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Prospect of Macro-economy and large-category Asset allocation in the second half of 2020
Jul 23,2020 15:43CST
translation
Source:Chongqing Binshan Science and Technology
The content below was translated by Tencent automatically for reference.

SMM News: macroeconomic

First, what is the difference between this economic recovery and the economic recovery under the wide credit cycle in the past? (1) although social integration will still lead the economic recovery in the second half of the year, its pulling effect is getting weaker and weaker, mainly due to the increasing proportion of consumption in the economic structure. Considering that the current epidemic has the greatest impact on labor-intensive services, it is difficult for low-and middle-income groups to recover their spending power quickly. Superimposed by the high leverage accumulated by residents in the past few years, consumption will be a major drag on the economy. (2) due to the slow recovery of residents' income after the epidemic, the main body of this round of credit expansion and leverage is enterprises and the government, and can not rely on residents, and residents have never been absent in the past credit expansion cycle. The financing of government and enterprises is counter-cyclical, while the financing of residents is pro-cyclical. this difference leads to a completely different structure in the process of currency rebound. In the absence of spontaneous financing demand, M1 growth rate is difficult to exceed M2 growth rate, and the corresponding economic recovery is often weak, maintaining the judgment of "Li Ning type" of GDP month-on-month than for the whole year.

Second, will monetary policy be gradually tightened in the second half of the year? The central bank's attitude towards liquidity has changed marginally, money market interest rates have rebounded to near the reverse repo rate, and rising house prices are the main reason for curbing monetary policy easing. However, if it is difficult for property sales to become regular throughout the year, it is unlikely that monetary policy will tighten. Judging from the central bank's expected lending target, the probability of credit and M2 growth has peaked.

Third, can the monetary expansion of the United States be sustainable? The world is in a cycle of substantial monetary expansion, and unlike in 2009, China is the world's fastest-growing economy in liquidity, and the main increase this year comes from the United States. The rise in M2 growth in the United States is the common result of the Fed's rapid expansion and credit recovery, but with the weakening of fiscal relief, private sector credit has begun to contract again, and the pace of Fed bond purchases has also slowed. M2 rise may not be sustainable. What is relatively certain is that the dollar has begun a depreciation cycle.

Prospect of asset allocation in large categories

First, can a sustained rebound in social finance drive commodities into a bull market? This round of credit expansion does not boost commodity demand as it did in 2009 and 16. The lower growth rate of M1 than M2 determines that commodities do not have a bull market basis for rising trends, but easy credit does increase the ability of companies to hoard goods. so even high inventory commodity prices may not fall. Precious metals and non-ferrous metals with value preservation and financial properties are expected to perform better than black, which is more sensitive to terminal demand.

Second, whether the bonds are in place? After the epidemic, there will be a permanent downward shift in China's economic growth center, which means that there will also be a systematic decline in the interest rate center, and low interest rates will become the norm. If the three-month interest rate stays below 2.5 per cent for a long time, the 10-year bond yield is capped at about 3.5 per cent. The slump in the bond market between May and July has basically fallen to the upper limit of this reasonable range. The profit-making effect of the stock market will attract residents to redeem financial products, superimposed by the extraordinary issuance of government bonds, and the imbalance between supply and demand is the biggest short-term disadvantage of the bond market.

Third, can stocks enter the bull market phase of accelerating growth throughout the year? Whether it is a structural bull market or a comprehensive bull market, from a liquidity point of view, the driving force behind is the increase in residual liquidity represented by M1-PPI, and there is little room for the index to continue to rise in the second half of the year, that is to say, a significant rise at the index level this year is unlikely. However, unlike relying more on leveraged funds in 14-15, the appreciation of the RMB brought about by the high interest rate gap between China and the United States and changes in new financial regulations make incremental funds more diversified, and the market will still be easy to rise and difficult to fall. From the ratio of free circulation market value to M2, A shares have begun to enter the bubble stage, but have not yet reached the extreme situation when they reached the peak of 15 years. Equity valuations are significantly less attractive to bond yields.

