onlinecasinoslotgames| CICC: Global capital reallocation boosts China's asset rebound

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A study on the large categories of assets of CICC: Li Zhao, qu Botao, Yang Xiaoqing

Global capital reallocation contributes to the rebound of Chinese assets

Recently, China's stock index has risen again, and the reallocation of overseas funds may play an important role. Us economic data and expectations of interest rate cuts were more volatile in April, the VIX volatility index rose, the yen depreciated faster against the dollar, and weakness in overseas markets could drive profit-taking of some global funds, adding to lighter Chinese assets with lower valuations.

EPFR global institutional investor allocation data show that the pressure on overseas active capital outflows has declined significantly in the past three weeks, with net outflows of A shares and Hong Kong stocks falling to their lowest level since the fourth quarter of 2023. EPFR mainly covers "fund" type investors, not all foreign investors ("how to describe and analyze foreign investment"). Combined with the continued northbound capital inflows and customer exchanges, we believe that transactional foreign capital, which is more flexible than the funds covered by EPFR, may have turned to inflows to support the performance of the Chinese market.

Chart 1: the pressure of overseas active capital outflow decreases.

Source: EPFR, China International Capital Corporation Research Department

The basic characteristics of global capital allocation

As of March 31, global fund investors allocated the largest number of US assets, accounting for 60 per cent of total assets, according to EPFROnlinecasinoslotgamesThe proportion of assets invested in the UK, Japan and France is 5.2%, 5.5% and 4.1% respectively, and that of Chinese assets (A shares and Hong Kong stocks) is 1.3%.

Figure 2: global investors account for the proportion of national allocation

Note: data as of March 31, 2024

Source: EPFR, China International Capital Corporation Research Department

Asset allocation is the result of capital flows, so the US inflows far exceed those of other countries: since 2021, EPFR-covered funds have accumulated inflows into the US of nearly $900 billion, compared with inflows of about $100 billion from both China and Japan and outflows of about $50 billion from Europe. Specifically, China took the lead in controlling the epidemic "first-in, first-out" in 2021, and the market rebound attracted large inflows of capital, which turned to outflows after 2023. Japanese capital inflows hovered low for a long time, and the theme of "getting out of the deflationary trap" fermented in 2023, and capital began to flow in. Europe also attracted some capital inflows in the process of repairing the epidemic in 2021, but the conflict between Russia and Ukraine escalated in 2022 and funds continued to flow out.

Chart 3: the largest inflow of foreign capital to the United States since 2021, the first inflow and then outflow to China

Source: EPFR, China International Capital Corporation Research Department

Drivers of global capital allocation

The funds covered by EPFR include both active and passive funds, and we find that active funds are more closely related to market performance. In China, for example, there has been a strong synchronous relationship between active capital inflows and A shares / Hong Kong stocks in the past three months. Therefore, we pay particular attention to active capital changes.

Chart 4: active foreign capital inflows are synchronously linked with A-shares

Source: EPFR,Wind, China International Capital Corporation Research Department

Chart 5: active foreign capital inflows are synchronously linked with Hong Kong stocks

Source: EPFR,Wind, China International Capital Corporation Research Department

We examine the relationship between active capital and economic fundamentals, the dollar, VIX and valuation, and find that economic fundamentals and the dollar may be the long-term drivers of global capital inflows to China.

Figure 6: manufacturing PMI is positively correlated with foreign capital inflows.

Source: EPFR,Wind, China International Capital Corporation Research Department

Figure 7: negative correlation between dollar index and foreign capital inflows

Source: EPFR,Wind, China International Capital Corporation Research Department

1) Economic fundamentals: using PMI to measure economic strength, when PMI is strong, capital tends to inflow, which applies to many countries, such as China, the United States, Europe and Japan.

Figure 8: us PMI is positively correlated with foreign capital inflows

Source: EPFR,Wind, China International Capital Corporation Research Department

Figure 9: positive correlation between European PMI and foreign capital inflows

Source: EPFR,Wind, China International Capital Corporation Research Department

2) USD: a lot of global money comes from the US, and a stronger US dollar makes US assets more attractive and attracts money back to the US. A stronger dollar is often accompanied by risk aversion and can easily lead to capital outflows from other markets, so the dollar is negatively correlated with inflows into China.

3) Stock valuation: theoretically, global funds may have a "seesaw" phenomenon, that is, reducing the allocation of high-valued assets and adding low-valued assets, at this time, capital inflows should be negatively related to stock valuations. But from the data point of view, the above theory is not valid for Chinese assets. We see that Chinese asset valuations are not negatively correlated with capital flows, but show a strong positive relationship, that is, the attractiveness of low valuations to overseas funds has not been observed. Valuation is positively correlated with capital inflows, in fact, because domestic stock movements are driven by valuation, while stock market performance is positively correlated with capital inflows.

