Recent adjustments in safe-haven assets reflect more on positioning and capital factors, with the dominant logic remaining unchanged.
In our outlook for the second half of 2024, "Major Asset Classes 2024H2: Upholding Principles and Awaiting the Right Time," we proposed that global assets will face the challenge of "three major forces" in the second half of the year, with Chinese high-dividend stocks, gold, and foreign bonds among other "safe-haven assets" potentially holding a relative advantage. In July, the CSI Dividend Index fell by 4.5%. Although the price of gold continued to rise in July, its volatility significantly increased. How should we view the recent pressure on safe-haven assets? We believe that the recent pullback in high dividends and gold is largely influenced by capital and positioning factors, with the bullish logic not showing a significant change. After the short-term pressure is released, safe-haven assets may continue to hold an advantage in the second half of the year.
Macro fundamentals support the medium to long-term performance of high dividends.
The recent adjustment in high dividends is partly due to the inflow of funds earlier, leading to some capital taking profits, and may also be affected by the decline in commodity prices: looking at transaction volumes, turnover rates, and dividend yield spreads, the high-dividend sector is quite crowded in trading, with its valuation advantage relatively weakened compared to the broader market, and it is still not possible to rule out the pressure of "high-to-low" capital outflows in the short term.
However, if we extend the investment horizon to the next 1-2 months or the second half of the year, we believe that the configuration value of high dividends remains prominent. The combination of China's structural forces and a weak recovery cycle provides an ideal macro environment for the performance of high dividends. Currently, China's household leverage ratio is approaching an inflection point, the economy is in the second half of the financial cycle, with credit and real estate cycles resonating, exerting a cross-cycle impact on the market. Under the transformation of the economic structure, the performance of high dividends may span cycles. Looking at the short economic cycle, low growth and inflation are conducive to the performance of high dividends.
In "Buying Stocks or Bonds," we constructed an economic principal component index using four key economic data: second-hand housing prices, credit impulse, PPI, and PMI, which is mutually verified with high-frequency economic activity indices, showing that China's economy is still in a weak recovery state;
Using historical GDP data for HP filtering and linearly extrapolating the results as a rough measure of economic expectations also shows that economic growth expectations have fallen year-on-year in recent years.
Long-term and medium-term factors叠加, the performance of high-dividend assets is relatively superior. In the process of capital moving from high to low, growth industries are alternatives to high-dividend assets, but growth-style market trends generally require valuation expansion. We find that in the context of a weak macro recovery, it is difficult to expand valuations, and profits may continue to dominate market performance and overall market trends: since April 2022, the negative contribution of valuations to the overall A-share index has been only about 100 points, while profit declines have dragged down index growth by about 400 points.
Wind consensus forecast results show that in 2024, high-dividend assets have a strong advantage in profitability compared to other industries, with their ROE absolute level ranking at the forefront.
We also reviewed the changes in EPS and stock price levels across industries since 2020 and found that during the 2020-2023 period, the strong profitability of high dividends drove stock price increases, and the distribution of gains and losses in other industries also showed a clear positive correlation with fundamental changes, once again confirming that profits dominate the market. So far in 2024, the high-dividend sector still occupies the first quadrant of "strong fundamentals-strong stock price," maintaining a relative advantage.In summary, we believe that the high-dividend sector may continue to be an excellent safe asset in the second half of the year. Although short-term performance may be disturbed by fund switching, the risk of decline is limited, and we maintain an overweight position. Considering the downward pressure on commodities, we suggest adjusting the high-dividend allocation structure accordingly, reducing exposure to energy resources, and increasing allocations to finance and public utilities.
The recent correction in gold prices has been greatly influenced by funds, with the interest rate cut trade and the election trade resonating, and gold continues to be favored.
In early July, gold broke its historical high again, with London gold spot prices touching $2,480 per ounce, then falling back to around $2,350 per ounce, and then rising back above $2,400. We believe that the recent increase in gold volatility reflects more on fund factors: multi-asset accounts have a heavy position in US technology leaders, and since the end of July, some technology leader stocks have not met profit expectations, leading to stock price corrections and increased asset portfolio volatility. Some funds have been forced to reduce leverage and reduce risk exposure, leading to risk spillover and triggering a broad correction in major asset classes such as stocks, bonds, copper, gold, and oil. Therefore, the recent adjustment in gold may just be a "wrong kill," and its allocation value remains prominent:
Firstly, supported by the interest rate cut trade. The China International Capital Corporation's (CICC) large asset class inflation sub-item forecast model shows that US inflation may continue to improve in the coming months. As long as there are no black swan events, CPI inflation will fall to a range of 2.5%-3% this year, and PCE will fall to a range of 2%-2.5%. There is a high probability that there will be no second inflation risk in the second half of the year.
