Great global stagflation

The world may enter the era of “Great Stagflation”, which is the macroeconomic dilemma that the global economy once again fell into after the 1970s.

  The European Central Bank finally couldn’t hold back and joined the army of raising interest rates.
  On July 21, the European Central Bank raised its benchmark interest rate by 50 basis points, exceeding market expectations for a 25 basis point increase. .
  The high inflation data around the world has gradually made central banks lose patience and accelerated the pace of tightening. The Fed has already raised interest rates by 225bp in 2022. On July 13, the Bank of Canada raised interest rates by 100bp beyond expectations, with a cumulative increase of 225bp in the first half of the year; the Bank of England also raised interest rates by 100bp in the first half of the year.
  Data released by the U.S. Department of Labor showed that the U.S. CPI rose 9.1% year-on-year in June, exceeding expectations again and hitting a 40-year high. At present, the inflation level of major developed countries is above 6%, while the prices of some emerging market countries are rising faster. For example, Brazil’s CPI has risen by more than 11%, Russia’s inflation has reached 17%, and the inflation levels of Turkey and Argentina are different. As high as 79% and 64%.
  While central banks are busy, the market is not optimistic about their ability to solve the current predicament. On the one hand, inflation is like a wild horse that has run away from the control of central banks; on the other hand, in Europe and the United States, which are accustomed to the environment of “flooding” and low interest rates, the economy may not be able to withstand the pressure of sharp interest rate hikes.” The risk of a “hard landing” has increased substantially.
  In the latest “World Economic Outlook Report” released by the IMF, the global economic growth in 2022 and 2023 is expected to be 3.2% and 2.9%, respectively, down 0.4 and 0.7 percentage points from the forecast in April; The economic growth in 2023 will be 2.3% and 1.0%, respectively, which is a sharp reduction of 1.4 and 1.3 percentage points from the forecast in April; the economic growth of the euro area is expected to be 2.6% and 1.2% in 2022 and 2023, respectively, compared with the forecast in April. The forecasts were lowered by 0.2 and 1.1 percentage points, respectively.
  The world may enter the era of “Great Stagflation”, which is the macroeconomic dilemma the global economy has once again fallen into after the 1970s. The global market is already undergoing “stagflation trading”, US stocks have entered a bear market channel, long-term US bond interest rates have fallen rapidly, commodities have ebbed, the US dollar has appreciated sharply, and the euro has entered a parity range.
  What impact will this have on the Chinese economy? In terms of stagnation, the slowdown of the global economy in the future will put pressure on China’s exports; in terms of inflation, imported inflationary pressures will increase, and if it resonates with domestic pork, it is easy to form a lasting impact; In terms of capital flow, the global risk appetite will decline, and capital will flow out of emerging market countries, creating a certain depreciation pressure on the RMB, and the A-share market may be disturbed by the “pumping” of foreign capital. Globalization or populism is on the rise, and the international economic and political landscape is more complicated.
  Against the background of the dislocation of the economic and policy cycles between China and the United States and the global “great stagflation”, China’s economy must focus on itself, continue to maintain steady growth, and consolidate the achievements of economic stabilization and recovery, so as to better cope with the complex and complex global economy. Changed situation, the A-share independent market since May is also expected to continue.
High global inflation