Fourth, will there be a style switch in the stock? From the perspective of the profit cycle, it should still be in the growth style cycle represented by emerging economies, but judging from the characteristics of industry rotation in bull markets in the past, when liquidity indicators show an inflection point, high valuation sectors are more likely to have a pullback. on the contrary, there is an opportunity for valuation repair in the undervalued sector.

Fifth, is the opportunity of Hong Kong stocks better than A shares in the second half of the year? With the secondary listing of a large number of Chinese stocks in the Hong Kong market, the industry pattern of Hong Kong stocks has shifted from traditional industries to emerging industries, which helps to enhance the overall activity of Hong Kong stocks and reduce the AH premium rate. Once the depreciation cycle of the US dollar is determined, Hong Kong stocks tend to outperform A shares.

Part I: macro-economy

First, what is the difference between this economic recovery and the economic recovery under the wide credit cycle in the past?

Generally speaking, China's economic cycle is highly consistent with the credit cycle, each round of expansion will lead to economic recovery, generally speaking, there is a lag of one or two quarters. At present, there is a consensus in the market that the economic situation in the second half of the year must be better than that in the first half of the year, because we have seen that the growth rate of social finance has continued to pick up in We have no objection to the fact that we have reached a new high in June, but what is the strength of this round of recovery? At present, there are relatively large differences in the market, such as the sharp rise in credit growth in 2009, and the economy is a typical "V" reversal; but the economic recovery is very weak in 2012, driven by social integration. It shows that although the impact of credit expansion on the economy is consistent in different cyclical environments, there are obvious differences in intensity. If we calculate the pull of GDP caused by the increase in the rising cycle of social finance, we can see that the efficiency is getting lower and lower every round. It is true that the effect of traditional credit expansion on the economy is becoming less and less significant. A big reason is that great changes have taken place in China's economic structure, and consumption has become the most important component of the economy. The response of consumption to credit expansion is obviously weaker than that of investment, which also leads to a decline in the efficiency of credit expansion.

In the context of the epidemic, we believe that this round of economic recovery is very different from that in the past:

First, the recovery of the consumer side will be relatively slow, and the impact of policy stimulus will be relatively weak. Last week, economic data for June were released, comparing the performance of the main economic indicators in the first half of this year with those for the whole of last year. The worst of all economic indicators is consumption, which not only has not become a regular employee, but also has the largest decline compared to the whole of last year. The second is real estate sales, which fell nearly 9 percent in the first half of the year, weaker than investment, exports and industrial value added, although they felt good in the past few months. The recovery of macro indicators related to residents is the slowest after the epidemic, indicating that the greatest impact of the epidemic on this round of economy is reflected in the residential sector. Consumer confidence is also at an all-time low, not because of a big rebound in the government's stimulus policies.

Catering, accommodation, transportation, transport and retail, which are mainly related to the epidemic, account for 1/3 of China's employed population. Judging from the rebound in the growth rate of GDP in the second quarter, the tertiary industry is weaker than the primary industry and the secondary industry. As the epidemic has a great impact on employment in the residential sector, the recovery of income is also relatively slow. Comparing the income growth of enterprises, residents and the government in the first half of this year with that of the subprime mortgage crisis in 2009, household income grew by 1.5% in the first half of this year, corporate income fell by 7.4%, and government revenue fell by 10.8%. During the subprime mortgage crisis in 2009, the income of residents increased by 10%, and the income of enterprises and the government also grew negatively. Compared with 2009, the decline in household income is very obvious, so we think that this epidemic has done more damage to the residential sector than other sectors.

In the past, the changes in rent prices were basically the same as those in house prices. Prices usually fell when rents fell, but this year's rent growth was negative compared with the same period last year, which has never been seen before, while house prices are still rising. The problem with this deviation reaction is that rent-to-income changes in low-and middle-income groups are more sensitive than other expenditures. In fact, housing prices more reflect the purchasing power of high-income groups, and the impact of the epidemic on the income of low-and middle-income groups is significantly higher than that of high-income groups.

