It's time for great power competition again: Are cyclical and tech stocks on the rise?

Last week, the results of the U.S. elections came out, the results of China's National People's Congress Standing Committee meeting were announced, and the Federal Reserve's interest rate meeting in November took place. In the comments from the Changqiao community, Dolphin Jun has already made some remarks, and here Dolphin Jun will summarize briefly.

1) What are the possible impacts of Trump's election?

In terms of domestic policy, the "carrot" that Trump offers is tax cuts. Since individual and corporate taxes are the absolute source of U.S. fiscal revenue, significant tax cuts will inevitably increase the fiscal deficit. Moreover, with the current slight "soft landing" of domestic demand, tax cuts will clearly benefit the stimulation of domestic demand. Therefore, from the current situation, the economic issues in the U.S. next year are not significant.

In terms of foreign policy, expelling immigrants is almost a core proposition. Currently, the supply and demand of labor in the U.S. have approached balance, and slowly tightening immigration controls is indeed not a big issue. However, large-scale and forceful expulsion of immigrants may impact employment and lead to rising labor costs.

Among foreign policies, the most important is the tariff stick in trade, aimed at compensating for the revenue loss from domestic tax cuts by raising tariffs. However, since tariffs account for a very small proportion of revenue, if one truly wants to effectively compensate for the gap caused by tax cuts, it may require imposing tariffs of 10-20% on goods exported to the U.S. globally, and 60% on Chinese goods to have any hope.

However, such a high rate of increase in tariffs significantly raises the possibility of a global economic recession, which is much higher than the possibility of boosting the U.S. economy. Especially since the U.S. individual income tax law will need to be revised by the end of 2025, if a tariff war is initiated first, leading to a substantial increase in domestic prices, the likelihood of a global economic recession will be even greater.

Currently, Dolphin Jun believes that the probability of such an extreme scenario is low; this statement is more of a negotiation chip for Trump to guide key manufacturing back to the U.S. and boost U.S. exports. Ultimately, the increase in tariffs is likely not to be that high. If we also consider the environment of interest rate cuts in the U.S. next year, if Trump's tax cuts lead to a recovery in residents' purchasing power, the U.S. economy may actually have the potential to recover upward next year.

In this case, it will clearly benefit U.S. stocks, especially cyclical assets, including the Dow Jones Index and small-cap stocks, while the Nasdaq, represented by technology stocks, may yield to the previous two indices in terms of growth.

2) Great Power Game: Can Cyclical Assets Take Off?

From the perspective of Chinese assets, economic growth in 2024 will mainly rely on external demand. Under the original outlook, the growth rate would naturally decline due to the high base of external demand. If tariffs increase next year, the decline may be even greater.

In this case, the thinking of domestic economic policy will be simpler: only stimulate domestic demand and return to inflation. The Politburo meeting that ended on the 8th of last week, with a three-year addition of 6 trillion yuan in hidden debt replacement + a five-year 4 trillion yuan special bond quota to replace hidden debt + repayment of hidden debts from shantytown renovations according to the original contract after 29 years, has indeed solved the debt issues of local governments to some extent, allowing them to free up energy to focus on the economy.

However, apart from addressing hidden debts, this meeting did not provide detailed explanations regarding local government arrears, real estate risks, and the banking system's capital injection issues. Additionally, with weak domestic demand, how to effectively stimulate demand at the resident level is also an important issue. The answers to these questions will have to wait for the Politburo meeting in December, the Central Economic Work Conference at the end of the year, and next year's Two Sessions Therefore, in terms of trading strategy for Chinese assets, the first half (even including before next year's Two Sessions) will have opportunities for cyclical policies such as consumption, while the second half will focus on the effects of re-inflation policies. Throughout this, key industries in the great power competition—semiconductors and the financial sector—will be central.

At this juncture, both Chinese and U.S. assets can be gradually optimistic.

2. Portfolio Adjustment and Returns

Based on this, and with the earnings season gradually coming to a close, Dolphin has begun to gradually increase positions in some cyclical assets that he believes have decent fundamentals.

Last week, the Alpha Dolphin portfolio's return fluctuated at 1.3%, lower than MSCI China (1.8%), Hang Seng Tech (4.1%), CSI 300 (5.5%), and the S&P 500 (4.7%).

Since the portfolio began testing (March 25, 2022) until last weekend, the absolute return of the portfolio is 68.5%, with an excess return of 75% compared to MSCI China. From the perspective of net asset value, Dolphin's initial virtual asset of 100 million USD has exceeded 170 million USD as of last weekend.

3. Individual Stock Profit and Loss Contribution

Last week, the underperformance in the market was mainly due to Dolphin's insufficient increase in equity asset positions, as the increase in equity assets was within the market's range of increase. The specific analysis of individual stock gains and losses last week is as follows:

4. Asset Portfolio Distribution

The Alpha Dolphin virtual portfolio holds a total of 16 individual stocks and equity ETFs, with a standard allocation of 6 stocks and 10 equity assets being under-allocated. The remainder is distributed among gold, U.S. Treasury bonds, and U.S. dollar cash. As of last weekend, the asset allocation and equity asset holding weights of Alpha Dolphin are as follows:

5. Key Events This Week

This week marks the peak of the U.S. earnings season, which has passed, while the earnings season for Chinese concept stocks is surging, with companies like Tencent, Alibaba, JD.com, NetEase, Bilibili, Sea, etc. Dolphin will cover key companies and core focus points of the earnings reports as follows:

Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure

Recent articles from Dolphin Investment Research Weekly Report include:

“Why are American residents spending so fiercely?”

“Is there much hope for buying into the US stock market correction?”

“With US inflation still simmering, can Chinese concept stocks still chase the rise?”

“Afraid to chase the tech seven sisters? Chinese concept stocks unexpectedly benefited.”

“Corporate Relay Supports the Economy, U.S. Rate Cuts Won't Come Soon”

“Tech Giants Stagnate, Chinese Concepts Shine, Is It a Flashback or a Style Switch?”

“In 2024, Will the U.S. Economy Avoid a Hard Landing?”

“This is the Most Down-to-Earth, Dolphin Investment Portfolio Has Started”