  The trigger for the current “Great Stagflation” pattern of the global economy is rising inflation.
  As early as the mid-term of the global economic recovery after the epidemic, global inflation began to show signs. In April 2021, the year-on-year increase in the US CPI climbed to 4.2%, but it did not arouse the vigilance of the Federal Reserve and central banks around the world, which they attributed to temporary supply reasons.
  Due to the different anti-epidemic policies of different countries, the intensity of the policies implemented to stimulate the economy is also different, resulting in different rhythms of economic recovery and inflation in various countries, which greatly increases the difficulty of predicting inflation in the early stage. For example, in the first half of 2021, inflation in the euro area will remain below 2%, and the UK CPI will remain below 1% until April 2021.
  People are easily immersed in the inertia of their own past, and they will become slow to sudden changes and easily take it lightly. In the past few decades, the western developed economies have hardly been attacked by inflation. Europe and the United States have long been accustomed to low inflation and low interest rates, and many people no longer believe that inflation will still occur in Europe and the United States.
  While European and American central banks are still arguing about the “inflation temporary theory”, inflation in various countries is rising at a rocket-like speed. Inflation in the United States exceeded 5% in May 2021, reached 7% by the end of 2021, rose to 8% after March 2022, and now rises to 9.1%. Inflation in the euro area topped 3% in August 2021, reached 5% by the end of 2021, and has now climbed to 8.6%. Inflation has soared even faster in the UK, rising from 2% to 9.4% in just one year.
  The IMF’s latest forecast shows that inflation in advanced economies will reach 6.6% in 2022, and emerging markets and developing countries will reach 9.5%, up 0.9 and 0.8 percentage points from their April forecasts, respectively.
  The freezing three feet is not a day’s cold, and global inflation is getting higher and higher under the resonance of multiple factors of supply and demand, and there is still no sign of stopping.
  The tight global supply caused by the decline in production capacity is the main driver of this round of high global inflation. Cinda Securities believes that the direct reason for the decline in global production capacity is the epidemic, and the underlying logic lies in the reduction of production capacity of industrial enterprises under the background of “carbon neutrality”, especially in the energy industry, where investment in production capacity has declined in the past decade, and new production capacity has been limited, Weak supply. In addition, geopolitical crises such as the Russia-Ukraine conflict continue to ferment. Major economies such as the United States, Canada, and the European Union have closed their airspace with Russia one after another. The United Kingdom and the European Union have successively banned Russian ships from docking at their ports, and a series of bans and embargoes Sanctions have exacerbated the fragility of global supply chains. In recent years, the rise of global trade protectionism has hindered international economic and trade cooperation and accelerated the exposure of structural problems in the global supply chain.
  Any inflation is ultimately a monetary phenomenon, too much money chasing fewer goods. After the outbreak of the epidemic in 2020, the central banks of the world’s major economies have released water. The size of the Fed’s balance sheet is now as high as $8.8 trillion, an increase of about $4.7 trillion from pre-pandemic levels, far exceeding the size of the Fed’s first quantitative easing policy in 2008. Not only that, but advanced economies have also introduced massive financial subsidies. The growth rate of M2 in the United States once climbed to an ultra-high level of 27% in 2021, and the currency is over-issued like a mountain.
  The experience of stagflation in the 1970s taught us that although a necessary condition for stagflation was a negative supply shock, the missteps of monetary policy also contributed to the high inflation at that time. The Fed’s monetary policy was too accommodative in the face of inflation and too slow to respond, eventually leading to runaway inflation expectations.

  It can be seen from the high CPI in the United States that inflation has exceeded the previous expectations of the Federal Reserve and the market. It is the result of the resonance of multiple factors such as food, energy, housing, travel and wages. There are both temporary and persistent causes; both supply-side shocks and demand-driven outcomes.
  CITIC Securities pointed out that, first, due to extreme weather and transportation bottlenecks, the pulling effect of food prices on the US CPI will gradually increase from the end of 2021. Second, under the influence of the rapid rise in oil and natural gas prices, the contribution of energy items to the US CPI has gradually increased since March 2021. Under the effect of the Ukraine crisis significantly raising energy prices, energy items are still the main force driving the rise of US CPI . Third, Shelters, which account for more than one-third of the U.S. CPI, continue to contribute a large boost to the rising rents driven by rising housing prices. Fourth, the increase in used car prices has been an important factor driving up inflation in the United States. In addition, the prices of new cars and air tickets related to travel have increased significantly. Fifth, since the outbreak of the epidemic, the US job market has always been in a state of insufficiency, and wage growth has continued to maintain rapid growth, which also brings the risk of a wage-price spiral to US inflation.
ECB’s belated rate hike

