Shocks abroad could cause changes in A-share style

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The global capital markets fell down this past Monday, and “Black Monday 1987” appeared again. Japanese stocks led the global recession and once triggered the circuit breaker The gains from the start of the year have largely passed.

We believe:

1.There have been violent fluctuations abroad, and there has been a bear trade in the past, but more importantly, it is the result of devaluation.

2. As the interest rate differential between Japan and the United States has narrowed, pushing the yen up, the bearish trade trend will continue in the future, which means that there will be pressure on so- sell US dollar assets and return them to Japan.

3. Remove trade, on the one hand, the interest rates of short-term US bonds did not fall, and on the other hand, it caused the EPS of Japanese stocks denominated in yen not to grow , affecting the performance of Japanese stocks. market.

4. Performance that is prohibited in the Japanese stock market could cause some global Asia-Pacific funds to choose Chinese assets in stages.

5. If these global Asia-Pacific funds choose Chinese funds, they will most likely choose businesses with long-term growth potential instead of traditional businesses with high valuations.

6. If there is a net inflow of money into the business, it will trigger further changes in the A-share market style.

Danger warning:1) Economic recovery is lower than expected; 2) The pace of interest rate cuts by the Federal Reserve is lower than expected;

1. Violent shocks abroad are due to vandalism

One is around Nvidia debugging.This year, Nvidia quickly became a member of the “3 trillion dollar club”. It has become the target of a large number of institutions. This has also led to a large number of Nvidia derivatives in the market. A decline in Nvidia’s stock price from its highs will inevitably be accompanied by a large number of product meltdowns. In a sense, this is a process of disinfection.

The second is the devaluation surrounding the Japanese stock market.We believe that the sharp fluctuations in Japanese stocks are not due to appreciation of the yen, but to rising interest rates in Japan. In fact, when foreign investors, including Buffett, invest in Japanese stocks, the main approach is to borrow Japanese yen to buy Japanese stocks. Two months ago, Japan’s 10-year government bond yield exceeded 1%, hitting a near 10-year high after the Bank of Japan announced a 15bp interest rate hike, the 10-year government bond yield continued to rise to 1.07 %. This caused investors who originally borrowed Japanese yen to buy Japanese stocks to choose to sell Japanese stocks.

Third, if past market fluctuations can only be explained by behavioral trades, there are two phenomena that cannot be explained:

1) The usual function of closing a carry trade is to sell US dollar assets to repay Japanese yen.However, the current decline in US stocks is more due to a decline in trade We have not seen the unusual decline in US stocks caused by carrying trade. In other words, the current US stock market does not reflect the trend of closing transactions.an accidentform fell. The market is worried that the US labor market data will trigger Sam’s Law, which will trigger panic about the US economic recession.

2) Short-term US bonds should be the biggest subject of bearish trading meltdownsbut right now we haven’t seen a big selloff in US one-year or two-year treasuries.

The spread of carry trades includes more transactions between US dollar assets and the Japanese yen, which cannot explain the sharp decline in Japanese stocks, and even the gains of the past year bone in one day. therefore,We believe that there have been trade closing transactions in the past, but that is not the main reason for the recent large fluctuations in the market.

2. The interest rate gap between Japan and the United States has narrowed, and there will be a Carry Trade Unwind in the future.

Bear trading has occurred in the past, and we believe it will continue in the future. The main reason is the appreciation of the yen. As the Federal Reserve will begin cutting interest rates in the second half of the year and the Bank of Japan will raise interest rates, the interest rate gap between Japan and the United States will narrow. The trend of narrowing interest rate differentials between the United States and Japan means that the yen will appreciate more As the yen appreciates, Japanese financial institutions will continue to sell dollar assets the US back to Japan.

3. If carrier trades are going on, what are the possible effects?

First, US short-term bond interest rates may remain high, further strengthening the logic of recession.Arbitrage traders borrow low-interest Japanese yen to buy high-interest-bearing assets, with 1-year and 2-year US bonds as the main investment targets. If the bearish trade holds back, US short-term debt will become a major selling target, which will cause US short-term debt interest rates to remain high or even rise, thus reducing interest rate volatility .

Second, the Japanese stock boom was hampered.Major profits of Japanese listed companies will come from abroad Japanese stocks will also be affected.

4. If the Japanese stock boom is blocked, what will it mean for the Chinese stock market?

If the short-term rise in Japanese stocks is blocked, some global Asia-Pacific funds may gradually introduce Chinese funds.

From the point of view of the behavior of capital itself,Part of the world’s Asia-Pacific assets can only be allocated to the Asia-Pacific except for the Japanese market, no other market in the Asia-Pacific has enough capital capacity, the Chinese market will also choose in stages.

From the point of view of economic fundamentals, China’s nominal GDP is expected to increase month-on-month in the second half of the year, which will also be a reason for periodic inflows of foreign capital.We believe nominal GDP is expected to rebound on a monthly basis, particularly as fiscal spending is likely to increase month-on-month in the second half of the year. Similar to the pace of fiscal efforts in 2023, compared to the first half of the year, the efforts in the second half of the year will be more evident. Fiscal spending in the first half of this year was also lower than in the same period in history, so fiscal spending in the second half of the year will accelerate. In this context, this contributes to an improvement in nominal GDP.

If the Japanese stock market ebbs and domestic nominal GDP increases month after month, we believe that overseas funds will flow into Chinese funds in stages.

5. If foreign capital returns to China in stages, what will it buy?

In terms of business preference, I also prefer the “old favorite” of the past 20 years:1) The most competitive energy and new cars globally; 2) General consumption that cannot be changed, such as alcohol in food and drinks; 3) The technological internet backed by the world’s largest middle class.

6. If foreign capital enters Chinese assets in stages, how can business style be defined?

If foreign capital flows into China in stages,Will the true market style in the first half of the year converge?Value stocks may not outperform growth stocks, and the CSI 100 Index may not continue to outperform the CSI 500 Index.In the last two years, the cumulative increase in the CSI 100 Index compared to the CSI 1000 Index has exceeded 120%. In the second half of the year, this extreme definition may converge, and the CSI 500 and CSI 1000 may no longer underperform the CSI 100.

Authors of this article: Chen Li, Chen Meng, source:Chen Lilichenoriginal title: “Overseas shocks could prompt changes in A-shares style”

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