Rate cut is finally here, can Chinese concept stocks have a chance?

Last week, perhaps hundreds of millions of people around the world were watching an elderly man in his seventies at the global central bank summit, defining the interest rate cycle in the United States and deducing the possible investment risks and opportunities that may follow.

I. The Rate-Cutting Cycle is Really Here

Powell expressed his persistence in the 2% long-term inflation target, which is to firmly anchor the market's long-term inflation expectations, using short-term interest rates to suppress demand. Now, he has even stronger confidence in continuing to repurchase the 2% target.

In the middle, he also extensively reviewed the trajectory of U.S. inflation before and after the epidemic to the present wave of the cycle. In the eyes of the Dolphin, he is intentionally or unintentionally showing off this information: Under the "firm" attitude and path of the Federal Reserve, the United States has smoothly dealt with inflation without pain, achieving an almost perfect soft landing economically, turning something that was originally only seen in theory into reality under his leadership.

As for the next steps in this meeting, the truly effective information released by Powell is: the labor market has already recovered to the state of supply and demand in 2019 before the epidemic, or even a more relaxed state. The Federal Reserve "does not seek, does not welcome further cooling of the labor market."

Given that the Federal Reserve defines the current policy rate of 5.25%-5.5% as a restrictive rate level, the meaning behind the phrase "does not welcome further cooling of the labor market" is crystal clear in the eyes of the Dolphin:

a. After maintaining high interest rates for over a year, the Federal Reserve's next target is to return the restrictive rate to a neutral level. Otherwise, continued restrictive rates will inevitably lead to further cooling of the labor market.

b. The start of the rate-cutting cycle, which is almost a certainty at the meeting on September 18th, is because Powell has previously stated that the recent decline in CPI over the past few months, with the continued decline in housing costs and service prices, is more sustainable and healthier; and the labor market has also returned to a relatively balanced state before the epidemic.

This year, starting from September, the Federal Reserve has held three interest rate meetings. The current market debate is about the slope of the rate cut: Will it be 100 basis points or 75 basis points this year, and how many basis points next year?

Of course, in terms of the rate cut slope, Powell still expresses a data-driven decision-making approach. Some interpretations in the market believe that with around 2.5% inflation vs. policy rates of 5%+, the rate restriction is too high, and a 100 basis point rate cut is needed within the year to reflect the Federal Reserve's attitude of "not welcoming" further cooling of the labor market.

However, the Dolphin still believes that the rate cut this year should be around 75 basis points. The core reason is that looking at the three major sectors driving the economy - residents, enterprises, and government - although the momentum has slightly slowed down, overall it is still relatively robust: a. The corporate sector has largely completed destocking and is increasing investment under the drive of the new technology cycle; b. In the post-epidemic era, the path of low revenue and high expenditure for the U.S. government is certain, and the deficit will continue.

c. Currently, the main weakening momentum is in the low-income groups in the household sector with weaker risk resistance, while the middle and high-income groups with assets should still be doing fine. Overall, the household balance sheet remains at historically good levels.

In this economic situation, the data-driven decision-making path of the Federal Reserve also means that in the case of a steady economic slowdown, the Fed can comfortably cut interest rates. Moreover, from the perspective of financial risk management, stable interest rate cuts themselves also help with risk management in the financial industry.

II. Interest rate cuts are here, how to trade?

Under the combination of interest rate cuts and a soft landing, initially, small-cap stocks like the Russell 2000 will be most sensitive to interest rate cuts, with higher elasticity. However, if combined with earnings certainty, the next step is to look for tech stocks, especially true global tech giants that can benefit from the decline in the US dollar.

Among the soft tech companies covered by Dolphin, the overseas revenue of the Mag 7 generally accounts for around 50%. In the scenario where the US dollar index is likely to fall below 100 with interest rate cuts, significant benefits can be gained from a weak US dollar. With valuations adjusting due to stories and scares (such as Google's antitrust issues), there are still opportunities with a certain level of certainty.

Another niche group that many people may overlook is Chinese concept stocks. In Dolphin's view, there is still an opportunity for them this year due to the US dollar interest rate cuts. The recent pullback in Chinese concept stocks is still driven by negative earnings news.

Looking at the Chinese concept financial reports released in the past two weeks, divided into internet value-added services/sales driven by product strength, advertising monetization driven by traffic, and online sales driven by transaction volume:

a. In the first group, the probability of performance collapse is relatively smaller. Whether it's Pinduoduo or Xiaomi, whether it's overseas expansion or domestic recovery, there is a certain business alpha logic; in value-added services, Tencent's gaming business and Bilibili's games also have potential. Essentially, through their own product cycles, some companies in this group can slightly resist the overall macroeconomic environment dragging them down.

b. In the second group of traffic monetization: all companies are unable to escape the curse of macroeconomic beta. Baidu and Weibo are somewhat hanging by a thread, just getting by. Platforms like Bilibili, Kuaishou, and even minutes with a certain advantage in advertising revenue growth of 10-20% are nothing extraordinary.

c. In the third group of sales monetization: Vipshop, JD, and Alibaba, which have released financial reports, are almost all struggling. Either there is no GMV growth, no revenue growth, or no profit growth, all results of operating without alpha under poor macro conditions. Even the high growth in live streaming e-commerce reflected in Kuaishou's GMV has come to an end. A 15% GMV growth, the unfinished shelf e-commerce, means that Kuaishou's e-commerce dividend is almost over.