  In the face of high global inflation, the Federal Reserve raised interest rates for the first time in March, sounding the clarion call for a war on inflation. The ECB, after being patient for several months, also lost patience and joined the army of raising interest rates. On July 21, the European Central Bank raised its benchmark interest rate by 50 basis points, marking the official exit from the era of negative interest rates. There are two unusual features of the ECB’s behavior.
Figure 1: Global inflation continues to climb

  An unusual feature is that the inflation situation in Europe is relatively severe among developed economies, but the ECB’s actions are very lagging behind, which is very inconsistent with the ECB’s tradition.
  The European Central Bank has traditionally inherited the mantle of the German central bank, and has implemented a single inflation target system, which has always been less tolerant of inflation than developed economies such as the United States. In the 1970s, the Bundesbank did not have a great stagflation similar to that in the United States due to its proper restraint on monetary policy.
  When the European debt crisis in 2011 was still difficult and the global economic recovery was still uncertain, the European Central Bank decided to raise interest rates because the European inflation indicator continued to exceed 2%. In hindsight, the ECB’s rate hike at the time proved to be a mistake. The European debt crisis has been exacerbated by the interest rate hike environment, which has further affected the “core countries” of Europe. After just a few months of raising rates, they had to cut rates again.
  Perhaps it was the missteps of 2011 that made this time the ECB too cautious, dull, and possibly even reputational. Historical experience has not become a booster for success, but a stumbling block.
  Another unusual feature is that the ECB has abandoned “forward guidance” and no longer gives expectations for the future path of interest rate hikes.
  At the June meeting, the ECB communicated to the market a rate hike path of 25 basis points in July and possibly 50 basis points in September. But the ECB’s actions in July went beyond the “forward guidance” it had previously given.
  Shenwan Hongyuan Securities believes that a 50 basis point interest rate hike by the European Central Bank means that it has exhausted its patience with overseas supply-side uncertainty and declared war on high inflation. The broad pass-through of inflation and the continued weakness of the euro against the dollar were the reasons for the 50bps-beating rate hike.
  European Central Bank President Christine Lagarde said at a press conference that global energy prices will remain high in the near future. At the same time, inflationary pressures from food inflation and supply chain bottlenecks are also on the rise. In addition, the depreciation of the euro has also led to increased inflationary pressures.
  Regarding future policy, Lagarde noted that the next interest rate decision will lead to “further normalisation of interest rates”. The previous guidance on the September interest rate decision no longer applies, the ECB will abandon its forward guidance, and the future monetary policy path will be decided on a “data-dependent” month-by-month basis.
  The so-called “forward guidance” is a modern monetary policy tool used by central banks to guide the market’s expectations of future interest rates and bring market expectations closer to the central bank’s target expectations. After the 2008 global financial crisis, “forward guidance” was widely used by central banks in Europe and the United States.
  The original purpose of “forward guidance” was to further expand the room for monetary policy easing. After the 2008 financial crisis, the Federal Reserve quickly lowered the benchmark interest rate to zero, and interest rates have been cut to nowhere, but the recovery of the economy is still unsatisfactory. The Fed has developed forward guidance, such as when it announced at its December 2008 rate meeting that “the federal funds rate has been at ultra-low levels for a period of time.”
  Later, “forward guidance” has also become a way for the central bank to communicate effectively with the market in advance. For example, the “dot plot” of benchmark interest rates published regularly by the Federal Reserve gives the expected path of benchmark interest rates in the next few years. This will help the market to respond to the policy in advance and reduce the impact on the financial market when the policy is actually implemented.
  For a long time, “forward guidance” has worked well. Perhaps it is the relatively stable macroeconomic environment that makes central bank officials and market investors mistakenly believe that the central bank can make very accurate forward-looking forecasts.
  However, under the attack of this round of high inflation, the “forward guidance” of central banks has been slapped in the face. The Fed unexpectedly raised interest rates by 75 basis points in June, implicitly abandoning “forward guidance.” The Swiss National Bank also declared that it “does not provide forward guidance” after it unexpectedly raised interest rates by 50 basis points. Canada’s unexpected 100 basis point rate hike in July also violated “forward guidance.” Now, the ECB has also ditched “forward guidance” entirely and has become a discretionary choice for inflation data.

