HK stocks under a blanket Kill? Hold on, Reversal is Near

Hello everyone,below are takeways of Dolphin's portfolio strategy this week:

1. After emphasizing for several consecutive weeks that the market should not be excessively priced in anticipation of interest rate cuts, Dolphin believes that the trading of the US stock market, which previously rushed to the "recession-interest rate cut" expectation and has been adjusted, is nearing its end.

Currently, the market and the Federal Reserve have basically reconciled their differences. The macro data of the US stock market only shows that the economy is resilient, but the fact remains that the growth rate is slowing down and consumption is becoming more cautious.

2. This also means that the excess returns brought by the US stock market's re-pricing of the economic recession pace are gradually disappearing. At the same time, the continuous decline of the Hong Kong stock market in recent weeks, especially the market trading that shakes the value investment and only blindly kills beta, regardless of Alpha, will also come to an end.

3. Currently, despite of a EPS recovery, though slowly, Hong Kong stocks has been on de-valuation pass, while US stocks are elevated, leaving HK stocks especially attractive in valuations. In the situation where the outflow of foreign capital is nearing its end, Dolphin plans to reduce the overvalued US stocks this week and increase the proportion of Hong Kong stocks with attractive valuations.

4. This week, Hong Kong stocks such as Pinduoduo, MEITUAN, Kuaishou, and Xiaomi, will release their financial reports. Judging from the peer companies that have already released their reports, the probability of Pinduoduo and MEITUAN-W exceeding expectations is relatively high, and the basic fundamentals are not obstacles to their stock price rebound.

The following is the detailed content:

After the release of macroeconomic data in April, the trading of the past two weeks has become a scenario assumption of "US recession, China's recovery" at the beginning of the year, which has been severely "slapped in the face": the US recession "only hears thunder, but no rain", and China's recovery "only has forecasts, but no clear skies".

I. US recession: "Only hears thunder, but no rain"

After tracking for several months, Dolphin Analyst found that the main logic for judging the marginal changes in the US economy in the short term is simple and clear:

(1) The endogenous driving force of the US economy is based on household demand (contributing 72% of GDP), followed by corporate demand (private investment 18%). Therefore, the marginal changes in GDP are key to the household income and expenditure statement: the first is the open source end of the household income statement-Topline should be stable; the second is that the household income and employment expectations are not worse, so that the savings rate does not increase, and the new income will be transformed into new expenditures;

(2) The key to the increase in household income lies in "open source": among the total income of households, employee compensation contributes 63% of household income. Therefore, the marginal increment of household demand in GDP ultimately evolves into two trackable variables-new non-farm employment and non-farm hourly wages.

(3) At the beginning of April, we already knew that the new employment in April was good, and more importantly, the non-farm hourly wage (seasonally adjusted) was accelerating positively by 0.48% on a month-on-month basis. These two basic attitudes have laid the foundation for all subsequent endogenous numbers in April, including PCE this week.

Based on this logic, Dolphin Analyst has already pointed out in "Putting High Interest Rates in Another Bank? The Probability of a Soft Landing is Even Greater" .

1) The US April retail sales data released is a natural results of hourly pays and paroll growht further verifying that the economic recession in the US is still a slow decline on the "income statement"side. Residents are more cautious about spending, but underpinned by strong payroll numbers, the decline in consumption is slow. So far, the US economy has not seen a deep recession.

(1) After seasonal adjustment, US social retail (retail + catering) shrank for two consecutive months, and rebounded in April with a month-on-month growth rate of 0.4%, which is basically consistent with the seasonlly adjusted (SA) hourly wage growth rate_0.48% mom. The year-on-year growth rate reached more than 5%. It can be said that residents' domestic demand is the real confidence for positive growth of US GDP in the second quarter.

(2) There are several very positive factors in the sub-items: under high interest rates, the market is relatively pessimistic about automobile consumption, but in April, the retail sales of auto parts stores increased by 0.4% month-on-month, which is in line with the recovery of automobile manufacturing in the manufacturing capacity utilization rate of that month.

(3) In addition to the repair of health care and daily shopping mall retail, building materials have also been repaired, which seems to be related to the rebound in US construction spending last month.

(4) However, the tightening of consumption is still clearly visible: in April, e-commerce and other non-store sales representatives with better prices accelerated to a month-on-month growth rate of 1.21%. Durable goods that can be selected offline, such as 3C appliances, furniture, and hobby goods, still have poor sales performance, while necessities remain stable.

2. US banking industry: tightening credit at a "snail's pace"

From the latest disclosure of the US Federal Reserve's nationwide banking report, it can be seen that the US banking industry is still tightening credit as of the week of May 10, but the speed is progressing at a "snail's pace": a net decrease of 6 billion US dollars in a single week, which is basically negligible compared to the total assets of 22.9 trillion US dollars.

Comparison:

Asset side: The securities assets such as national bonds and institutional bonds that are still shrinking last week; the toB commercial and industrial loans and housing mortgage loans that are shrinking in loans; consumer loans have resumed expansion, and only car loans in consumer loans have shrunk slightly. The commercial real estate sector that the market is more worried about has expanded for six consecutive weeks.