As residents' income is expected to decline, residents' debt growth begins to slow, which leads to the second difference we are going to talk about. What is the second difference? People say broad credit, credit is expanding, there is no doubt that credit expansion depends on which department? The three main bodies of residents, enterprises and government count all the credit expansion cycles in history. In the past three rounds, from 2008 to 2009, from 2012 to 2013, and from 2015 to 2016, all of them had residents plus leverage, and only one enterprise and government usually appeared. The other does not appear. Each round of credit expansion generally has two subjects with leverage and one subject with deleveraging. What are the characteristics of this round? The growth of government and corporate debt is very obvious, the red line is residents, the red line is basically unchanged, what is the biggest difference between this round of credit expansion and the past three rounds? Residents did not participate in this round of leverage, because residents' income was greatly affected. Although they are all credit expansion, what is the difference between enterprise credit expansion and resident credit expansion? The credit expansion of enterprises is a counter-cyclical expansion, while the credit expansion of residents is a pro-cyclical expansion. For example, look at the loan growth of enterprises and electricity generation is an inverse relationship, what does it mean? When the economy is better, the corporate debt does not expand, and when the economy is worse, the enterprise expands, which seems to be against the economic law. On the other hand, the behavior of residents is relatively normal, and they generally expand their debt only when the economy is good and their income expectations are high.

Counter-cyclical characteristics mean that the credit expansion of Chinese enterprises is more policy-driven. This is the loan approval index, the higher the loan, the looser the loan scale, now that loans are more relaxed than in 2009, what are the problems caused by this policy-driven credit expansion? It is easy to idle funds and turn them from reality to emptiness, and now the central bank is also raising this issue. Because the financing demand of the enterprise itself is not strong, the policy-driven model will cause the enterprise to take a lot of unneeded funds, which will not do industrial investment, but will do things such as financial management and financial investment. We can see that a considerable proportion of corporate loans this year have been used as structural deposits. The reason for this problem is that the amount of credit is far greater than the amount actually needed.

Without the spontaneous credit expansion of residents, the result is that the growth rate of M1 can hardly exceed that of M2. Credit expansion will certainly create money, so there is no doubt about M2, but whether M2 can be converted into M1 reflects whether the money put out has gone into the entity. If enterprises do not invest and people do not consume, they will be more willing to save, and the funds will be placed in fixed accounts, so the growth rate of M1 will be very difficult. On the contrary, if everyone is willing to spend after getting the money, the circulation speed of natural money will accelerate, and the dominant feature of the accelerated circulation speed is that the growth rate of M1 will obviously be horizontal, because M1 is a demand deposit, when a large amount of money is in the turnover link, it will objectively cause the rise of M1, so the rise of M1 can more accurately reflect the substantial increase in the trading behavior of the economy. Historically, the growth rate of M1 in China is higher than that of M2, which is usually caused by the credit expansion cycle of residents. The poor growth rate of household loans and corporate loans and the growth gap between M1 and M2 coincide very well. This year, the credit expansion of the residential sector has not risen, relying entirely on policy-driven corporate credit expansion, resulting in M1 growth rate has been lower than M2 growth rate, from this point of view, the strength of this round of economic recovery is weak.

For example, social integration also led the economic recovery from 2012 to 2013, but the rebound was weak because the growth rate of M1 has been lower than the nominal growth rate of M2 GDP. On the contrary, as in 2009, the relatively strong economic recovery in 2016 was actually accompanied by a higher growth rate of M1 than M2. As the growth rate of M1 is lower than that of M2 this year, it is also likely to be a weak recovery. We believe that from the perspective of GDP, the second quarter is the fastest time for economic recovery. Although the economy is still improving in the third and fourth quarters, the momentum for improvement is weakening.

Second, will monetary policy be gradually tightened in the second half of the year?