  Economist Lawrence H. Summers has sharply criticized “forward guidance,” noting that the Fed should resist the broad concept of “forward guidance,” which is just the academic that seems “elegant” One of the points is that it is difficult to work in practice, because the central bank does not know and cannot know what it will do in the future. Most of the time, “forward guidance” is stupid and the market doesn’t really believe it. Now that “forward guidance” has been given, you feel compelled to follow through, so it steers policy away from what should have been the best path.
  The current tightening by global central banks may only be the prologue, as they are a long way from bringing inflation back into target territory.
  On July 25, Martins Kazaks, a member of the European Central Bank’s Governing Council, said that the European Central Bank may still raise interest rates significantly in the future. Even open to a 75 basis point hike. Given the uncertainty, given the dynamics of inflation, discussions should be open, although the ECB should not simply follow the Fed.
  The dot plot from the June Fed meeting on interest rates shows that the median federal funds rate will be 3.4% in 2022 and 3.8% in 2023. The current actual federal funds rate is 2.25%-2.5%, and it is estimated that the Fed will still need to raise interest rates by more than 100bp in the second half of the year.
The European and American economies may have a “hard landing”

  Macro policy is always an art of balance. No policy is a cure-all, and no policy is without side effects.
  In the face of high inflation, as long as it is willing to significantly raise interest rates and tighten monetary liquidity, the beast of inflation will always be subdued one day. However, the substantial tightening of macro policies will inevitably have a negative impact on the economy. Ideally, a smaller economic slowdown would be traded for effective control of inflation, a so-called “soft landing.” The reality may not be so ideal, and it may take the price of a sharp recession to subdue high inflation, which becomes a “hard landing”.
  Although Federal Reserve Chairman Jerome Powell has repeatedly stated that the Fed will not try to induce a recession in the United States, there is no sign of a broader slowdown in the U.S. economy, nor a significant slowdown in consumer spending.
  But avoiding a “hard landing” has become increasingly difficult after the Fed missed a good opportunity to tackle inflation, as the Fed would have had more room to act early in 2021.
  Some officials within the Fed are also gradually losing confidence in the economic outlook. The Fed’s “number three” New York Fed President Williams recently said that the Fed must resolutely curb inflation, which will lead to a significant slowdown in US economic growth and a rise in unemployment. He expects the U.S. economy to grow by less than 1% in 2022.
  On June 17, the New York Fed released a working paper showing that the DSGE model predicts that the U.S. GDP growth rate will be -0.6% and -0.5% in 2022 and 2023, respectively, and the probability of achieving a soft landing is only 10%. The probability of GDP growth falling below -1% at least once in each quarter is as high as 80%.
  Summers’ research argues that the current level of U.S. inflation is grossly underestimated compared to the 1970s due to differences in statistical caliber. Using revalued CPI data shows that current U.S. inflation is very close to levels seen in the late 1970s, and bringing the current core CPI back to 2% would require almost a similar level of policy tightening as under Volcker.
  In the late 1970s, in order to combat high inflation, the Federal Reserve raised the federal funds rate to 20% for a time, and eventually the economy also suffered a recession.

