that. Not to mention that historically, stock market valuations during recessions are generally no more than 20 times. In addition, the risk premium is still historically low in terms of real GDP and risk-free rates.

There is also a historical reference for the rapid growth of liquidity and currency.For example, the stock of broad money has doubled since the collapse of the Japanese bubble in 1989, but the Nikkei index is still 40% short of its high in December 1989.

With regard to the reasons for the attractiveness of the stock market relative to bonds, it is very problematic to compare the yield obtained from the reciprocal of the price-to-earnings ratio, and it should be compared with the dividend yield which is closer to the cash yield.However, it is also a question whether to compare with risk-free debt or credit debt. We think that we should compare the dividend yield with the yield on credit bonds, and the result is that stocks are not very attractive. Another reason to be bullish on stocks is that the tech giants are more certain about the future and are the winners of the epidemic, so the money is concentrated in this part, which may be more tenable.

For bubbles, we think that now is the process of bubble formation.If the reason for a high return on stocks is to hold up, the price must go up, that is, the bubble has to inflate. Generally high valuations mean that stock returns will not be high in the future. But there are exceptions in history, such as from 1997 to 1999, when Nasdaq valuations were already high, but prices continued to rise, with stock returns exceeding 20% for several years in a row. Of course, this is a bubble in the process of expansion. From the current policy environment and structural factors, it is possible to continue to support the continued expansion of the bubble, and the recent fall in the stock market may be just a correction.

Chief Chen XianshunLiquidity is the core factor of this US stock market reversal. What else can we do after the "average inflation target"? In other words, can we think that the possibility of US liquidity exceeding expectations is basically zero?

Dr Liao Minxiong：There have been calls for monetary policy reform before, such as the "symmetrical inflation target" mentioned by Ms Yellen before.In the final analysis, it is because it is problematic to keep the inflation target at 2%, and the balanced inflation rate should be lower than that level. The Fed's next stimulus is mainly QE. The Fed is still buying debt, but the pace of expansion is slowing, but the excess reserves on the Fed's balance sheet remain high as long as it does not shrink. But if there is another big (though unlikely) turmoil in the market next year or if there is a lot of economic pressure, QE and table expansion are likely to accelerate. Due to his pessimistic attitude towards the economic outlookAlthough the Fed has not yet decided on its bond-buying plan for next year, the Fed's stimulus will continue. We don't think that's going to happen to the expectation that the Fed will buy stocks directly.

Chief Chen XianshunDo you think the current US stocks are a better opportunity to increase their positions whenever they fall from the investment dimension of 2-3 years?

Dr Liao Minxiong：We think this is the process of bubble formation.. There were three 17% adjustments in history from 1997 to 1998, but by 2000 it was still 1.5 times higher than that in 1998. We don't see any value for current stocks, but from the logic of the bubble, we may still get excess returns, but we still need caution and corresponding risk management.

The fourth link: the chief communication between Dr. Hua Changchun and Chen Xianshun

Dr Hua Changchun:After so much discussion, let's go back to A-share. Under the current situation, what do you think of A-share market?

Chief Chen Xianshun:The view since July is the concussion pattern, which is located in 3200-3500, and the band of possible concussion pattern has narrowed since September. We believe that the upward force of the stock market lies in earnings repair, and the downward force lies in Sino-US relations and liquidity.Earnings repair is a cyclical problem, so it is also a matter of Sino-US relations and liquidity in the short term. By contrast, liquidity is a more central issue, but not the factor with the biggest marginal change. On the one hand, there are market expectations of tighter liquidity, and on the other hand, there is no basis for a sharp shift. Therefore, on the whole, liquidity is important, but it has little impact on the market in the short term. The marginal changes in Sino-US relations, including Huawei sanctions on September 15 and the current US election, are all factors in Sino-US relations fluctuations. To sum up, we think that the short-term pressure moves down to 3100-3200 points. However, if we look at the end of this year, we think that the shock pattern of 3200-3500 will remain unchanged. Our suggestion is to "shake the cycle and add technology to every fall". We believe that the cyclical sector is looking for changes in numerators and denominators. At present, everyone is dissatisfied with the profit end, showing that consumption and growth have exceeded expectations, but consumption and growth have fallen since mid-August. so the key is to go back to the denominator. If the credit side and the profit side exceed expectations will be good for the cycle, if liquidity exceeds expectations will be conducive to growth caused by asset price appreciation. We are in a delicate state, at the marginal inflection point of liquidity changes and credit contraction, but we believe that future credit-side repairs will be more certain than liquidity easing expectations, which means that cycles will be more certain than consumption. However, Phoenix Butterfly still needs to buy technology, because the decline in risk appetite and changes in Sino-US relations will have a direct impact on the technology sector, but we believe that Sino-US policy hedging expectations are strong enough, which means that technology stocks are now in the process of bottoming out. Our current technology market is different from that of technology stocks in 13 to 15 years, because it is now supported by profits.From the point of view of the order of profit repair, we recommend new energy companies, consumer electronics, cloud computing and semiconductors. To sum up, there is pressure in the short term, moving down to 3100-3200, and it is still 3200-3500 for the whole year. What is more important is the structure, "shock cycle, plus technology every fall."