From the perspective of the second quarter, the monetary policy margin is already tightening. The most important thing to look at is the change in the repo rate, which represents the attitude of the central bank. The repo rate has risen to 70bp in the past, from a low of 1.5% to around 2.2%, which can be understood as a turning point in monetary policy towards neutrality, as the central bank's reverse repo rate is at 2.2%. Why did the central bank adjust its monetary policy? We believe that the core reason is house prices. If we look at the relevant indicators of China's inflation, PPI has rebounded slightly from the previous month, and has not yet formed a decent rebound. The core CPI is still innovatively low, but the increase in house prices has slowed down in the past six months, but it still continues to rise, restricting the easing of monetary policy. The growth rate of real estate sales area in the first half of the year is still negative. In the case of negative growth in sales area, the rise in house prices is mainly due to the relatively low inventory of real estate. Although the area of new construction has exceeded the area of sales in the past six months, inventory is also slowly increasing, but inventory is still relatively low compared with 2014 and 2015, and real estate prices appear to be more resilient.

Whether monetary policy will tighten further next depends more on land production and sales than prices. In the past, the large upward cycle of interest rates must have been accompanied by the positive growth of the cumulative sales area of real estate. If the growth rate of real estate sales this year is still negative compared with last year, there is no basis for trend tightening in monetary policy, but rising house prices will indeed limit its loosening, so sales volume and prices determine the attitude of monetary policy up or down, respectively. From the perspective of sales volume, due to the decline in leverage in the residential sector as a whole, sales are now at the top. The annual sales area of the house is in the range of 1.5 billion square meters, so it is difficult to go up again. In fact, the top has been built for several years. And as the purchasing power of residents is now relatively weak, it is difficult for real estate to achieve a pattern of simultaneous rise in volume and price, so prices will go down and prices will rise and fall. From this point of view, we do not think that monetary policy will tighten in the second half of the year, but it will not relax either.

The credit target for the whole of this year is 20 trillion, and if the loan growth rate is estimated to be about the same by the end of the year according to 20 trillion, that is, loan growth basically peaked in June, which means that M2 growth may also have peaked.

Third, can the monetary expansion of the United States be sustainable?

In 2009, global liquidity easing mainly depended on China. At that time, only China's M2 rose sharply, and the M2 of Europe and the United States did not rise. This time, the Dragon King of the four Seas released water together, but the most fierce of this round was not China, but the United States. In terms of the contribution rate of M2 to the world, M2 has made the greatest contribution to China in the past many years, but the United States has surpassed China this year.

Why can the United States play this round? There are two reasons: the first reason is that the Fed's balance sheet has expanded very sharply; the second reason is that credit in the US banking system has generally contracted in the past after the subprime crisis, but now credit growth is rebounding. This monetary expansion is the result of a combination of bank credit and Fed expansion. From the perspective of credit, the United States only increased more in March and April, because at that time there were a lot of loans to small and medium-sized enterprises, which were guaranteed by the Ministry of Finance, which can be understood as giving money to the common people in a disguised form of credit. In May, with the landing of the first round of fiscal stimulus, the one-off effect ended and corporate credit turned negative again, while household loans, which truly represent private sector demand, never rose. The Fed has expanded more than each round of QE in the past three months, but has recently begun to contract, in part because it has done a lot of buybacks and swaps, all of which are short-term and zero as long as they do not continue when they expire. Although a large number of credit facilities have been launched this year, which seem to be able to expand the balance sheet indefinitely, the actual usage is very low, accounting for only about 4% of the upper limit. The main expansion is actually achieved by buying treasury bonds and MBS, but the pace of later purchases has also slowed down significantly. What the Fed promises now is to increase its bond purchases by $120 billion a month, and the market expects the latest round of fiscal stimulus to be roughly around 1 trillion. But in fact, the Fed's 120 billion monthly bond purchases can basically support this order of magnitude. Under the premise that the scale of the new round of stimulus is only about 1 trillion, we do not expect the Fed to continue to expand its table significantly in the second half of the year, which makes the growth rate of M2 in the United States is expected to be basically the same as the current growth rate. Unless new liquidity risks occur in the stock market, causing the Fed to use other liquidity instruments to accelerate its expansion, M2 growth is likely to be significantly higher than the current level. So similar to China, overseas liquidity actually has an inflection point on the border, which is expected to have a greater impact on US stocks. Because the main driver of U. S. stocks this year is not earnings, but liquidity. In addition, the current fiscal expansion of the United States is expected to soon exceed the speed of World War II, high deficit problem superimposed by a sharp rise in M2 growth rate means that the dollar has entered a cycle of trend depreciation.