Liability side: Deposits are still moving, and the intensity has slightly increased compared to the previous two weeks; while net assets should be sensitive to the front-end loan interest rate and the slow speed of deposit relocation on the back-end, they have increased.

From the evolution of the past few weeks,

Summarizing the above, a clear feature of the current economic cycle in the United States is:

(1) In this economic cycle, due to the balance sheet problems of the private sector (enterprises + residents), which were covered by the Federal Reserve and the government in 2020, although the repayment ability of residents and enterprises has marginally deteriorated after the interest rate hike, the default rate has not exceeded the pre-epidemic level. In this crisis, the United States used national credit to cover the risks of the private sector, and the risks of the private sector were transferred to the government's balance sheet, mainly reflected in the national debt.

(2) The national debt problem mainly corresponds to the current two crises - a. the liquidity crisis of small and medium-sized banks, which has been quickly covered by the Federal Reserve; b. the US national debt ceiling problem, which is more of a tool for the two parties to play games and is actually difficult to default.

(3) In the global asset pricing - risk-free interest rate + risk interest rate: the first two premise conditions support the continuous high level of the risk-free interest rate. The government's behavior of covering everything has not caused a high premium on US risk assets, corresponding to the current high P/E ratio of US stocks, which is not proportional to its EPS growth.

(4) However, this strategy of the United States has a completely different impact on peripheral markets: especially for assets that rely heavily on US dollar liquidity, it is necessary to hedge against the relatively high risk-free interest rate, and strong EPS growth is required. However, in the global tight credit cycle, it is difficult to achieve strong EPS growth.

In this case, peripheral markets that rely on US dollar liquidity need to see a qualitative change in the decline of US residents' income tables, which will trigger the Fed's interest rate cut expectations.

Under the deduction of macro data, the market has priced in the decline of US stocks and interest rate cut expectations before the comprehensive recovery: the ten-year Treasury bond has rebounded to 3.7%, and all driven by long-term real economic growth expectations.

And the yield of one-year US bonds has returned to above 5%, which means that the market has finally recognized that there will be no interest rate cut within a year, and it will no longer confront the guidance of the Federal Reserve.

In contrast, the domestic market has entered a relatively painful state: due to the poor data on prices, credit, industrial value-added, real estate, and employment in China in April, the interest rate cut expectations have returned, causing the Sino-US interest rate spread to widen again and the RMB to depreciate. Chinese assets, especially offshore Chinese risk assets, have performed poorly during this period. Also because of this, last week's overall performance, the expectation of the recovery of the US economic recession drove the strong rebound of most markets worldwide, while the domestic repair expectation was blocked, the RMB devalued significantly, causing the market to completely ignore the repair of the income and profits of Chinese concept assets themselves, only focusing on the valuation that worsened at the Beta level, completely ignoring the fact that some individual stocks at the Alpha level delivered good performance in the current period.

As for the performance of Chinese concept assets last week, it is obvious that Chinese concept assets either have income repair + profit repair or profit repair, which is stronger than the market's weak expectations.

3. Where is the "breaking expectations" trading going?

Summing up the above points, it confirms Dolphin Analyst's initial conclusion: In the case where the US recession is minimal and China's recovery is long and difficult, the market has completely reversed the logic of "US recession, China repair" at the beginning of the year.

However, the correction of trading also needs to be "moderate". If it continues to be corrected, there is a suspicion of overcorrection:

1.) The ten-year US Treasury bond yield in the forward period has returned to a high position of 3.7%; the one-year US Treasury bond has already returned all the expectations of interest rate cuts in the previous year. If it continues to rise, it means that it will be priced to continue to raise interest rates in June, but currently, the market, including the Federal Reserve, does not have such expectations or clear guidance.

2.) Due to concerns about default risk, the market is unwilling to buy Treasury bonds, resulting in the shortest one-month Treasury bond yield hovering at a high level of 5.6%, and the six-month period is also at 5.4%; as the June 1st US bond "ceiling day" approaches, after the US bond ceiling problem is resolved, the supply of US bonds will increase, and under the high short-term return, it is necessary to consider the capital inflow into the Treasury bond market, which will divert funds from bank deposits and equity markets.

3.) With the outflow of foreign capital from Hong Kong stocks, the Hong Kong dollar has departed from the weak side guarantee of 7.85, implying that the outflow of foreign capital has gradually stabilized and the pressure has decreased.

4.) While EPS rebounds, it is also killed by valuation. The PE valuation percentile of Hong Kong technology stocks has returned to the historical low point, and the cost performance is obviously prominent. Consumption is also at a historically low level. However, whether it is TTM valuation or valuation percentile, Nasdaq is currently significantly higher, and there is a greater risk of correction.

Overall, Dolphin Analyst believes that the current market correction is sufficient, and the valuation of some assets in the Hong Kong stock market is prominent. The Alpha Dolphin portfolio plans to reduce its position in US stocks this week and increase its holdings in Hong Kong assets. Stay tuned.