Although the initial value of US GDP growth in the second quarter exceeded market expectations, this data will undergo multiple revisions in the future. Under the triple pressure of high interest rates, the depletion of excess household savings, and the decline in fiscal spending, the US economy may slow down further. Growth and inflation are falling synchronously, creating conditions for the Federal Reserve to cut interest rates as soon as possible (for details, see "The interest rate cut trade may usher in a key window period"). At the July FOMC meeting, the Federal Reserve clearly indicated that as long as economic data cools down as expected, interest rate cuts will begin in September; it no longer only focuses on inflation risks but also emphasizes the risks of a weakening labor market. From the data, we believe there is still a possibility of cutting interest rates earlier or cutting 50bp at a time.
Secondly, the election trade is favorable. Polls show that the Republican Party currently has an advantage in the presidential and congressional elections [2]. If Trump is ultimately elected and the Republican Party controls both chambers, then US fiscal policy may expand, and the risks of global trade friction and inflation will also increase next year, while also possibly increasing market volatility. We believe that gold can both hedge inflation risks next year and hedge the risks of a decrease in US dollar credit and geopolitical risks, and is expected to benefit from the election trade.
Although it appears that the increase in gold prices has significantly exceeded the level that matches US Treasury yields, we believe that gold has not significantly preempted the interest rate cut trade, nor has it been significantly overvalued: In the report "Can gold still be bought?", we constructed a four-factor model to explain the increase in gold prices. The model decomposition shows that the main reason for the rise in gold over the past two years is the expansion of US public debt and the increase in central bank gold purchases, not a lack of fundamental support. At the same time, high interest rates and a strong US dollar still have a significant suppression on gold.
As the interest rate cut trade unfolds and US Treasury yields fall, gold has further room to rise. We have also reviewed the performance of gold mining stocks before and after the Federal Reserve's interest rate cuts in history and found that within six months before and after the rate cuts, gold mining companies are often weaker before the market and then stronger. It is worth noting that although most of the profit structure of gold mining companies includes other industrial metals such as copper, cobalt, and lead, and the weak prices of industrial metals during the interest rate cut cycle often drag down the profits of related companies, the historical excess returns of gold stocks are not weaker than gold itself and also have allocation value.
August asset allocation suggestions:
► Domestic stocks: Opportunities are greater than risks, focusing on high-dividend structural opportunitiesAs previously discussed, against the backdrop of a weak economic recovery, the market valuation may find it difficult to expand significantly. However, we have also observed that in recent years, despite the lack of strong upward momentum in the market, the valuation has not contributed negatively to the stock market under the domestic stable growth context. From an absolute level perspective, the Chinese stock market is currently at a relatively low level, both historically and when compared horizontally, providing a low valuation advantage and a good margin of safety for the domestic stock market. On July 31, the forward price-to-earnings ratio of the non-financial sector of the CSI 300 was around 13 times, lower than the average level of the past decade. Although valuations may change dynamically with earnings, since 2024, the profit growth rate of industrial enterprises has gradually stabilized and turned positive, so the overall downward pressure on stocks may be limited. We believe that as domestic stable growth policies are gradually implemented, driving a marginal recovery in economic growth, it may be able to drive a cyclical decline in the risk premium, boosting market sentiment and valuation levels. Therefore, we believe that the medium-term opportunities in the Chinese stock market are greater than the risks.
