Navigating the Asset Landscape: Identifying Opportunities as Interest Rates Normalize

  The Politburo meeting on July 24 positioned domestic policy as the bottom, and the Federal Reserve interest rate meeting on November 1 confirmed the shift in overseas policy. The core factor plaguing the market is that the interest rate gap between China and the United States has reached an inflection point, and the “policy bottom” resonance between China and the United States has been formed.
  In October, the key data of “inflation + employment” in the United States continued to cool down, an inflection point in overseas liquidity appeared, and overseas policies were on a strengthening channel. Key data cooled: U.S. CPI and non-farm employment in October were lower than expected, consumer confidence and expectations are continuing to decline, maintaining the basic judgment that this round of interest rate hikes is likely to be over; market expectations are unified: Powell’s hawkish stance has not changed For the asset portfolio of “U.S. Treasury Interest Rate ↓ + U.S. Dollar Index ↓ + U.S. Stocks ↑”, the panic index continued to decline, showing that under the verification of key data, the market’s expectations that this round of interest rate hike cycles have ended have quickly unified. Overseas liquidity inflection point appears: historical experience shows that the peak of interest rate hikes will significantly improve liquidity. Recently, this expectation is increasing with the policy shift of the Federal Reserve. Looking forward to 2024, the supply and demand margins of U.S. debt are expected to become more balanced, which will help liquidity in 2024. Sexual easing, the current turning point has appeared.
  What are the patterns in the price performance of major asset classes during the period from when the Federal Reserve ended raising interest rates to when it cut interest rates for the first time? Range performance: Most global equity indexes rose, growth indexes were more elastic, long-term bond interest rates mostly declined, especially U.S. bond interest rates, which were more sensitive, while the correlation with exchange rates and commodities was relatively weak. Asset price turning point time: The equity index mostly bottoms out before and after the last interest rate hike, and the two are highly synchronized; the bond market interest rate response is more advanced than the stock market, and most of the time it peaks and falls before the last interest rate hike, while the exchange rate With commodities, the regularity is still weak. A-share factor analysis: From the last interest rate increase to the first interest rate cut, the performance factors G (forecast) and ΔG in A-shares were relatively effective, while the effectiveness of defensive factors such as high dividends/low valuations was not significant.
  The effectiveness of A-share performance factors during the high interest rate platform period in the United States provides reference for current allocation ideas, that is, paying more attention to the improvement of the profit side. Based on the new investment paradigm, how can the new vision of industry comparison under high free cash flow achieve industry guidance based on the third quarter financial report?
  First, at the end of the clearing period, focus on the improvement of demand, that is, the bottoming out of the production capacity cycle, inventory cycle and continuous improvement in revenue; secondly, during the recovery period, focus on the repair of gross profit margin, that is, continuous improvement in revenue/orders/gross profit; finally, during the expansion period, focus on the quality of “expansion” and efficiency, that is, operating capacity, profitability, and debt solvency. Improvement in demand during the clearing period: comprehensive supply shrinks to the bottom (CAPEX, inventory), FCFF rises (has the ability to expand), and demand continues to pick up. Most related varieties have experienced 2-3 years of decline and are currently losing money. The rate and chip structure are both satisfactory, and may be the first to enter the recovery period. The industry is mainly concentrated in the consumer electronics chain (passive components/panels/security/branded consumer electronics), semiconductors (digital chip design/sealing and testing), real estate sales chain (white goods/home furnishings/consumer building materials), and other bottom-line recovery varieties (advertising and marketing /Robotics/Construction Machinery).
  The recovery period is one step ahead of the liquidation period (free cash flow is not bad), some industries have achieved a reversal of difficulties (EBIT has turned to increase), and companies have begun to expand at the bottom (CAPEX has increased). It is necessary to screen for continuous improvement in revenue and improvement in orders. , industries with gross profit margin recovery, related varieties are concentrated in optional consumption (clothing/soft drinks/hotels and restaurants/tourism and scenic spots), and the leading manufacturing industry in recovery (ships/commercial vehicles).
  Industries in the expansion period: Comprehensive search for varieties with stable operating capabilities, profitability, and solvency, focusing on a few manufacturing industries: aviation equipment, inverters, lithium battery equipment, etc.
  It is further confirmed that the overseas policy bottom has appeared, which means that the last link of the A-share market bottom – the resonance of the “policy bottom” between China and the United States has been formed. The valuation gap in A-shares has basically converged. In terms of industry configuration, A-share recommendations: Sino-US policy bottom resonance, valuation restoration: non-bank finance, innovative drugs. Clues from the third quarter report: Abundant free cash flow + improved demand during the clearing period: consumer electronics and upstream (passive components/panels), decoration and building materials, semiconductors (RF/storage); the first to start active replenishment and improve gross profit: chemical fiber, white Electricity, textiles and clothing. Hong Kong stock recommendations: Sensitive to the contraction of interest rates between China and the United States: consumption (pharmaceuticals, automobiles) represented by Hang Seng Technology, Hong Kong Internet stocks; low capital expenditure and inventory, late-stage clearing products with improved income: consumer electronics chain, semiconductor recovery chain, real estate sales chain (white goods/home furnishings/consumer building materials).

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