Guojin Securities: The innovative pharmaceutical sector may significantly benefit from the Fed's easing of monetary policy

According to the Wise Finance APP, Guojin Securities released a research report stating that as a capital-sensitive industry, innovative drugs may significantly benefit from the opening of loose monetary policy by the Federal Reserve. With the cooling of US economic data, the September rate cut by the Federal Reserve is almost certain, which will help lower the financing costs for innovative drugs. This will not only improve their cash flow and repair expectations on the molecular end, but also boost the valuation of the sector. Domestically, the innovative drug industry chain enjoys policy support, especially against the backdrop of falling financing rates and the expected recovery of industry prosperity. Such policy support may contribute to an increase in risk appetite for the sector.

Key points from Guojin Securities:

The important window for choosing between offense and defense is approaching: September rate cut is crucial

The upward pressure on negative PPI in China indicates that the willingness of residents and enterprises to spend money and economic activities have entered a relatively sluggish level. Whether it is PPI or "profit bottom" as a lagging indicator of credit, the recovery starting point will be further delayed at least until 2025Q3. The Federal Reserve is expected to cut rates by 25 basis points in September, with the risk of a "hard landing" for the US economy gradually confirmed around November.

Maintaining the forecast: Only if the US economy has not experienced a "hard landing" before the domestic central bank cuts rates, especially by at least 50 basis points for the 5-year LPR, can the actual return rate for enterprises be kept in a controllable range (-1% to 0%). This may help avoid domestic liquidity risks, control real estate risks, promote M1 recovery, and lead to the emergence of a "market bottom".

Suggesting a "right-side trading logic for rate cuts": If China cuts rates by 25 basis points in September, A-shares are expected to enter a "safe period" of rebound for at least one month; waiting for another 25 basis points cut in October, the uptrend can continue until the confirmation of a "hard landing" for the US economy (around November), otherwise it will stop. If China cuts rates by 50 basis points in September, A-shares are expected to enter a "safe period" of rebound for at least one quarter, until the risk of a "hard landing" for the US economy is confirmed, or even spreads.

Investment style corresponding to a 25 basis points rate cut in September: Switching from high dividend stocks and banks to mid-cap, oversold, undervalued, and growth and consumption stocks with expected dividend yield increases, with over half of the positions switched; if the rate cut in September exceeds 50 basis points, the above can be fully switched to "offensive" positions. If there is no rate cut in September or it is less than 25 basis points, market volatility may enter an "accelerated upward" channel, maintaining a bottom position in "gold + innovative drugs" and large-cap defensive stocks such as banks and high dividend stocks.

Why is the bottom position in innovative drugs favored? How to select innovative drugs?

As a capital-sensitive industry, innovative drugs may significantly benefit from the loose monetary policy of the Federal Reserve. Due to the long research and development cycle and large initial capital investment, innovative drug companies cannot achieve stable cash flow through sales before industrialization. This model makes innovative drug companies heavily reliant on financing activities to support their cash flow. Historical patterns show that during each Federal Reserve rate cut cycle, US bond yields tend to fall, leading to rising opportunities and excess returns for innovative drug stocks in both A-shares and H-shares. Further selection of innovative drug stock combinations can be made from three dimensions: internal and external demand segmentation, leading and non-leading factors, and ROE factors Based on the historical retrospective analysis, the following conclusions can be drawn: For the A-share market, the three factors of "relying on external demand + non-leaders + high ROE" all demonstrated the effectiveness of this strategy when constructing a portfolio. As for the Hong Kong stock market, the effectiveness of the ROE factor stock selection strategy is not significant, but the two factors of "relying on external demand + leaders" still remain effective.

Looking at the current situation, there are two layers of positive factors supporting the subsequent innovative pharmaceutical market: With the cooling of U.S. economic data, the September Fed rate cut is almost certain, which will benefit the cost of financing for innovative pharmaceuticals to decrease. This will not only improve their cash flow and repair expectations on the molecular end, but also boost the valuation of the denominator at a low level. Domestically, there are policy advantages in the innovative pharmaceutical industry chain, especially in the background of falling financing rates and the industry's prospects for recovery. Policy support may become an additional factor for the sector's risk appetite to warm up.

Style and industry allocation: Maintaining the "large-cap value defense" strategy before the significant rate cut in September

Maintain the "large-cap value defense" strategy, and recommend: Bank core positions; Gold + innovative pharmaceuticals for "offense"; Non-cyclical industries with potential for sustained high dividends.

Risk Warning

Domestic export slowdown exceeds expectations; Domestic "loose monetary policy" pace and intensity are lower than expected; U.S. bond yield rebound exceeds expectations; Historical experience has limitations