The second part: the prospect of asset allocation in large categories.

Compare the trend of assets this year with history, and which year is more similar? If you look at the monetary credit cycle, there is no doubt that this round of credit expansion is similar to 2009, unlike in 2014 and 2015, which is the trend of both stocks and debt and commodity decline, corresponding to credit contraction, so now it may be more like 2009. But if you take a closer look at the trend of stocks and bonds, you will find that the aggregate looks like 2009, and the structure looks more like 2014 and 2015.

First, can a sustained rebound in social finance drive commodities into a bull market?

First look at commodities, commodities fell first and then rose in 2009, and this is indeed the case so far this year. It first plummeted in January and February, and then rebounded, which is different from the continuous decline in 2014 and 2015, but the strength of the rise is obviously weaker compared with 2009. As mentioned earlier, although it is a credit expansion cycle, from a structural point of view, the growth of M1 in 2009 is significantly higher than that of M2, indicating that the vitality of the real economy was very strong at that time, and now, although there is a lot of liquidity, the vitality of the entity is not good, so M1 does not rise up and has a great suppressing effect on PPI. This year, many commodities are in high inventory, and prices can rise even if they do not fall, which is largely related to loose liquidity, which makes people not eager to sell and have the ability to hoard spot goods. So the stronger the commodities that can be hoarded and the stronger the metal properties, the stronger the performance of gold, needless to say, while the strongest performance of industrial varieties is copper, because it can also be hoarded and has a certain degree of value preservation function. This is also the case from 2012 to 2013, the growth rate of M1 has been lower than M2, the overall price of industrial products fluctuated, there is no basis for sustained rise.

The ratio of government debt to GDP has reached an all-time high this year, but in fact spending has not increased significantly, falling 6 per cent in the first half of the year compared with the same period a year earlier. A large deficit is making up for the lack of revenue, which has been growing at a slower rate than the nominal growth rate of GDP for the past five years, falling by more than 10 per cent in the first half of this year.

There was no overall growth in infrastructure in the first half of this year, and there was a sharp decline in the manufacturing industry. to put it bluntly, investment in real estate in the first half of this year was still dependent on real estate investment, and only real estate investment had a positive growth, so the demand for commodities did not see a But it is hard to expect infrastructure to have a big boost to demand.

 

Second, whether the bonds are in place?

The trend of bonds is similar to that of 2009, rising first because of the crisis or epidemic, and then plummeting in anticipation of an economic recovery, and the V-shaped reversal of yields is the same as in 2009. But in 2009, bonds fell more at the long end than at the short end, and the yield curve steepened upward. If expectations of an economic recovery are strong, the yield curve should also be steepened, but in fact the short end has risen more than the long end in the process of rising yields this year, which is a flattening upward feature. The rise of 100,000,150bp in less than five years is arguably the fastest adjustment in China's history, surpassing the cash crunch in 2013 and the debt disaster at the end of 2016. This shows that the decline in the bond market does not imply a strong expectation of economic recovery, but is more the result of the shift of the central bank's monetary policy from loose to neutral.

We believe that the upward rise in bond yields has fully reflected the rebound in GDP. After the end of the epidemic, the hub of China's nominal GDP growth will move down, so it is difficult to return to the past range. The lower limit of the nominal growth range of GDP from 12 to 19 is about 7%, which may become the upper limit of GDP growth after the normalization of the epidemic in the future. The same is true of the United States, where after every crisis, economic growth goes to the next level, and so does the volume of global trade.

Generally speaking, due to the systematic downward shift of China's economic center, the interest rate center will also move down systematically. We believe that 3-month Shibor is unlikely to exceed 2.5% unless real estate can enter a new upward cycle. From the experience of the United States, Europe and Japan, if the three-month interest rate does not exceed 2.5%, then the 10-year interest rate does not exceed 3.5%, a spread of about 100 points. Now that the 10-year national opening yield is at 3.5%, the adjustment of bonds may have been basically in place from this point of view.

