Is the supposed "decline of the US and resurgence of China" going to fail?
Hello everyone, here is the core information of Dolphin's summary of combination strategies this week:
US retail sales stalled in March, and retail sub-categories convey the message that necessary goods are strong and optional goods are weak, online sales are strong while offline sales are weak, and disappearing energy consumption means disappearing retail growth. This is consistent with previous PMI, PCE, CPI, etc., indicating that US consumption power is exhausted. This is not incremental information, but a sign that the May interest rate hike should be the last one.
However, the question of how long it will take for the US to enter the easing cycle has improved significantly week by week in the US banking industry: on April 5, the total US banking deposits finally stopped bleeding after more than a month of continuous outflow and started to flow back. At the same time, credit contraction, except for mortgages and car loans, temporarily stopped. After the market's concerns about the banking industry eased, US bond yields began to rise, giving up the expectation that interest rates would be lowered twice within a year as priced in earlier.
In China, CPI fell more than expected in March, casting a shadow over the Chinese economic recovery story. However, Dolphin does not agree with deflationary theories. If there must be deflation, it can only be said that the inertia of demand contraction before being released has been extended. March CPI shows that the core issue is only that China's economic recovery is slower, but the recovery of forward-looking economic variables such as credit and real estate suggests that China's economic recovery will further come.
Based on this judgment, in the process of withdrawing consumer stocks (including Hong Kong Internet stocks), Dolphin slightly increased its holdings of two advertising stocks, Baidu and Focus Media, and timely downgraded some harder-tech stocks such as BOE, and will also choose the right time to downgrade Hikvision.
The following are the detailed contents:
I. US retail fires quickly, and Temu catches up with good times
As a domestically driven economy, consumption contributes more than 70% of the US GDP, and the growth rate of consumption basically determines the amplitude of the US GDP.
In terms of high-frequency data, there are two observation dimensions for the growth of consumption: one is US retail sales, and the other is personal consumer expenditure (PCE).
a. Personal consumer expenditure is directly the core component of GDP (accounting for 70%), which is the money spent from the pockets of individual consumers, covering various expenses such as medical care, housing, clothing, food, housing, and entertainment, etc., and PCE inflation is derived from this data.
In addition, individual consumer expenditures account for 96% of the disposable income after deducting personal income tax from the total income of US individuals, except for interest paid on debt and becoming savings (savings can exist in the form of investment or deposits).
b. US retail sales are similar to those of social and retail goods published in China every month. The statistical calibre is the money received by retail companies (sales revenue). Of course, the people who give this money to companies are mainly individual consumers who buy retail/catering services, and there may also be government and corporate consumers.
Usually, service consumption and commodity consumption in US individual consumption are about 6:4, while social and retail sales are mainly dominated by individual commodity consumption, and US individual consumption is usually 2.2-2.4 times that of retail sales. These two are both monthly frequencies, as important indicators for observing high-frequency consumption, PCE is obviously more important, but PCE is usually released later than social zero data, so before PCE is announced in the current month, retail data is also an important indicator for observing consumption.
In the composition of US social zero, sales of locomotives and locomotive parts related to new car sales (including new and second-hand car dealers and parts/tire stores) account for 20%, and gas stations related to the use of existing cars account for 8%; the second largest category is online retail, with a penetration rate of 15%; the third is catering, accounting for 14%; the fourth is food and beverage, accounting for 11%; and the fifth is daily necessities (daily department stores/supermarkets, etc.), accounting for 10%.
In the era of 2% inflation, inflation corresponds to a year-on-year retail growth rate of 3-4%, but due to strong commodity consumption during the epidemic, US retail growth has reached 8-10%. The rate of decline in retail growth currently being observed is also an important indicator of the degree to which the US economy is slowing down.
In March of this year, the year-on-year growth rate of US retail and services (restaurants only in social zero) quickly fell from 6.1% in the previous month to 3.1%. Due to the high growth rate of catering at this stage, after removing high-growth catering, retail growth rate has only reached 1.6%.
The sales of cars in retail have been seen as suffering from high interest rates and poor sales since the addition to employment in March. The actual year-on-year growth rate of motorcycle retail in March was only 0.4%. After removing motorcycle retail, the year-on-year growth rate of retail was 2%, which slowed down significantly compared to the 5.6% of the previous month.
