Has the US interest rate peaked? Is there hope for the Hong Kong stock market?

Hello everyone, here is the summary of this week's core information on the combination strategy by Dolphin:

1) Interesting observations on US retail sales: The retail sales in the US in June were quite intriguing - overall, essential goods showed weakness while discretionary goods were strong, and online penetration accelerated. Among the two major consumer sectors, the real estate sector seemed to rebound, but its sustainability was relatively poor. On the other hand, the automotive sector showed stronger sustainability.

Overall, the retail sales reflect the logic of "cash flow-driven economic growth" in the current situation. When the pace of job creation slows down and employment conflicts ease, once residents start to replenish their savings rate, consumption will be hit back. Therefore, the key to future economic growth momentum still depends on whether the unemployment rate will worsen.

2) Domestic private demand weaker than household demand: Looking at fixed asset investment in June, it can be seen that private fixed asset investment has only recovered to 70% of the same period in 2019. Although retail sales, which are widely recognized as weak, have also recovered relatively weakly, they have reached 117% of the same period in 2019. The proportion of private investment in total fixed asset investment has also decreased from over 60% in 2019 to over 50% in 2023.

3) Comparison of the economic development pace between the two major economies: The current situation in the US appears to be weak but not yet weak, with interest rate hikes reaching their peak and a small-scale burst after the surge in technology stocks. On the other hand, the Chinese economy is approaching its bottom, and the policy bottom has already arrived, with Chinese assets such as Hong Kong stocks at historically low valuations. In comparison, Dolphin believes that there is a greater opportunity for short-term recovery in Chinese assets.

Here are the detailed contents:

I. Signs of weakening US consumption

Under high interest rates, the marginal changes in the core driving force of the US economy - household consumption - are mainly driven by "current income + income expectation changes". In June, with the easing of employment market conflicts, the slowdown in job creation, and the unchanged growth rate of hourly wages, retail sales growth in June slowed significantly.

In June, seasonally adjusted retail sales in the US increased by 0.19% MoM, which is basically consistent with the CPI growth rate of 0.2% during the same period. This means that after excluding inflation factors, retail sales basically showed zero growth.

It is particularly noteworthy that the structure of retail sales this time is very interesting:

1) Rapid contraction in essential goods: In retail sales, the categories of food and beverage stores (12% share) and daily necessities stores (10% share) both showed a decline in sales. Gas stations (8% share) also experienced a significant decline in sales due to falling oil prices, and the health and personal care category (5% share) entered a decline in sales this month. Even the growth rate of dining-out services, which mainly rely on eating out, has dropped to 0.07% MoM, indicating a weaker state.

2) Recovery in discretionary goods related to "housing" sector: Retail sales of furniture and home improvement stores, as well as home appliances and electronics, have started to rebound. However, after a rebound, the sales of building materials and gardening related to housing construction have entered a decline in sales this month. This is consistent with the decline in the construction of new privately-owned residential buildings in June and the simultaneous decline in both volume and price of second-hand houses.

Overall, in the housing market chain, although the inventory is relatively low and the pressure of inventory adjustment is not significant, high interest rates continue to affect housing transactions. The real estate market has hit bottom, but it is currently more inclined to grind at the bottom rather than rebound.

3) Optional "Automobile" Chain: Compared to the bottoming out and hovering state of the housing market, automobiles and auto parts, as the largest category in the social retail sector (accounting for 19% of social retail), have clearly bottomed out and rebounded. As of June, they have been in a positive growth range for three consecutive months on a month-on-month basis.

The month-on-month retail sales growth in June was 0.35%, which may be related to the supply recovery in the automotive manufacturing industry in the past two years. In the past three years, the global pandemic and semiconductor shortage have caused the utilization rate of manufacturing capacity in the U.S. automotive industry to remain low, resulting in continuous weak demand-side sales. With the improvement of capacity utilization rate this year, automotive sales have continued to marginally recover.

4) The second largest category in social retail - online businesses (with online shopping accounting for 90%) - saw a nearly 2% month-on-month growth in June, indicating strong growth.

Overall, it can be seen that the expected impact of high interest rates on optional consumption in June is as follows: necessary consumption is weak, online consumption is strong, and optional consumption is relatively strong. Among the two chains of housing and automobile consumption, the automobile chain is strong, while the recovery of the real estate chain remains uncertain.

Therefore, in terms of sustainability, the consumption in the real estate industry chain is not sustainable. In the future, social retail may mainly rely on the continuous recovery of online retail and automobile consumption to drive growth, but there are signs of weakening consumption momentum.

II. China: Household Demand and Private Sector Vitality

Last week, a series of macroeconomic data was released in China. Behind the slow recovery at the beginning of the year, there are two key factors: a) weak household consumption data (click here for the interpretation of June social retail Realism Strikes, How Far Can Chinese Stocks Rebound?).

Another important aspect is the weaker corporate demand:

On the one hand, this is reflected in the persistently low employment demand of enterprises, with the overall unemployment rate unable to drop below 5%. At the same time, the youth unemployment rate remains high.

2) On the other hand, it is reflected in the continuous downturn of private investment: prior to the pandemic, private investment accounted for 60% of fixed asset investment, but after the restrictions were lifted, it decreased instead of increasing. As of June this year, it only accounted for just over 50%.

