Haitong Securities: Fed's preemptive rate cut may help improve A-share liquidity

According to the Zhitong Finance and Economics APP, Haitong Securities released a research report stating that the overseas environment for this Fed rate cut is more complex, similar to the U.S. economy in 1995, with the upcoming U.S. election and decreasing coordination of overseas monetary policies. In the past, during Fed rate cuts, the economic and monetary policy cycles of China and the U.S. were relatively consistent, but this time there is a mismatch, with future attention possibly driving positive signals for fundamental improvement. The Fed's preemptive rate cut may help improve A-share liquidity, but medium to long-term fundamental repair validation is still needed. In terms of industries, short-term focus on financial and consumer sectors, with technology gradually taking the lead in the medium term.

Key Points from Haitong Securities:

More Complex Overseas Environment

According to Fed Watch data as of 24/09/14, the market generally expected the Fed to cut rates in September, but there are divergent views on the pace of rate cuts, with a 50% probability for a 25bp or 50bp cut. Compared to history, what are the similarities or differences in the macro background of this rate cut? Economically, the current U.S. macro environment is similar to 1995, showing high growth, high inflation falling from highs, and a low unemployment rate. The difference is that this time the unemployment rate is on the rise, and the government deficit rate is significantly high. Politically, this rate cut coincides with an election year, and historically, election years do not hinder the Fed from cutting rates, but the Fed's operations in election years are usually more cautious.

Regarding overseas monetary policies, in the past, the Fed usually led global central banks in starting rate cut cycles, but this time global central bank policy coordination has decreased. In this environment, the Fed's rate cut this time may lean more towards preemptive action, with a relatively gradual pace of rate cuts.

Slow Domestic Economic Recovery

In the past, during Fed rate cuts, the economic and monetary policy cycles of China and the U.S. were relatively consistent, but this time there is a mismatch. Looking back, before Fed rate cuts, the Chinese economy was usually weak, and after the rate cuts, the Chinese central bank often followed suit. Before this Fed rate cut, the domestic economy was also weak, but this time the Chinese central bank initiated rate cuts ahead of the Fed. In fact, since the end of 2021 to stimulate domestic economic recovery, the central bank has continued to exert counter-cyclical adjustments.

At the current juncture, the Fed's rate cut is expected soon, and domestic economic growth is similarly weak as in the past, but the difference is that this time the Chinese central bank started rate cuts at the end of 2021, while the Fed will begin raising rates from March 2022, leading to a mismatch in the monetary policy cycles of China and the U.S. The economy may be transitioning from a dilemma to a turning point, focusing on gradually accumulating positive signals: first, regulatory authorities releasing signals of stable growth, with fiscal stimulus expected to boost domestic demand; second, since the beginning of the year, exports have performed well, with manufacturing advantages supporting new growth points in external demand.

Impact of U.S. Rate Cuts on A-shares

Overall Trend: The Fed's preemptive rate cut may help improve A-share liquidity, with medium to long-term focus on validating fundamental repair. In terms of liquidity, the Fed's rate cut may improve A-share macro and micro liquidity in the short to medium term, supporting A-share upward movement. In terms of fundamentals, the long-term trend of A-shares is related to fundamentals, and the boost to A-share fundamentals from rate cuts still needs to be observed.

Style: During the Fed's preemptive rate cut, A-share growth outperforms, while during relief rate cuts, A-share value takes the lead. Specifically, during preemptive rate cuts, A-share growth style has a higher success rate, with no clear trend in size style During the easing interest rate period, A-shares value and small-cap style are advantageous. Within the first month of the initial interest rate cut, growth and large-cap styles performed better.

Industry: In the short term, the financial industry, which directly benefits from the improvement in macro liquidity, took the lead, while consumer industries such as food and beverage, and beauty and skincare preferred by foreign capital, consistently showed strong performance. In the medium term, the social services and power equipment industries gradually outperformed, while interest rate-sensitive sectors like electronics and computers in the technology industry gradually gained an advantage. Looking ahead, Chinese advantage manufacturing with better fundamentals is expected to become the main theme in the mid-term for A-shares.

Risk Warning: The Federal Reserve's interest rate cut is later than expected, the progress of growth-stabilizing policies is slower than expected, and the domestic economic recovery is slower than expected