In Dolphin's view, the core information that implies the exhaustion of consumption momentum in retail in March can be summarized into two points:
In January, after the price of essential energy dropped, the slowdown of retail growth was not significant but rather increased slightly. The reduced energy consumption was converted into other consumptions such as clothing, sports, hobbies and music. But in the latest March, reduced energy consumption is the reduced retail growth rate.
In March, the "rigid demand/online resilience and optional difference" feature is very obvious in the retail structure: apart from auto retail that is closely related to high interest rates, furniture decoration and building materials related to housing consumption, optional clothing is also poor.
On the other hand, the growth rate of essential consumption related to food and medicine (food and beverage, personal care and health care) is more resilient. At the same time, off-store vendors representing online retail have accelerated their growth on a low base, returning to double-digit year-on-year growth, reaching over 12%.
By observing these two structural signals in retail in March, it can be clearly seen that when the money in the pockets of Americans gets less, spending starts to become more cautious.
In addition, in Dolphin's view, in 2023, when Pinduoduo is "making miracles" with its strong push of Temu, it can continue to pay attention to the explosiveness and persistence of Temu's business in the recession cycle that the US is entering, and see if it can quickly grow into an asset with independent valuation value in the secondary market.
2. US Banking Industry: Deposit Outflows Take a Breather
As the dynamic changes of the balance sheet of the banking industry have become one of the key factors affecting the trend of US interest rates, Dolphin recently began to focus on its changes.
From the changes last week, the deposit outflow dilemma of the US banking industry has undergone a significant change in the week ending on April 5th after four weeks of sustained high-speed net outflows:
Although the balance sheet is still contracting, and the contraction is basically the same as the previous week, there has been a fundamental change in the structure:
a) Deposits on the liability side finally rebounded, and the equity corresponding to the assets minus liabilities also began to rebound. The shrinkage of the balance sheet is mainly due to the crazy expansion of borrowing during the liquidity crisis, which is actually an indication of the improvement of liquidity.
b) On the asset side, the main decrease in the week of April 5th was net cash, which should be directly related to the decrease (repayment) of borrowing on the liability side. After deposit outflows were contained, the two major asset classes that are truly related to asset expansion - fixed income assets and bank loans - have also turned into positive growth in weekly changes.
Among them, in the securities asset class, the balance of mortgage and non-mortgage securities has basically turned positive; while in bank loans, the balance of commercial and consumer loans in the week of April 5th was higher than the previous week. Only mortgages and car loans related to high-interest rates are still contracting week-on-week.
In addition, the actual first-quarter performance reports of US banking giants released last week basically confirmed Dolphin's judgment: although the amount of new loans did not increase much, the front-end lending rates were anchored to the latest market loan rates, while the deposit rates for back-end collection remained low. Therefore, the difference in interest rates increased and income growth was relatively high. However, this process requires more bad debt reserves and profit growth is slower than income growth.
However, in Dolphin's opinion, on the one hand, this wave of performance of large banks is actually better, and the other key lies in the change in financing costs of the US banking industry after the SVB crisis. This may be difficult to verify from the first-quarter performance of the banking industry. It can only be said to pay attention to whether there are banks giving business prospects in the future and see how the prospects are affected by the changes in collection and financing costs.
In any case, from the marginal changes of the US banking industry's balance sheet on April 5th, it seems that the deposit outflows of the banking industry have finally taken a breath. However, as of March, the difference between the deposit interest rate of banks versus the actual federal interest rate is still considerable, and it is still necessary to continuously observe the speed of deposit outflows in the future.
And looking at them together, :
Retail shutdown, together with the recent CPI decline seen by Dolphin Jun, cooling of service consumption, net layoffs in employment, deceleration of wage growth, marginal decline of non-manufacturing PMI, and so on, all follow the same trend. But the economic slowdown revealed by these high-frequency data at present is still the slow decline in the income statement of the real economy and the peak of the Fed's rate hike cycle, which cannot support the argument that it will quickly enter the rate cut channel.