IV. Alpha Dolphin Portfolio Returns

During the week of May 22nd, the Alpha Dolphin virtual portfolio did not make any adjustments. The portfolio's performance this week was down 0.1%, outperforming the MSCI China Index (-0.9%), and was basically the same as the CSI 300 Index (-0.2%), but significantly lower than the S&P 500 Index (+1.6%).

Since the start of the portfolio test until the end of last week, the absolute return of the portfolio was 7%, and the excess return compared to the MSCI China was 14.2%.

V. Individual Stock Profit and Loss Contribution

Looking at the performance of the stocks covered by Dolphin in the past two weeks, due to Alibaba's return to a three-year investment period in last week's financial report, the short-term revenue and profit growth guidance was unclear, which caused e-commerce stocks to fall again.

At the same time, consumer stocks that were previously more resilient, due to poor macro data in April, the market indiscriminately killed the valuations of these companies regardless of their actual business and revenue in April and May.

Although the consumer holdings retained by the Dolphin portfolio are all consumer stocks with more resilience in their fundamentals, the correction is still relatively obvious under the trading logic of killing valuations based on mid-term expectations rather than current performance. The portfolio barely maintained its returns last week, mainly relying on US semiconductor stocks such as Micron Technology, TSMC, and Nvidia.

The specific reasons for the top gainers and losers are summarized by Dolphin as follows:

VI. Portfolio Asset Allocation

The portfolio did not make any adjustments this week, with a total of 21 stocks or ETFs allocated, including 4 standard-rated and 17 low-rated stocks, as well as gold, US bonds, and US dollars. As of the end of last week, the asset allocation and equity asset allocation of Alpha Dolphin were as follows:

Seven. Key Events Next Week

This week, Hong Kong stocks' Chinese concept stocks entered the intensive earnings season, and MEITUAN-W, Pinduoduo, Xiaomi, and Kuaishou are the key focus. As the online retail growth rate in the first quarter is still good, while Alibaba has negative growth and JD.com is close to zero growth, and JD.com's financial report implies that this round of subsidies is not "real", Dolphin Analyst tends to believe that Pinduoduo has a greater chance of exceeding expectations, and it can be focused on at that time.

In addition, the growth of Ele.me orders in Alibaba's financial report also implies that the growth rate of MEITUAN-W takeaway should not be bad. In the case of store repair, MEITUAN-W local life is expected to exceed expectations. The competition expectation should be mainly judged by the profit margin of the store business. Dolphin Analyst tends to believe that MEITUAN-W also has the possibility of exceeding expectations.

In addition, there is also a heavyweight company in the US stock market-NVIDIA. After the stock price rose magically, Dolphin Analyst believes that its risk is relatively high and needs to match a strong fundamental rebound.

Please refer to the following articles in the recent weekly report of Dolphin Investment Research:

"Putting high interest rates back into a bank? The chance of a soft landing is even greater"

"ChatGPT vs. Performance List, Can Giants Support the US Stock Market?"

"Is the promise of "US recession, China's recovery" going to be in vain?"

"The direction of the US recession is set, it's just a small decline in sentiment, and a big decline in health"

"The collapse of US service consumption, and the US stock market celebrates?" 《Fed Rate Cut: Just Waiting for the Moment of Attack by the US Version of Yu'ebao?》

《US Stocks Are Going to Decline and Cut Interest Rates? Anyway, Trading Has Already Run Ahead》

《 Silicon Valley Bank Run Crisis: Is the US Recession Running to the Scene?》

《 US Stocks Give Up Trading and Run Ahead, and the World Can Finally Breathe a Sigh of Relief》

《Inflation Rising is Confirmed? Adversity Brings Opportunity》

《 Putting Inflation Aside, Signals in Alibaba and Baidu are More Important》

《 Hong Kong and the US Are Both Weak, and the Wolf is Coming Again?》

《High-frequency Macro as a Puppet, US Stocks are a Puppet Market》

《 A Yang Line Changes Faith, Tesla Leads US Stocks to Come Back?》

《 How Far is the "Danger" and "Crisis" of US Stocks?》《Is the hammer of performance just around the corner when US stocks don't have a "red New Year"?》

《What's behind the stagnant US stocks?》

《Has CPI fallen back enough for the Fed to be at ease?》

《Is it easy to eradicate service inflation? Beware of market overcorrection.》

《Hong Kong stocks finally have a backbone? Independent market still has further upside potential.》

《Darkness before dawn: the mentality is focused on darkness or dawn.》

《Can emerging markets bounce around for much longer as US stocks are hit hard by reality?》

《Global estimate repair is good news? There are still performance checks to be made.》

《China's asset violence pulls up, while China and the US are two different worlds.》

《Did the giants Amazon, Google, and Microsoft fall? Meteor showers still fall on US stocks.》

《Policy shift expectations: unreliable "strong US dollar funding" GDP growth?》《Southern takeover vs Northern escape, another test of "determination"》

《Slow down rate hikes? The American Dream is shattered again》

《 Reintroducing a "Iron-blooded" Federal Reserve》