  Some leading indicators are already slowing down rapidly, with the U.S. ISM manufacturing PMI at 53% in June, down 3.1 percentage points from the previous month. The Michigan consumer confidence index came in at 51.1 in July, the lowest level in nearly a decade.
  Since real estate is highly sensitive to credit and interest rates, the rapid rate hike by the Federal Reserve has led to a rapid rise in mortgage rates and a marked drop in home sales. At the end of June, the 30-year residential mortgage interest rate in the United States exceeded 5.8%, and has risen sharply by about 280bp since 2022. Existing home sales in the U.S. fell 5.4% in June to 5.12 million, the fifth consecutive month of declines, and a 25% drop from the high at the end of 2020.
  The European economy is more fragile than the United States, and if the European Central Bank raises interest rates sharply, the probability of falling into recession is greater.
  First of all, European countries are more dependent on Russia’s energy imports, and are most directly affected by the conflict between Russia and Ukraine. CITIC Securities believes that the Ukraine crisis may lead to a downward revision of 0.8 percentage points in global economic growth. The major overseas economies are most affected by Russia and Ukraine, followed by Europe. Europe may not escape the problem of energy shortages in the next few years, and the possibility of stagflation will increase.
  Secondly, the economic levels of European countries are not uniform, and it is difficult for the same monetary policy to take all aspects into consideration. The government leverage ratio of many European countries is too high, and in the context of sharp interest rate hikes, the European debt crisis is likely to return.
  Sinolink Securities pointed out that the recent European high-yield bond credit spread has widened sharply to nearly 600bp, reflecting the market’s concerns about the European economy, which is close to the level before and after the last round of the European debt crisis. At the same time, the market’s concerns about the internal economic imbalance in the euro zone have also increased significantly, which is manifested in the rapid expansion of the country-specific interest rate gap between the “peripheral countries” and Germany. More than 250bp, which is equivalent to the level during the last round of European debt crisis.
  The old problem of European debt has not been cured, and the fiscal discipline under the epidemic and the energy crisis has been relaxed, which has further increased the leverage ratio of some economies. Under the background that the European Central Bank is about to start raising interest rates, the rise in interest rates has greatly increased the government’s debt repayment pressure, among which the debt repayment pressure of Italy and other countries may become more prominent. Insufficient promotion of fiscal integration and “quasi-stagflation” constraining monetary policy, the scourge of European debt is still difficult to cure.
  Recently, the European economy has shown obvious signs of slowing down. The manufacturing PMI in the euro zone was 49.6 in July, a 25-month low and below the boom line; the consumer confidence index in the euro zone fell to -17.6 in June, reflecting the risk of weakening consumption.

Major asset classes under the stagflation pattern

  Markets tend to overreact to fundamentals. Although the global economy is only showing signs of slowing down, investors are already fully discussing the possibility of a “hard landing” and the market is already in a “recession trade” ahead of schedule.
  Global stock markets are bleak. The S&P 500 index will drop by 17% in 2022, and the largest drop in this round is nearly 25%, completely falling into a bear market channel. Since 2022, Germany’s DAX is down 16.5%, France’s CAC 40 is down 13%, and the FTSE Italy’s MBI is down 22.4%.
  In the first quarter, the global stock market was mainly worried about high inflation, and the market decline was more moderate. But after the second quarter, the market’s fears of a global economic slowdown have grown, and the decline in global stock markets has become more violent. Stocks in some export-oriented economies have fallen even more, such as South Korea, which has fallen 19% since 2022, and has fallen more than 10% since June.
  China Merchants Securities believes that the pricing of U.S. stocks is mainly affected by the four factors of the U.S. economy, non-U.S. economy, risk-free interest rate and risk premium. The four-factor model has already shown abnormal signals, and it is expected that U.S. stocks will still fall for the last time in the second half of the year. It is expected that this round of adjustment will become a watershed in the style of US stocks. After the sharp decline, core consumption, medicine, and finance may outperform at this stage, and technology growth stocks such as information technology have a higher probability of underperforming.
  The long-term interest rate of U.S. Treasury bonds has fallen significantly, or even inverted, starting to price the economic slowdown. Since August 2020, the 10-year U.S. Treasury bond rate has roughly undergone three stages of changes: First, from August 2020 to the end of 2021, the 10-year U.S. Treasury bond rate has risen by about 100bp, mainly reflecting the post-pandemic U.S. The strong recovery of the economy; second, from the beginning of 2021 to mid-June, the 10-year U.S. bond interest rate has risen by about 200bp, reflecting the rapid increase in the Fed’s tightening expectations under high inflation; third, since mid-June, 10-year The U.S. bond interest rate fell by about 75bp, and it has formed a continuous inversion with the 2-year U.S. Treasury bond, which is a manifestation of the coexistence of economic slowdown and the Federal Reserve still raising interest rates sharply.
  China Merchants Securities judged that the political cycle and social structure of the United States may mean that the US debt is at a historical turning point. If the U.S. political spectrum is determined to switch from the pursuit of efficiency to the pursuit of fairness, and then promote the optimization of the social structure, there is a high probability that it will be accompanied by a tax hike cycle, a fall in government leverage, and an increase in risk-free interest rates. Then, the long-term inflection point of the 10-year US Treasury yield has come, and the long-term center will rise.