Third, can stocks enter a comprehensive bull market that accelerates their rise?

Finally, let's talk about stocks. This is the asset that everyone is most concerned about, and it is also the best performing asset this year. From a macro point of view, one of the most important indicators affecting the trend of the stock market is M1murPPI, which represents excess liquidity. PPI is equivalent to the real price. If M1 exceeds the real price of PPI, it can be considered as excess liquidity, which is beneficial to the asset prices of the financial market. All the rising indicators in history have given a very clear direction, such as the great bull market from 2006 to 2008, and the time when the market rose in 2009 was almost exactly the same as the inflection point of this indicator. From 2012 to 2013, this indicator actually showed a periodic rise, corresponding to the entrepreneurial version of the bull market. When this indicator entered the inflection point in October 2014, A shares also ushered in a round of sharp gains.

Now the feeling of looking at the index is just beginning to rise, but the inflection point of this index appears at the end of 2018. In fact, if you look at Wande Quan A, this bull market began as early as the beginning of last year. Fund managers who are individual stocks can feel that many high-quality underlying stock prices have been rising for a long time. The bottom of the market is often consistent with the rebound inflection point of this index, but the market often falls back at the top not when the index reaches its peak, but when the index rises near the end. Looking back, the growth rate of M1 may go up a little at most, and PPI will gradually pick up in the second half of the year compared with the same period last year due to the low base effect. if we use this indicator to understand the current stock market, it is not the initial stage of the bull market, but at the end of the bull market.

Of course, this does not mean that the market will fall immediately in the second half of the year, but is more likely to turn into a shock phase. There are some differences in the incremental funds of the stock market between now and 2014 and 2015. The net value management of products under the new financial regulations leads to a decline in the financial return at the initial stage of the rise of interest rates, which helps to transfer financial funds to the stock market, and the annualized return of stocks in the past three years has exceeded that of real estate, so it is becoming more attractive to residents. The interest rate spread between China and the United States reached an all-time high, driving the appreciation of the RMB and the continued inflow of foreign capital, which is also different from that in 2014 and 2015, when the RMB depreciated and foreign capital flowed out; the proportion of financing buying as a share of market turnover was weaker than in 2014 and 2015. So on the whole, the quality of incremental funds is indeed better and more diversified than in 2014 and 2015, which is relatively healthy.

From the perspective of historical law, once the ratio of the free circulation market value to M2 exceeds the central line in the chart, the stock market will accelerate into the bubble stage, and the time to stay at this stage will be very short. For example, after exceeding this central line in June 2007, it continued to rise for seven months, and after surpassing the central line in 2015, it only rose for three months. This time, it rose for two weeks and then fell, indicating that the learning ability of the market is very strong. Once there are some signs of a bubble in valuations, they become cautious. Although the current valuation level is not as extreme as in 2015, and the risk premium excluding the risk-free interest rate does not seem to have reached a very low position, it should be noted that the risk premium center of A shares increases gradually with the rise of China's macro leverage ratio, and it is difficult to use the upper and lower limits of the past range to judge where the reasonable risk premium should be.

Fourth, will there be a style switch in the stock?

In terms of style, stocks are not at all characteristic of 2009, more like 2014 and 2015, with growth rather than cyclical dominance. The industries with the largest market capitalization of free circulation in 2009 and 2014 are still banks, but now the industries with the largest market capitalization of free circulation have become pharmaceuticals and electronics, which now have a greater impact on the rise of the market as a whole.

At present, the stock market is very divided, and the ratio of the entrepreneurial version to the Shanghai Composite Index has reached an all-time high, as does the United States, where the ratio of the Nasdaq 100 to the S & P has exceeded the high point reached during the science and technology bubble in 2000. Whether you look at PB or PE, the differences in valuations across industries are at an all-time high. How do you understand this differentiation? In terms of the profit cycle, the trend differentiation of 50 and gem is largely determined by their poor profits.