The advance expectation of a rate cut in market trading is mainly based on such concerns: continuous structural outflow of bank deposits in the banking industry results in the rise of financing costs, and bad loans may occur in fixed-rate loans in the front end.
Although the deposit inflow on April 5th week, it is not clear how much financing cost has been raised by banks to achieve it. However, at least the crisis has passed in the short term, and the previous expectation of a rate cut has been “returned” since last week.
Looking at the US Treasury trading: the market was expecting an interest rate hike once within six months and two rate cuts within a year, but the expectation for an interest rate hike once remained unchanged last week, and more people traded on this expectation. However, in the next half year, there will be only one rate cut instead of two as before.
On the ten-year yield of US Treasuries, the yield also began to rise last week, rising from 3.3% at the lowest point in two weeks to 3.5% at the end of last week, and the corresponding bond price fell.
In terms of expectations, if the weekly US bank deposits flow back again, the short-term US bond yields are expected to rise by 25 basis points, matching the official guidance of the Fed not to cut rates until 2023. This will continue to accompany the downward trend of gold prices, the rebound of the US dollar index and the decline of US bonds, as well as the fall of growth stocks.
Due to the bank financial report repair and the rise of US bond yields, the Nasdaq composite index responded slowly to the direction of trading last week, while the Dow Jones Industrial Average accelerated its repair.
3. Will China really experience deflation? The slow recovery and deflation are two different things. Last week, China's March inflation data was released: PPI continued to shrink by -2.5% YoY, but consumer inflation CPI and core CPI both increased by 0.7% YoY (due to the lack of seasonality adjustment or availability of data, it is not possible to view the YoY data on a MoM basis).
After the release of CPI data, the market seems to begin to worry about deflation. However, after carefully examining the sub-items, I believe that: 1) there is no such thing as deflation, and if there is a demand deflation, it is the inertia extension after the impact of the pandemic, which is more indicative of CPI as a lagging economic indicator; 2) economic recovery is indeed slow and consumer demand, except for catering and social services, has continued to vent after being suppressed. Specifically speaking:
- excluding strong seasonal items such as food, the main drag on YoY data is mainly residential (22% weight) and transportation and communication (11%): the YoY decline in residential costs is mainly due to the decline in rental costs, which is directly related to the downturn in the real estate market in the past two years; while in transportation and communication, both the price of the transportation itself (car price) and the power source used for transportation (gasoline) are well-known; the communication part is mainly from the price decline of communication tools such as mobile phones, and the communication network service has been a perennial deflationary price category due to the decline in bandwidth and traffic prices.
In summary, CPI has fallen below 1%, but it is only due to three major problems: 1) the old problem of falling house prices in the past; 2) the decline in oil/vehicle prices; 3) slow recovery.
The resonance of these three factors has led to the insignificant rebound of the inflation-based commodity categories after being released, instead, they have been overshadowed by the imported inflation and the supply improvement (automobile chain) brought about by the pandemic itself, making it look like a demand deflation.
If we look ahead, I am inclined to believe that China's recovery is a more enduring presence than deflation:
1) Long-term resident loans rebound: After the beginning of this year, credit data has been good, and it has basically continued in March. RMB loans increased by 760 billion YoY in March, of which the medium- to long-term loans in the previously lagging resident loans began to rebound, increasing by 260 billion YoY. Before that, it had been negative since June 2021.
Of course, currently, the proportion of new deposits for residents is still higher than that of new loans. After the smooth fluctuations before the pandemic, the ratio was basically 1:1, but now it is still 2.3:1 as of March. Resident loans still need further repair, and whether it is a longer-term personal business loan or a personal behavior credit expansion such as a home loan, it needs to continue to be repaired.
2) Real estate has clearly improved marginally
In addition to the latest data in March, where the prices of newly-built residential homes in 70 cities have all turned positive on a month-on-month basis, the prices of second-hand housing have also approached a positive rate of change. Moreover, in February, the completion rate of real estate construction and the sales volume of new houses both turned positive, indicating that there is already clear evidence of an upswing in the sector.
3) From credit facilities extended to corporations and enterprises to consumer credit lending, it takes time for a ripple effect to occur. Looking at the urban unemployment rate at the end of March, it is still high compared to pre-pandemic levels, but the forward-looking index of corporate hiring has rebounded quickly. We can only observe the trends of future corporate investment and hiring, and only when the job prospects for residents begin to stabilize, will there be support for an upturn in consumer and investment spending.