  The U.S. dollar has been pushed higher by the Fed’s sharp interest rate hikes and the uncertainty brought about by the “great stagflation”. The U.S. dollar index once exceeded 109, and non-U.S. currencies have depreciated sharply. The euro has entered an era of parity against the U.S. dollar. The U.S. dollar has reached 139 against the yen at one point.
  CITIC Securities believes that the recent expectation of the European Central Bank to start an interest rate hike cycle will push up the euro-dollar exchange rate in stages. However, considering that the fundamentals of the euro area are more difficult to bear the continued interest rate hikes like the Fed, the medium-term interest rate differential factors and risk aversion still remain. May push the dollar index higher. We need to wait for the US dollar index to peak and fall, the US unemployment rate to peak and fall, and the energy crisis and liquidity crisis in Europe to be effectively resolved.
  Commodity prices have retreated amid expectations of a global economic slowdown. For example, the price of WTI crude oil futures has fallen from US$122 in early June to around US$93, a drop of 24% in two months; “Dr. Copper”, which is more sensitive to the global economy, also fell sharply, and the price of copper in London fell below US$7,000 / ton, down 35% from the highs in early March.
  Even so, oil prices are still well above their pre-pandemic levels of $60. A slight drop in commodities may not be enough to completely reverse high global inflation.
Impact on China’s economy

  In the face of global stagflation and the sharp tightening of central banks in Europe and the United States, how will China’s economy be affected? At present, the dislocation of China’s economic and policy cycle with Europe and the United States is the key to affecting China’s economy and A shares in the future.
  In terms of inflation, the absolute price of bulk commodities is still at a relatively high level, which still constitutes a certain imported inflationary pressure. In recent months, PPI has maintained a positive growth month-on-month, but due to the influence of the base, the year-on-year increase of PPI has dropped to 6.1%.
  CITIC Securities believes that the occurrence of imported inflation requires the following conditions: first, the exchange rate is inflexible and cannot be effectively adjusted according to the economic situation at home and abroad; second, it is highly dependent on foreign countries and is a passive recipient of international commodity prices; third, There is also a clear excess of domestic liquidity. At present, as the domestic economic system becomes more and more mature, the macro-policy control capability is also significantly enhanced, which is expected to effectively cope with the current imported inflationary pressure.
  The trend of CPI depends more on domestic changes. Huachuang Securities believes that the recovery of pork and the repair of core prices are the main driving forces for the continued upward trend of CPI in the second half of the year and even in the first quarter of 2023. Under neutral expectations, the CPI in September may exceed 3%, and the CPI in the first quarter of 2023 may reach 3.4%.
  In terms of stagnation, the short-term impact on China’s exports is still limited. On the one hand, China’s exports recovered the fastest after the epidemic. Exports (in U.S. dollars) in June increased by 17.9% year-on-year, a sharp rise of 14 percentage points from the trough in April, and achieved a trade surplus of US$97.94 billion, a record high in a single month. Net exports also contributed the most to the economy in the second quarter. On the other hand, the current global economy is only slowing down slightly, not enough to cause too much negative impact on China’s exports.

  From the perspective of risk appetite, the uncertainty of the global economy is rising, and the risk appetite of global funds will decline. Considering the substantial appreciation of the US dollar and the significant depreciation of non-US currencies, funds will flow out of emerging markets. From April to May, the renminbi also depreciated to a certain extent.