In June alone, the year-on-year growth rate of private investment (calculated from the cumulative value) continued to hover around 26% decline. And the amount of private fixed asset investment by June this year was only 70% of the value in the same period of 2019.

The heavy weight investment sector, private investment demand shrinking, resulted in an overall fixed asset investment recovery of only 80% compared to the same period in 2019. In contrast, despite the weakness in the retail sector, the first six months of this year were still around 117% of 2019.

Therefore, what we see is weak consumer spending, but even weaker than consumer spending is the investment demand of businesses, especially private enterprises.

Therefore, for the domestic market, the key to restoring employment expectations and improving consumer spending lies in how to boost private investment and support private enterprises.

Third, where is the market heading?

Recently, the performance of the Hang Seng Tech Index has shown a clear correlation with the renminbi exchange rate. After the issue of China's slow economic recovery was fully discussed, combined with various policy releases at the end of July, there are signs of stabilization in the renminbi exchange rate.

In addition, considering the continuous decline of the renminbi exchange rate index anchored to a basket of currencies, and the stabilization of the renminbi against the US dollar, the stabilization of the renminbi exchange rate should mainly be attributed to the decline of the US dollar index, rather than the strength of the renminbi index itself.

The key to the future stabilization of the renminbi exchange rate still depends on the volume and speed of the actual implementation of various policies in July.

From the current market trading valuation percentile, the market is already pessimistic about Hong Kong stocks, with the Hang Seng Index trading at less than 10 times earnings and the five-year valuation percentile below 10%. Among the three major weight sectors of the Hang Seng Index, except for the real estate sector's EPS, both the financial industry's PB percentile and the Hang Seng Tech's PE percentile are hovering near historical lows.

If we believe that the long-term trend of the domestic economy is not deflationary but rather a structural issue in the process of economic adjustment, and that there is no long-term deflation in the domestic market, then the undervaluation actually brings opportunities. Four, Combined Returns

On July 21st, Alpha Dolphin's virtual portfolio decreased by 1.4%, underperforming the S&P 500 index (+0.7%), but outperforming the CSI 300 index (-2.0%), MSCI China index (-2.7%), and Hang Seng Tech index (-2.9%).

Since the start of the portfolio testing until last weekend, the absolute return of the portfolio was 22.4%, with an excess return of 44.4% compared to MSCI China. From the perspective of asset net value, Dolphin's initial virtual assets were $100 million, and currently stand at $123.5 million.

Five, Individual Stock Profit and Loss Contribution

Last week, the portfolio decline was concentrated in two sectors - semiconductors and Chinese consumer assets. The decline in semiconductors was mainly due to TSMC's downward revision of its annual revenue guidance, implying that the incremental demand from the new AI cycle cannot compensate for the sluggish semiconductor demand, which affected the entire semiconductor industry and led to a sector-wide correction.

The decline in domestic consumer assets was due to the relatively weak macroeconomic data last week, resulting in a significant decline in consumer assets.

The specific companies with the highest gains and losses are summarized by Dolphin as follows:

Six, Portfolio Asset Allocation

The portfolio was not adjusted this week and consists of 24 stocks or ETFs, including 5 stocks with standard ratings, 18 stocks with lower ratings, and the rest in gold, US bonds, and US dollars.

As of last weekend, Alpha Dolphin's asset allocation and equity asset holding weights are as follows: Seventh, Key Events of the Week:

This week is the busiest week both in terms of macro and individual stocks. On the macro level, there will be the Federal Reserve's interest rate meeting, as well as the MoM annualized value of US GDP, US personal consumption expenditure, and so on.

The interest rate meeting is likely to mark the peak of this round of rate hikes, which is good news for peripheral assets including Hong Kong stocks.

On the individual stock level, the earnings reports of Microsoft, Google, and Meta for the third quarter will be released one after another. After the sharp rise, it is worth paying attention to whether these three companies can meet or even exceed market expectations.

Specifically, the release dates of the earnings reports covered by Dolphin this week are summarized as follows. Dolphin will interpret the reports and release them as soon as possible. Please stay tuned.

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

Please refer to the recent weekly reports of Dolphin's investment research portfolio:

"Reality Strikes, How Far Can the Rebound of Chinese Concept Stocks Go?"

"Look Further, Will US Rate Hikes Aggravate Stagflation?"

"Decoding the Mystery of Low Savings in the United States, Is It Sustainable?"

"US Housing Market: Subprime Original Sin, Why Is It Resilient This Time?"

"Peeling the Onion: Where Did the Predicted Recession Go, and Can It Still Come?" 《Is the small essay market biased? Extreme pessimism followed by overcorrection is the core》

《Is the US stock market still in a frenzy? Economic schizophrenia, beware of excessive joy leading to sorrow》

《Purgatory vs. Celebration, what are the US and Hong Kong stock markets really trading?》

《US stocks pull up valuations, Hong Kong stocks kill beta? Don't despair, a reversal is imminent》

《 Deposit high interest rates in another bank? The probability of a soft landing has increased instead》

《 ChatGPT vs. Performance Release, can giants support the US stock market?》

《 Is the plan of "US recession, China recovery" going down the drain?》

《 The direction of US recession is set, only a minor decline is pleasing, a major decline is harmful》

《 US service consumption collapses, US stocks celebrate?》《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》