【Zhenzhuo Institutional Perspective】KGI's latest market trend analysis, embracing the liquidity feast with diversified offensive and defensive strategies

KGI today released its latest market trend analysis for December, covering global, bond, and commodity markets.

Macro Focus

AI-driven productivity improvements have continued to strengthen since the second half of 2023, effectively boosting corporate profits by reducing unit labor costs. Although AI investments led by industry leaders have pushed up valuations, the evolution of fundamentals and subsequent "AI adoption rates" and "free cash flow" have alleviated short-term bubble concerns. We maintain a positive outlook for Japanese stocks next year as Japan enters economic normalization under inflationary conditions, which will help improve corporate revenues and profits, while enhanced capital efficiency will also drive valuation upgrades and foreign capital inflows.

US Market: The productivity boost driven by the AI revolution has become evident since the second half of 2023 and continues to strengthen. Declining unit labor costs (wages/labor productivity) have lifted corporate profits, leading to better-than-expected Q3 2025 earnings. Given that AI themes are largely dominated by large companies, the likelihood of stable future earnings is relatively high. Elevated valuations are also supported by fundamentals, easing concerns of an immediate bubble burst. Future focus will be on changes in "AI adoption rates" and "free cash flow." Key variables affecting US stocks next year include tariff developments, monetary policy, the labor market, and midterm elections. The first quarter is expected to be most affected by tariff uncertainty,

monetary policy falling short of expectations, economic slowdown, and weakening employment, with the stock market likely to trend downward. The second quarter may see tariff reductions as Trump considers election prospects, along with the economy bottoming out and monetary policy becoming clearer, leading to a market rebound. By the fourth quarter, around the election period, the market may record significant gains.

European Market: Despite the bumpy road to economic recovery, structural improvements keep our medium- to long-term outlook for European stocks positive. First, deeper integration among European countries and reduced reliance on German growth make the region more attractive. Second, the eurozone has fiscal expansion capacity given its debt-to-GDP ratio. Third, European stocks' current P/E ratios are only slightly above long-term averages, with EPS growth continuing to rise year-on-year, and 2026 revenues and profits are expected to improve quarter by quarter. Thus, we recommend an overweight position in European stocks as a tactical allocation, favoring Germany for its fiscal stimulus and economic growth improvements, and Spain for its strong fundamentals and high financial sector weighting. Sector-wise, we prefer financials with improved balance sheets and defense stocks supported by policies.

Asian Market: We are positive on Japanese stocks next year as Japan finally exits deflationary sentiment and enters economic normalization under inflation, with companies willing to raise prices and households increasing consumption, boosting corporate revenues and profits. Capital efficiency improvements will also drive valuation upgrades and foreign capital inflows. Corporate reforms have shown results, with rising ROE, ROA, PBR, and dividend payout ratios, declining cross-shareholdings, and increased share buybacks.

China Market: Hong Kong stocks in 2026 remain supported by: 1) China's economy nearing a mid-term bottom, with local debt risks easing and property market risks gradually diminishing, sustaining asset revaluation and benefiting Hong Kong stocks; 2) Hong Kong's economy recovering, led by a financial sector rebound, resilient exports, a gradually improving property market, and accelerating tourism recovery; 3) The Fed's rate-cut trend remains intact, supporting Hong Kong stocks; 4) Hong Kong stocks remain undervalued, with the Hang Seng Index's forward P/E at just 11.5x, still far below historical highs. With the return of US-listed Chinese stocks and accelerated secondary listings of A-share tech firms in Hong Kong, the sector's weighting will rise, making it a mainstream market for China's tech industry and attracting more global capital.

Hong Kong & China Stocks

Medium- to long-term, the "dual easing" of US-China monetary policies will drive sustained capital inflows into Hong Kong stocks, especially via Stock Connect. Earnings upgrades and valuation repairs will sustain the market's volatile uptrend.

Bond Market

After the October FOMC meeting, Fed Chair Powell stated that further rate cuts in December are not the baseline scenario. Coupled with the US government shutdown in early November halting official data releases, the market largely expected unchanged rates in December in the first half of November. However, post-shutdown, recent data showing US labor market weakness—such as the Fed's Beige Book noting slight job declines and weaker labor demand, and ADP reporting an unexpected 32K private-sector job loss in November—have strengthened the case for a December cut.

Meanwhile, New York Fed President John Williams' openness to further easing has further boosted market expectations for a December cut.

Over the past month, the US Treasury yield curve has steepened slightly. The rate-sensitive 2-year yield fell ~7bps, partly due to rising December cut expectations; the 10-year yield dropped ~6bps, while the long end (30-year) was flat.

Commodity Market

Doubts about the dollar system are another force driving gold higher. Since the 2022 Russia-Ukraine war, central banks have recognized dollar political risks, reducing dollar reserves and increasing physical gold holdings. Now, beyond central banks, US trade policy and long-term debt issues have also raised doubts about dollar credibility, making gold—the ultimate store of value—a target for capital. Rate-cut cycles and a weak dollar remain key to gold's continued rise.

Source: KGI Securities