On the policy front, the Third Plenum and the Politburo meeting have expressed a positive stance, and policies are expected to be gradually implemented. The Third Plenum of the 20th Central Committee was held in Beijing from July 15 to 18, focusing on further comprehensively deepening reforms and promoting the goal of Chinese-style modernization, and making systematic deployments. It set the overall goal for China's medium and long-term development: "Continue to improve and develop the socialist system with Chinese characteristics, and promote the modernization of the national governance system and governance capabilities." It proposed to "complete the reform tasks proposed in this decision" by 2029 and to "basically establish a high-level socialist market economy system" by 2035. This is beneficial for the medium and long-term development of the capital market and the marginal repair of investor confidence. The Politburo meeting held on July 30 paid more attention to the deployment of economic work in the second half of the year, pointing out that the tasks of reform, development, and stability in the second half of the year are very heavy, and emphasized "resolutely completing the annual goals. Macro policies should continue to exert force and be more effective." We believe that the subsequent policy intensity may be increased. The policy focus will shift more towards benefiting people's livelihoods and promoting consumption. In July, the government arranged 300 billion yuan of special treasury bond funds to support large-scale equipment updates and the exchange of old consumer goods for new ones, which has already reflected the marginal change in fiscal attitude. In addition, monetary policy has also shown a positive attitude recently, with the central bank's unexpected interest rate cut, showing care for macro liquidity. The loose monetary policy, combined with the gradual implementation of fiscal funds to form physical work volume, may bring positive changes to the economic fundamentals.
Structurally, it is recommended to focus on high dividend and sectors that may repair the fundamentals. Under the macro background of weak economic recovery and profit-driven market in China, we believe that the structural market of A-shares may continue, and in terms of industry segmentation: 1) High dividend sectors with stable fundamentals, dividend capabilities, and willingness, focusing on opportunities from the bottom up with the potential to increase dividends on the molecular end. 2) Fields with expected industry improvements and high performance elasticity, such as electronic semiconductors, lithium batteries and other new energy sectors, and the reform and price increase expectations of public utilities are also worth paying attention to. 3) During the mid-year reporting period of listed companies, pay attention to fields and stocks with good performance. (For details, see CICC's "Stabilization Measures are Expected to Further Strengthen")
Interest Rate Bonds: It is recommended to maintain standard allocation
The central bank's interest rate cut helps interest rates to fall, and the willingness to regulate counter-cyclically is clear. On July 22, the central bank lowered the 1-year and 5-year LPR interest rates by 10bp each, which was the first interest rate cut of the year, showing the central bank's stronger willingness to strengthen counter-cyclical regulation and increase financial support for the real economy. On July 25, the central bank rarely carried out MLF operations at the end of the month again after carrying out MLF operations in the middle of the month, and lowered the winning interest rate by 20bp, providing a reasonably sufficient liquidity environment for financial intermediaries. Affected by the central bank's interest rate cut, the long and short-term interest rates in July fell again, and the ten-year Treasury bond interest rate set a historical low of 2.15%. Looking ahead, we believe that this interest rate cut may become the starting point for further relaxation of this round of monetary policy. Considering that the probability of the Federal Reserve's interest rate cut is gradually increasing overseas, and the constraints of exchange rates on further relaxation of domestic monetary policy are also expected to be reduced, there is still room for subsequent interest rate cuts and reserve requirement ratio cuts.
The problem of insufficient domestic demand in the economy still exists, and the demand for safe assets is high, and the actual risk of interest rate increases is limited. From the perspective of the economic fundamentals, the reality of weak economic recovery in China has not changed, and social financing growth mainly relies on the issuance of government bonds, with insufficient demand for medium and long-term bonds from residents and enterprises. The lack of financing demand in the real economy, coupled with the weak performance of risky assets, has led to a long-term "asset scarcity" situation, and the market's demand for safe assets remains strong, with bonds still being a good investment target. The current policy interest rate is still slower than inflation, and the actual interest rate is high, which may restrict the speed of economic recovery. A single interest rate cut may not be able to significantly drive up economic growth expectations, and the actual risk of subsequent interest rate increases is limited. However, considering that the central bank's reduction of policy interest rates has a stronger guiding effect on the money market and short-term bond interest rates, and the central bank's control over long-term bond interest rates is still in place, the yield curve may continue to steepen, and investors can appropriately shorten their holding duration.
In summary, we recommend maintaining standard allocation of interest rate bonds and appropriately shortening the holding duration.