With regards to , China's assets last week suffered due to PPI and CPI growth rates that were below market expectations, leading to concerns about deflation and a slow recovery in demand. Meanwhile, the two main themes this year have been:
1) The issue of U.S. recession: The crisis in the banking industry has been resolved.
2) China's recovery: There are signs of deflation, and the recovery is slow.
As a result, Chinese assets, especially those related to consumer goods have experienced significant setbacks, while traditional U.S. industries have begun to recover.
However, if we look beyond weekly fluctuations and extend our focus to the long-term, the U.S. banking industry still faces high-interest rates, low interest rates for deposits, low-weighted lending rates for existing fixed-rate loans, and risks that are yet to be resolved.
As for China's recovery, we can only say that it requires patience once valuations have been restored, as the extension of corporate and enterprise credit facilities to the stabilization and improvement of household income and employment prospects to support an upturn in consumer spending and investment, require time to gradually spread. IV. Combination Switching
Based on the improvement in domestic consumption margin and the general decline in consumption in the market under the concern of deflation, Alpha Dolphin has increased positions in two advertising stocks with good basic margin, among which Focus Media has both the rebound of advertising and the favorable impact brought about by the re-balancing of its Youpin e-commerce platform, while Baidu has benefited from a relatively high proportion of offline business in advertising and the marginal benefits of its product search function after opening up e-commerce.
Meanwhile, it has reduced its position in BOE, which had risen too much previously, as shown below:
V. Combination Returns of Alpha Dolphin
In the week of April 14th, Alpha Dolphin combo fell by 1.1%, significantly lower than the S&P 500 (+0.8%) and the CSI 300 Index (-0.8%), but slightly better than HS Tech (-1.7%).
Since the start of combo testing until last weekend, the absolute return was 17%, and the excess return compared to the benchmark S&P 500 Index was 22.5%.
V. A Week of Setbacks to the Recovery of China and the Decline of the United States
Last week, the performance of Alpha Dolphin combo was lower than the S&P 500, mainly due to two reasons:
The weighting of US bonds in the combo was too high. After the banking crisis was resolved in the short term, US bond yields rebounded, which had a significant impact on the combo. Moreover, since US bond yields still have room to pay back, US bond prices may also experience a correction. However, considering that Alpha Dolphin combo is biased towards medium and long term logic, no adjustment will be made for the time being, only according to the weekly fluctuation correction.
The deflation argument in China has affected the performance of consumption stocks. The e-commerce stocks (Meituan, Alibaba, Jingdong, etc.) in HS Tech are relatively cheaper consumer stocks, but their volatility is significantly higher than that of normal food and beverage stocks, which has a more serious impact on the position.
For specific companies with the highest gains and losses, the reasons are summarized as follows:
VI. Asset Allocation of the Combo
There was no adjustment to the combo this week, with a total allocation of 23 stocks or ETFs, including 5 with standard ratings, 16 with low ratings, and the rest in gold, US bonds, and US dollars in cash. As of last weekend, the allocation and equity asset holding weights of Alpha Dolphin are as follows:
VII. Key Events of the Week:
This week, the US stock market will be led by TSMC as it enters the first quarter earnings season, while the A-share market will enter the final stage of annual report disclosure and the start of first quarter earnings disclosure. Key US stocks include Tesla, Netflix, and TSMC, and key A-shares are mainly GoerTek and Ningde Times.
Please refer to the recent weekly reports of the Dolphin Research Group:
"US recession is inevitable, but a small one won't be too bad, a big one will be disastrous."
"US service consumption collapse, US stocks celebrate wildly?"
"Federal Reserve rate cuts: is there a moment for the US version of Yu'ebao to sneak attack?"
"US stocks are going to decline and interest rates are going to fall? Anyway, trading has already started."
"Silicon Valley Bank's run on deposits crisis: will the US recession jog over?"
"After returning the gains from trading, the entire world can finally breathe a sigh of relief." app_id=longbridge&channel=t4355034&invite-code=276530)》
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