Zhike | Will the Expected Landing Confirm an A-share Bull Market?
Author | Huang Yida
Editor | Zheng Huaizhou Ding Mao
Last week (November 4th - 8th), the A-share market rose strongly. The Shanghai Composite Index increased by 5.51% within the week and closed at 3452 points on November 8th; the Wind All-A Index had a greater increase, soaring by 7.11% this week.
In terms of sectors, all 31 first-level industries in Shenwan rose last week. Among them, the computer, military industry, non-bank finance, and business retail sectors led the gains, with the weekly increase of these four sectors exceeding 10%. The banking, public utilities, coal, and home appliance sectors had a lower increase last week.
From the perspective of style, the A-share technology sector was obviously dominant last week, and the increase of large-cap stocks was relatively less than that of small-cap stocks. Reflecting on the performance of style indices and broad-based indices, the Beijing Stock Exchange 50, Sci-tech Innovation 100, Sci-tech Innovation 200, Innovation Value, ChiNext Index, ChiNext 50, and Sci-tech Innovation 50 led the gains; the MSCI China A50 Connect, CSI Dividend, and Dividend Index had a lower increase.
Chart: Trends of the Shanghai Composite Index and the Hang Seng Index; Source: Wind, 36Kr
The Hong Kong stock market fluctuated sideways last week. The Hang Seng Index increased by 1.08% within the week, and the Hang Seng TECH Index rose by 4.11% last week. In terms of sectors, among the 12 Hang Seng industry indices, 9 industry sectors rose last week. The consumer staples, healthcare, consumer discretionary, and finance sectors led the gains last week, while the energy, telecommunications, and public utilities sectors declined last week.
In terms of overseas major assets, most of the major stock indices in North America, Japan, and South Korea rose last week, while European stock indices were significantly differentiated, with Eastern Europe rising and Western Europe falling. In terms of commodities, crude oil rose slightly; among basic metals, aluminum rose sharply, while steel and copper declined; most precious metals declined; and agricultural products mainly rose. The US Dollar Index fluctuated and rose last week.
01 Expectations for Major Asset Classes under Trump Trade 2.0
The most influential macro event overseas last week was Trump's victory. With the continuation of Trump Trade 2.0, it will have a significant impact on global major asset prices.
Let's first look at US Treasuries. In the previous interest rate hike cycle, as the benchmark interest rate rose, the US Treasury interest rate was also pushed up. Then, if only considering the impact of the economic cycle, from the market's trading of interest rate cut expectations at the beginning of this year to the interest rate cut landing in September this year and the subsequent continuous interest rate cuts, the expected trend of the US Treasury interest rate is that it will undergo mean reversion as the benchmark interest rate declines.
From the actual situation, in the early stage, driven by the interest rate cut trading, it followed the above logic. From April to mid-September this year, the 10-year US Treasury interest rate declined by more than 100 bps. However, after the interest rate cut landed, especially when the inflation data was already very close to the policy target, the US Treasury interest rate started to rise significantly from mid-September. The 10-year US Treasury interest rate rose by nearly 70 bps from the阶段性 low on September 16 to November 8, obviously affected by Trump Trade 2.0.
Picture: Trend of the 10-year US Treasury interest rate; Source: Wind, 36Kr
The recent trend of the US dollar exchange rate is also the result of Trump Trade 2.0. Previously, affected by the interest rate cut trading, the US dollar was generally weak this year. However, after the interest rate cut landed in September, with the intervention of Trump Trade 2.0, the US dollar strengthened and led to the symmetrical depreciation of non-US currencies. The performance of major asset classes such as US Treasury interest rates, US dollar exchange rates, and US stocks since mid-September this year indicates to a certain extent that the capital market has already bet on Trump's victory.
Chart: Trend of the US Dollar Index in recent years; Source: Wind, 36Kr
Speaking of Trump Trade 2.0, essentially, it is the pricing in of Trump's policy orientation in major asset prices, and the main characteristics of Trump's policy orientation can be simply summarized as small yard and high wall, fiscal easing, regulatory easing, tax cuts, manufacturing reshoring, and emphasis on traditional energy, etc.