Credit Bonds: It is recommended to maintain standard allocation
From the demand side, after the quarter, under the condition of stable and increasing scale of wealth management, the demand for credit bonds may still be able to maintain stability. However, in the medium and long term, we believe that the growth of wealth management scale may face the pressure of banks' own issuance of wealth management scale compression and trust rectification, and the scale growth rate may have certain limitations. On the supply side, under the current background of local governments resolving hidden debts, the space for leverage is limited, and the financing demand of real estate and enterprises has weakened, making the growth of credit bond supply limited. Under the current environment, the market has a high demand for risk aversion, and we believe that the supply and demand pattern of credit bonds may still be healthy. Looking ahead, in the context of the economic fundamentals not yet clearly reversed and the central bank's interest rate cut, although the current credit spread is low and the overall valuation of credit bonds remains high, the overall fluctuation of the bond market may be relatively limited, and the yield of credit bonds may continue to follow the interest rate bond trend.
In summary, we believe that the configuration value of credit bonds is still high. Although the downward space of credit spreads may be limited, the macro interest rate decline will open up space for credit bonds. Considering various factors, we recommend maintaining standard allocation of credit bonds.► Overseas Assets: Overweight Bonds, Neutral Stocks
The uncertainty in the U.S. economic situation still exists, and linear extrapolation may underestimate the risk of a weakening U.S. economy. Although the U.S. GDP for the second quarter once again exceeded market expectations, we believe that the downward trend of the U.S. economy has not changed, and the Bureau of Economic Analysis will revise the GDP readings multiple times in the future. Under the pressure of high interest rates, the withdrawal of fiscal support, and the depletion of excess savings, we think the U.S. economy may continue to weaken, and there is a possibility of non-linear decline, with a higher likelihood of GDP data being revised downward. Looking at the details, the number of U.S. companies filing for bankruptcy remains at a high level, and the interest coverage ratio of companies continues to decline, indicating that the suppression of high interest rates on corporate activities still exists. From the investment perspective, U.S. manufacturing capital expenditure orders and construction spending are still declining, and the Federal Reserve's survey of manufacturing capital expenditure intentions remains at a low level of fluctuation, suggesting that corporate sector growth may further contract, weakening employment demand. In terms of employment, referring to historical experience, the current job market may have already approached the inflection point where the slope of the Beveridge curve and the Phillips curve changes, indicating a risk of an accelerated increase in the U.S. unemployment rate. On the consumption front, the large amount of excess savings formed by fiscal stimulus during the pandemic has supported U.S. consumption and the economy in the past few years. However, the latest data calculated by the Federal Reserve Bank of San Francisco shows that the excess savings of U.S. residents have been exhausted, and since the actual growth rate of personal consumption in the U.S. has always been higher than the growth rate of personal consumption expenditure, residents' cash flow is under pressure. On the fiscal side, the U.S. federal fiscal deficit in June was significantly reduced compared to May, with the fiscal deficit rate TTM dropping to 5.6%, and the fiscal impulse continues to decline, showing that U.S. fiscal policy has been more of a drag on economic growth rather than supporting economic upward movement since the beginning of this year.
From a valuation perspective, the expected return of U.S. stocks is still lower than that of U.S. bonds, and the issue of high valuation has not improved. Overall, although U.S. stocks have experienced some adjustments recently, the 3-month short-term bond yield is still higher than the forward price-to-earnings ratio (expected earnings for the next 12 months / stock index price) of the S&P 500, indicating that the expected return on risky assets may reflect a relatively optimistic investor sentiment, and the capital market may have overestimated the price of stock assets to some extent. In our July report "Elections in Europe and America and Market Variables," we warned that market volatility may increase in the second half of the year. To date, the VIX index has risen by more than 40%, and our view has been preliminarily realized. The economic, electoral, and geopolitical factors that are currently disturbing the market still exist. Against the backdrop of rising volatility, we believe that caution should be exercised towards risky assets. However, the development of the semiconductor and artificial intelligence wave may bring industry opportunities. The recent market adjustment and strong earnings growth have brought the valuations of major leading companies in the artificial intelligence field to around 30X. Compared to the internet bubble period around 2000, the valuations of leading companies in the current artificial intelligence field are only at the starting stage. With the further development of the industry, leading companies have the potential for long-term improvement, and attention is recommended. However, we also caution that due to the tendencies of "creative destruction" and "over-optimism," the risks that the AI revolution brings to stocks may not be less than the opportunities. Historically, during several technological revolutions, the stock market often rose first and then fell, with significant increases in volatility. We believe that the current AI technology is still in the early stage of new technology application and diffusion. Once the speed of technological progress does not meet investors' expectations, or leading stocks experience unexpected risk events, it may trigger market adjustments.