As e-commerce platforms serve as sales expense platforms for consumer companies, during typical macroeconomic headwinds, a company's sales expenses are more counter-cyclical compared to pure advertising expenses. With the four e-commerce platforms' performance already disappointing, Dolphin can only pin hopes on Pinduoduo and Douyin. If Pinduoduo and Douyin also disappoint, the signal points to an overall collapse in consumption. Tonight's Pinduoduo financial report is worth paying attention to But for Dolphin, before the Chinese concept financial report season, through various research information, it has already roughly known that the big consumption is accelerating to worsen, which is basically within expectations. However, looking ahead after the thunderous second quarter financial report season:

a. Currently, whether it is the weak performance of the current period or the weak guidance for the second half of the year, it has already been clearly revealed, and the pricing has been basically determined after this decline;

b. Looking ahead, from the perspective of the external environment, if the US stock market officially enters the interest rate cut channel, with a 75-100 basis point cut this year, China's currently high real borrowing costs will finally have room for operation.

If the RMB can cut interest rates in sync with a similar magnitude during this round of US interest rate cuts, for Chinese concept assets, whether in terms of discount factors or fundamentals, there will be some improvement in expectations.

Therefore, Dolphin reminds here that after the negative release of the financial report season and the price decline, when the US stock market officially enters the interest rate cut channel around mid-September, there is hope for Chinese concept stocks to have a short-term valuation repair opportunity. Dolphin is currently in a cash-heavy position, waiting for opportunities.

III. Portfolio Rebalancing and Returns

There was no rebalancing in the portfolio last week, and the portfolio return decreased by 0.4%, underperforming the Chinese asset index - MSCI China (+0.1%), Hang Seng Tech Index (+0.3%), and underperforming the S&P 500 (+3.9%), but slightly outperforming the Shanghai and Shenzhen 300 Index (-0.6%). This is mainly because last week, Pinduoduo and NetEase experienced significant declines, while AI assets such as Micron and TSMC fell slightly after the recovery.

Since the start of the portfolio testing until the end of last week, the absolute return of the portfolio is 41.5%, with an excess return compared to MSCI China of 63%. From the perspective of asset net value, Dolphin's initial virtual assets of $100 million have now risen to $140 million.

IV. Individual Stock Profit and Loss Contribution

Last week, due to the financial report disasters, Chinese concept assets such as Kweb generally experienced declines, while the relatively high-weighted TSMC and Micron in Dolphin's pure US stock holdings also experienced some pullback after the recovery.

Regarding individual stocks in Dolphin's stock pool that had large fluctuations last week, Dolphin explains as follows:

V. Portfolio Asset Allocation

Alpha Dolphin's virtual portfolio holds a total of 13 individual stocks and equity ETFs, with 5 standard allocations and 8 equity assets underweighted. The rest is distributed in gold, US bonds, and US dollar cash. Currently, there is still a significant amount of cash and cash-like assets, which will gradually increase based on performance after the financial reporting season ends. As of last weekend, Alpha Dolphin's asset allocation and equity asset allocation weights are as follows:

VI. Key Events This Week:

As the thunderstorm season for Chinese concept stocks comes to an end with the conclusion of the August financial reporting season, both current performance and future outlook are expected to be disappointing. Key assets to watch this week include Pinduoduo, Meituan, Ctrip, BYD, Li Auto, among others. However, the most critical event of the week is undoubtedly the performance of the pillar of the US stock market—NVIDIA, which could largely determine the market's direction for the coming period.

For the remaining pile of small companies, the Boss is expected to provide a clear definition from a recruitment perspective for the second half of the year. Other companies like Nongfu Spring only serve to illustrate the extent to which essential consumer goods can be affected in adverse conditions.

At that time, Dolphin will promptly release performance speed readings, in-depth analysis, key data breakdown updates, and conference call minutes on the LongPort platform. Please have the app ready, set reminders, and be the first to receive Dolphin's performance season analysis. For the Dolphin Research webpage link, please click (here) .

Risk Disclosure and Statement of this Article: Dolphin Research Disclaimer and General Disclosure

For recent Dolphin Research portfolio weekly reports, please refer to:

"US Stocks Continue to Explode with 'Ghost Stories', Is There a Bottomless Drop?" 《Economic and consumption are doing well, will the Fed really cut interest rates in September and cut three times in a row?》

《Are the "brilliant" small-cap stocks in the United States nourished by economic fundamentals?》

《Soft landing of US stocks = hard control by giants + scattering of small retail investors?》

《The head of the US consumption train leaked, can it still trade a soft landing?》

《Deflated social zero, soft landing economy, will it drag down Chinese assets?》

《The US government is spending money "without closing the door", trading interest rate cuts still requires caution》《US Stock Market Cuts Interest Rates Expectations and Shoots Back, Is It Reliable This Time?》

《Hong Kong Stock Market Suddenly Changes, To Escape or to Accept?》

《Financialization of the US Economy, Yellen and Powell as the Guardians of the US Stock Market?》

《US-listed Chinese Stocks Simultaneously Pull Back, Who Holds the Opportunity?》

《The United States in 2024, Soft Landing or No Landing》《Making more money and spending more, why do American residents consume so fiercely?》