To use a more vivid analogy, the year-on-year difference between the rebar price and the Philadelphia Semiconductor Index is significantly ahead of the ratio of 50 to the entrepreneurial version, about a year ahead. it shows that the differentiation between 50 and the gem is actually the differentiation between the traditional economy and the emerging economy. If you take the lead by this difference, it may not be until the first half of next year that the style is fully switched to 50. The current style also matches the changes in the economic structure, but there is a risk point here, that is, although the style is determined by their respective industrial cycles, driven by liquidity, the style trend is often further strengthened. make the stock valuation bubble in line with the direction of the industry. For example, in the science and technology bubble in 2000, the general direction of the rise of Internet stocks in that year was right in hindsight; now that people speculate on Tesla, it may be right to represent the direction of new energy vehicles in the next decade, but the extreme valuation differentiation must be caused by excess liquidity. In the broad credit stage in 2009, the main line of the market rise was the cyclical industry, when the cyclical industry was now the growth company, because China's real estate golden cycle has just begun, and now, although the macro environment is also broad credit, the market is not to hype cyclical industries that directly benefit from broad credit, but to speculate in the long-term direction of the technology and pharmaceutical industry through liquidity easing. However, it should be noted that if there is a marginal change in liquidity in the second half of the year, then the high valuation plate will face greater adjustment pressure accordingly, and the style will drift to the undervalued plate periodically. The same is true in 2009, the cyclical industry was the absolute protagonist in the first half of the year, and after M2 growth approached the peak in the second half of the year, the performance of the consumer and technology industries exceeded that of finance and cycles, forming a perfect reverse mirror.

Fifth, is the opportunity of Hong Kong stocks better than A shares in the second half of the year?

There are more opportunities for Hong Kong stocks in the second half of the year, one of the most important reasons is the return of Chinese stocks. China-listed stocks will have a great impact on the industry distribution pattern of Hong Kong stocks. In terms of the final weight, it is very likely that finance will no longer be the largest sector of the entire Hong Kong stock market, but will become technology and consumption, which is very similar to the change in the market value of A shares in circulation just now, which will significantly improve the activity of Hong Kong stock trading as a whole. The discount of Hong Kong stocks to A shares is largely related to poor liquidity. In addition, when the US dollar enters the depreciation cycle, Hong Kong stocks usually perform better than A shares.

Q: given the relatively loose monetary policy this year, will interest rates be cut in the second half of the year and next year? what will be the extent of interest rate cuts? can households appropriately increase their debts under the circumstances of interest rate cuts?

A: we don't think it is likely to cut interest rates this year. The simple summary of the previous analysis of monetary policy is actually two sentences: whether to tighten sales or not, and whether to relax or not to look at house prices. Now real estate is in a state where sales can get by, but prices have not fallen. If house prices do not fall, the need to cut interest rates is not great, and it should be very difficult to see it again this year.

We believe that China's real estate cycle has basically peaked, and looking back, the investment nature of real estate is getting weaker and weaker, so after the change in the supply and demand pattern of house prices, especially in non-core cities, prices may enter a slow bear pattern. In this case, the only way to avoid the systemic risk caused by a sharp fall in house prices is to reduce interest rates, so interest rate cuts will continue next year and the year after next. As for whether ordinary people should increase leverage to buy a house during the interest rate reduction cycle, depending on your purpose of buying a house, if the purpose of buying a house is to live, I think there is no problem, because the mortgage loan in China is basically a floating interest rate, not a fixed interest rate. unlike in the United States, in this way, in the interest rate reduction cycle, the financing cost will become lower and lower, so as long as the interest rate level basically matches your income level. I don't think it's a problem to buy a house. But if the purpose of buying a house is to invest, then it doesn't make much sense. In Taiwan, for example, although mortgage interest rates are as low as 2%, house prices have basically not risen in the past six or seven years. Once real estate enters a downward cycle due to the reversal of supply and demand, house prices can be stimulated without lowering interest rates, which is different from the previous logic. Even if interest rates continue to fall, house prices can hardly outperform monetary growth, so they do not have the value of investment.

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