Among various assets, U.S. bonds may be a better choice. We reviewed the performance of major assets from the 14 rounds of the Federal Reserve stopping interest rate hikes to the start of interest rate cuts, and found that U.S. bonds have the highest win rate. Even if we cannot determine whether the U.S. economy will fall into a recession in the future, from a neutral scenario, the probability of U.S. bonds rising is also relatively high. Considering the prospect of a decline in U.S. inflation and the risk of the economy falling into a recession, the probability of U.S. bond yields rising again is low. If the U.S. starts to cut interest rates, the win rate and increase of U.S. bonds will be further improved. In addition, the financing pressure of U.S. bonds has also weakened recently. On July 29, the U.S. Treasury announced a financing plan, significantly reducing the bond issuance scale in the third quarter by $100 billion to $740 billion. This is mainly due to the Federal Reserve slowing down the balance sheet reduction in June, reducing the redemption scale of U.S. bonds, and the Treasury paying less money to the Federal Reserve, thus reducing financing demand. We expect that in the fiscal year of 2024, the Treasury will maintain a stable scale of long-term U.S. bond auctions, alleviating the supply pressure on the U.S. bond market.
► Commodities: Maintain Underweight
In July, domestic and foreign commodity markets underwent a significant adjustment. With the expectation of the resonance and repair of the manufacturing cycles in China and the U.S. being proven wrong, the concern about insufficient demand support has dragged down the performance of commodities, and industrial products have shifted to pricing based on "weak reality." Looking ahead, the weak recovery environment of the domestic economy is difficult to change in the short term, and under the pressure of high interest rates, the U.S. economy is likely to continue its downward trend, and industrial products may eventually return to fundamental pricing.
In terms of crude oil, although the expectation of the peak demand season is gradually being realized, the current U.S. crude oil supply has already returned to the pre-pandemic historical high, exceeding 13 million barrels per day. The expectation of crude oil supply growth brought by the "Trump trade" also puts pressure on oil prices. As the subsequent peak season for crude oil consumption ends, we believe that the support for oil prices from the demand side may also weaken further. In non-ferrous metals, the negative feedback from high copper prices continues, and global exchange inventories are still on the rise. We believe that the expectation of interest rate cuts is difficult to offset the weak reality of demand, and the pressure on copper prices to adjust still exists. Black series metals are still in the off-season for demand, and we believe that the weak fundamentals may continue to suppress price performance.
We believe that commodity assets have a strong pro-cyclicality and may not be able to hedge the impact of weak macroeconomic demand at home and abroad. Although commodities may hedge some geopolitical risks, many geopolitical risks in the second half of the year come from commodity-importing countries, which may weaken the safety attributes of commodities. In summary, we suggest maintaining an underweight position in commodities.
► Gold: Maintain Overweight
In July, gold broke through its historical high but then fell back and fluctuated. We believe that this round of gold adjustment may be affected by the increase in stock market volatility, with some funds reducing leverage and risk exposure, leading to a spillover of risk. With the dual benefits of interest rate cut trading and election trading, gold still has outstanding configuration value, and it is recommended to take advantage of short-term adjustments to increase the allocation.From a medium to long-term perspective, we believe that the upward trend for gold may not have ended. Firstly, the U.S. economy faces the risk of cooling down under high interest rates. The CPI forecast model for major asset classes from CICC indicates that inflation is still on a downward trajectory, and gold has not truly decoupled from U.S. Treasury yields. A weakening economy and potential Federal Reserve rate cuts could drive interest rates lower, potentially providing new support for gold's performance. Structurally, the U.S. debt problem is deeply entrenched, and global political and economic instability may increase. The trend towards deglobalization and de-dollarization could further intensify, prompting central banks worldwide to continue increasing their gold holdings, which would support gold prices. In summary, we are optimistic about the medium to long-term allocation value of gold. (For more details, see CICC's major asset classes report "Can Gold Still Be Bought?" and "New Trends and Opportunities for Gold").