Minsheng Securities: The marginal changes in falling demand may have been fully priced in by the market, and the allocation strategy should not change blindly

According to the Wise Finance APP, Minsheng Securities released a research report stating that the marginal change in declining demand may have already been fully priced in by the market. The trend of input sectors' profitability remaining higher than output sectors' profitability in the economy will not change. However, the sustainability pricing of the existing structure is far from enough. It is recommended that investors should not switch blindly and adhere to the main theme of physical consumption.

Key points from Minsheng Securities:

Transition from "Landing" to "Soft Landing" in Interest Rate Cuts

This week, weaker-than-expected US CPI data has raised concerns about a recession, leading to expectations of interest rate cuts: the probability of the Federal Reserve cutting interest rates twice this year has significantly increased. US bond yields have declined, while US stocks, copper, aluminum, and the US dollar have weakened, and energy, agricultural products, and precious metals have strengthened. It is understandable for the market to trade the "landing" of the US economy in the short term, but we should focus more on the increasing probability of a "soft landing" in the US in the future. Understanding the impact of interest rate cuts on global investment activities is crucial. For the US, the existence of resilient service inflation in the past has kept interest rates high, thereby suppressing US manufacturing and real estate investment. With the decline in service inflation and weakening consumption, US manufacturing and real estate may have a chance to breathe, allowing the US economy to potentially achieve a "soft landing." While US CPI weakens, the trend of US PPI in June has exceeded market expectations. Currently, it seems that US production investment activities are more resilient.

For emerging market countries, FDI tends to accelerate inflows during interest rate cut cycles. In this cycle of rate hikes, there has been a counter-cyclical inflow amid deglobalization, partially offsetting the impact of the Fed's tightening. If we enter an interest rate cut cycle in the future, it may further facilitate foreign capital inflows into emerging markets. From the perspective of the total fixed capital formation, the proportion of India + Vietnam + Mexico among major countries has reached the highest level since 2013. Fixed asset investment in emerging market countries has become an important marginal source of global physical consumption. Looking at global manufacturing activity/GDP, it has to some extent outpaced the share of commodity consumption in the global economy. With the recovery of manufacturing activity amid falling interest rates, the resilience of physical consumption represented by commodities will be demonstrated once again.

Domestically: Opening of Policy Space to Ensure Resilience in Physical Consumption

For the domestic market, interest rate cut expectations have two impacts on the equity market: (1) From the denominator perspective, the pressure on the exchange rate will ease, relieving the suppression of bond yields on the equity market caused by the need to maintain the exchange rate. Since 2022, after the spread between the spot exchange rate and the RMB central parity reached a historical high, A-shares have also bottomed out temporarily. (2) From the numerator perspective, the domestic credit structure has already tilted towards the manufacturing industry. Therefore, if domestic interest rates follow suit, the gap between the return on investment of manufacturing enterprises and the minimum required return on investment for the whole society will widen, providing further room for convergence. Looking at the June export data, the pace of global production capacity construction is still ongoing: China's exports to ASEAN and Latin America maintained a year-on-year growth rate of over 15%, and exports to Europe and the US are showing marginal improvement From the perspective of export commodity structure, the export growth of goods closely related to overseas manufacturing activities still ranks high. Looking ahead, the pattern of driving domestic economy through exports is likely to continue, and may even be strengthened by the decline in overseas interest rates.

Market Pricing: Marginal Trading vs. Medium to Long-term Contradictions

Recently, the market has started marginal trading again, with emerging industries represented by autonomous driving and consumer electronics, as well as real estate, showing significant relative returns compared to physical assets and dividends. Similar marginal trading actually occurred from mid-April to mid-May this year. Currently, it can be observed that whether it is autonomous driving or consumer electronics, they are essentially driven by local government finances, focusing on encouraging supply rather than stimulating demand, or mainly based on the logic of external demand within the global division of labor system. This means that the trading attempts in the past month are not signals of a style change, but rather imply that the economic model focused on stimulating supply as the main purpose + external demand driving has not changed. This suggests that the trend of profit in the input sector being higher than the output sector may not change.

Do not fear the clouds obscuring the eyes, stick to the main line

The weakening marginal demand for market trading has actually persisted for over a month, and the judgment of future demand has become the core of market pricing. Globally, under the trend of loose monetary conditions, the trend of future production and investment activities > consumption activities may not be quickly reversed. For listed companies domestically, the trend of profit levels in the input sector of the economy remaining higher than the output sector is unlikely to change. The opening up of domestic and foreign policy space has actually delayed the clearing time, prolonged the duration of the existing pattern, and marginal changes may have been fully traded by the market, but the pricing of the sustainability of the existing pattern is far from sufficient.

Therefore, the market allocation strategy should not change blindly: First, upstream resource assets are still the top recommendation of Minsheng Securities: copper, aluminum, gold, oil, and coal; Second, around the sustainability of manufacturing activities, layout of the new global trade pattern: shipping (dry bulk, oil transportation, shipbuilding), grid equipment; Third, in the downward phase of the debt cycle, dividend assets reflect the resilience of physical consumption, and disturbances from pure dividend yield trading will not affect allocation value, recommending ports, railways, power, and banks; Fourth, focus on manufacturing industries mentioned in the institution's mid-term strategic report with hopes of clearing: household goods, refrigeration and air conditioning equipment, rail transit equipment.

Risk Warning: Domestic economy falling short of expectations; real estate policies exceeding expectations; significant overseas economic downturn