  Even if the renminbi has depreciated, its depreciation rate is still relatively small compared to other major non-US currencies. Since 2022, the offshore renminbi has depreciated by about 6%, while the U.S. dollar index has appreciated by 11%.
  The value of the renminbi is more determined by the fundamentals of the domestic economy. The rapid depreciation of the renminbi mainly occurred between April and May when the epidemic was the worst, reflecting the concerns of external funds about China’s economic downturn. However, since May, with the effective prevention and control of the epidemic and the continuous efforts of stabilizing growth policies, China’s economy has begun to stabilize and recover. The interest rate gap between China and the United States is wider than before, and the RMB will no longer continue to depreciate.
  Guosheng Securities believes that the domestic economy has stabilized and rebounded, while the U.S. economy has slowed down sharply, and the relative performance of the Sino-U.S. economy has reversed. In addition, it is necessary to pay attention to the disturbance of the RMB exchange rate due to potential changes in Sino-US relations.
  In fact, the RMB exchange rate maintains a certain degree of flexibility, which will play an automatic stabilizer role in response to external shocks, and is more conducive to stabilizing the domestic economy and prices.
  From the perspective of international economic and trade relations, if the United States can remove tariffs and implement a more liberalized trade policy, it will undoubtedly help alleviate the high inflation in the United States. Whether Sino-US economic and trade relations will be eased because of this is also an aspect worthy of attention in the future.
  The report released by the US PIIE in March pointed out that if China and the United States remove tariffs, and the United States removes tariffs on steel, aluminum and Canadian softwood lumber in all countries, the CPI inflation in the United States will drop by 1.3 percentage points from the base level. While the effect of tariff removal on inflation is one-off, the temporary drop in prices it causes may help dampen inflation expectations.
Can A-shares survive on their own?

  Industrial Securities summarized the experience of the past three rounds of independent market A-shares, and believes that the dislocation of the Sino-US economic and policy cycles is an important reason for the divergence of the Sino-US stock market. From the perspective of valuation and profitability, the dislocation of the policy cycle has led to the divergence of valuation trends in the Chinese and US stock markets. The looser domestic liquidity is conducive to the rapid rise of the valuation of A-shares, while the valuation of US stocks is mainly volatile or downward. In terms of profitability, “China’s strong and the United States are weak” are mostly in the downward period of US stock earnings, and A-shares have a certain comparative advantage in performance.
  In contrast, Industrial Securities believes that the macro and policy background of this round of A-shares outperforming U.S. stocks is similar to the independent A-share market from September 2000 to June 2001: In terms of policy, the central government has issued a number of active fiscal policies, The central bank continued to cut RRR and interest rates, while the Federal Reserve resolutely tightened it, and even raised interest rates by 75bp in a single time; in terms of economy, China has gradually stepped out of the “deep hole” smashed by the epidemic, and the economy has transitioned from recession to recovery; US economic growth has slowed down quarter by quarter, Inflation is at a high level in nearly 40 years, with obvious characteristics of “stagflation”, and there is even the possibility of a recession in the future. The difference is that the current commodity prices are at a high level, and the inflation pressures facing China and the United States are relatively greater than in 2000-2001.
  Looking back, the policy cycle of “relaxation on the inside and tightening on the outside” and the dislocated Sino-US economic cycle may provide stronger support for the valuation and profitability of the Chinese stock market, and the independent market of A shares is expected to continue to be interpreted.
  Judging from the performance of major asset classes, Guosen Securities summarized the domestic market performance when the China-US economic cycle was dislocated four times in the past 20 years, and concluded the following rules: The trend of the Shanghai Composite Index has no general rules, and most of them are volatile markets; Yields on 10-year government bonds were generally higher; the South China Composite Index was generally higher. From the perspective of the industry’s meso-scale, the excess returns of the media, household appliances, building materials, electronics, and computer sectors have all increased during the dislocation period of the Sino-US economic cycle in the past, while the excess returns of the coal and non-banking financial industries have all declined.
  Based on this, Guosen Securities judged that the priority of asset allocation in the second half of the year is commodities, stocks and bonds; in terms of industry allocation, it is recommended to focus on growth and consumption sectors, and pay attention to the opportunities of oversold growth sectors in the first half of the year.

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