Based on the above policy orientation for further deduction, after Trump takes office, under the guidance of policies such as broad fiscal policy, regulatory easing, tax cuts, and manufacturing reshoring, it will generate a large number of new demands from the construction of the real economy. At the same time, it will also intensify the complexity of global trade, leading to an increase in the cost of exports to the United States, and the resonance between the increase in import costs and the explosion of total demand will jointly exacerbate the risk of re-inflation in the United States.
It has to be said that the impact of Trump's victory on future monetary policy is complex. In the Trump 1.0 era, there was a relatively high degree of coordination between the Federal Reserve's monetary policy and fiscal policy; after entering the 2.0 era, it coincides with the interest rate cut cycle, and loose monetary policy and loose fiscal policy will once again cooperate with each other. However, the dual-objective system of the Federal Reserve's monetary policy has not changed, and the risk of re-inflation will still cause certain disturbances to the future interest rate cut rhythm, but this is a later story.
Therefore, based on the above policy logic, the expectations for major asset classes under Trump Trade 2.0 are roughly a pattern of strong US stocks, strong US dollars, strong crude oil, strong basic metals, weak US Treasuries, and weak precious metals, which is obviously favorable for risky assets, especially the technology sector, which is expected to have a better market outlook.
Moreover, according to the historical experience of Trump Trade 1.0, Trump Trade will significantly amplify the impact of the emotional aspect, leading to unexpected fluctuations in asset prices. It is worth noting that this round of Trump Trade 2.0 may not only be an expected game for his victory, but the long-term nature of the policy itself also determines the sustainability of the major asset market to a certain extent.
02 The 12 Trillion Debt Resolution Plan Opens New Investment Clues
The most significant macro event in China last week was the announcement of the local debt resolution plan with a total amount of 12 trillion yuan. Specifically, it is a three-pronged approach:
1. Arrange a 6 trillion yuan debt limit to replace the local government's existing implicit debts;
2. Starting from 2024, 800 billion yuan will be arranged from the new local government special bonds for debt resolution every year for five consecutive years, and a total of 4 trillion yuan of implicit debts can be replaced accumulatively;
3. The 2 trillion yuan of implicit debts for shantytown renovation due in 2029 and beyond will still be repaid according to the original contract.
According to the data from the Ministry of Finance, the local governments need to digest 14.3 trillion yuan of implicit debts by 2028. After the 12 trillion yuan debt resolution plan, the local debt resolution pressure has been significantly reduced, and the total debt resolution amount has dropped to 2.3 trillion yuan, with an average annual debt resolution amount of less than 500 billion yuan. With the significant reduction of local debt resolution pressure, the benefited sectors mainly include the following three directions:
1. The significant reduction of debt resolution pressure will help improve the asset quality of local state-owned enterprises, and local state-owned enterprises are expected to increase investment in the future. The prosperity of the construction of related industrial parks will significantly rebound, which is favorable for industries such as cement, nonferrous metals, and mechanical equipment;
2. The balance sheets of some industries characterized by垫付 construction funds will be repaired, especially the cash flow and ROE will be significantly improved, typical industries such as construction and environmental protection;
3. Expanding special bonds for land reserves will help repair the cash flow of some real estate enterprises, which is favorable for the real estate industry.
From the perspective of expectation management, the 12 trillion yuan debt resolution plan announces that next year's fiscal policy will still continue the proactive policy orientation. The specific layout includes issuing special treasury bonds, continuing to expand the uses of special bonds, and increasing the policy intensity of equipment and consumer goods trade-in. The good expectations of loose fiscal policy and loose monetary policy will also be reflected in the stock market. Based on the current package of stimulus policies for the secondary market, the realization of the bull market expectation of the A-share market is gradually approaching.
*Disclaimer:
The content of this article only represents the author's views.
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