Figure 10: positive correlation between active foreign capital inflow and A-share valuation

Source: EPFR,Wind, China International Capital Corporation Research Department

4) VIX:VIX is a volatility indicator that reflects the level of panic in global markets. In theory, with the increase of VIX, it is easy for global capital to flow back, but the correlation between VIX and Chinese capital inflows is general.

Chart 11: global capital inflows into China have a strong negative correlation with the US dollar and a positive correlation with PMI, but a general correlation with VIX. Capital inflow is positively related to valuation, and more reflects the positive correlation between capital and stock index.

Source: EPFR,Wind, China International Capital Corporation Research Department

In addition, we find that capital flows in China over the past two years are significantly lower than those matched with the PMI and dollar indices, which may reflect a structural decline in foreign capital inflows in the era of "great differentiation" ("asset allocation in the era of great differentiation").

Capital inflows ultimately depend on economic fundamentals and pay attention to the structural market

According to the above analysis, the recent inflow of foreign capital not only reflects the compensation of global capital underallocated to the Chinese market, but also verifies the improvement of China's economic fundamentals, and whether global capital can continue to flow into China may ultimately depend on the prospect of economic repair. According to the economic principal component indicators constructed by CICC's large categories of assets, China's economic activity repair slowed slightly in April ("buy stocks or bonds").

Figure 12: the economic principal component index shows that China's economy is still in the stage of repair.

Source: Wind,Bloomberg, China International Capital Corporation Research Department

If the policy continues to make efforts to promote further economic repair, it is expected to help China's economic fundamentals continue to repair and enhance the confidence of global funds in the allocation of Chinese assets. From a dollar perspective, if US inflation improves as scheduled (see the next section for details), boosting expectations of interest rate cuts will be conducive to the depreciation of the US dollar and capital inflows to China. Considering the economic fundamentals and the outlook of the US dollar, the superposition of Chinese equity assets is still undervalued in global stock indexes. we believe that opportunities outweigh risks in the medium and long term, and may still be dominated by structural opportunities in the short term. it is recommended to pay attention to the targets related to high dividends.

Figure 13: China's stock market is undervalued in major global markets

Source: Wind,Bloomberg, China International Capital Corporation Research Department

The expected increase in overseas interest rate cuts is as good as capital inflows to the bond market, but there is a certain adjustment risk for long-end bonds in the environment of central bank "anti-air rotation" and concentrated bond issuance. We propose to reduce the duration of bond holdings and relatively over-allocate short-end bonds. Commodity assets may need to wait for the actual demand to cash in after rising in the first quarter, and the uncertainty is relatively high before the demand at home and abroad improves significantly.

Us inflation is close to the inflection point, the risk of secondary inflation is controllable, and interest rate cuts are still dominant, which is periodically good for Chinese assets.

Us April CPI data will be released on Wednesday, May 15. CICC's major asset inflation sub-model predicts core CPI growth of 0.28% month-on-month (consistent forecast 0.3%, previous value 0.36%) and nominal CPI growth rate of 0.35% (consistent forecast 0.4%, previous value 0.38%). Corresponding to nominal CPI growth rate dropped to 3.4% year-on-year, core CPI fell to 3.6% year-on-year.

Figure 14: core inflation month-on-month growth rate and projected contribution split in the United States

Source: Haver, China International Capital Corporation Research Department

Figure 15: separation of the month-on-month growth rate of nominal inflation in the United States and its projected contribution

Source: Haver, China International Capital Corporation Research Department

We expect core inflation to fall into a range of 0.2% and 0.3% month-on-month in the next few months, supported by four factors:

1) inflation in core commodities is cooling. Prices in the used car wholesale market showed that used car inflation may remain negative in April, rising US car production and inventories depressed new car inflation, and the downward pressure index in the supply chain helped cool inflation in other core commodities.

Figure 16: the growth rate of wholesale prices of used cars in the United States is cooling.

Source: Manheim,BlackBook, China International Capital Corporation Research Department

2) the average inflation of automobile insurance returns. The higher-than-expected inflation in the United States in March was largely due to an unexpected rise in the auto insurance section of the transportation services section, which hit a post-epidemic high. Auto insurance prices are related to auto repair wages and auto parts prices, and the March rise lacks fundamental support and may not be sustainable.

Chart 17: the month-on-month growth rate of US auto insurance rose abnormally in March.

Source: Haver, China International Capital Corporation Research Department

Figure 18: auto repair salary is ahead of auto insurance CPI for about 2 months

Source: Haver, China International Capital Corporation Research Department

3) Medicare inflation updates the bottom data. At present, the US Bureau of Statistics changes the bottom data of Medicare inflation every six months, and we think Medicare inflation may fall to around 0% in April.

Figure 19: the inflation center of Medicare in the United States may begin to move down in April

Source: Haver, China International Capital Corporation Research Department

4) the labor market has cooled down. In the United States, non-farm payrolls have fallen, unemployment has risen, the gap between supply and demand in the labour market has narrowed, wages have fallen or contributed to inflation in other core services.

Figure 20: the gap between supply and demand in the US labor market continues to narrow

Source: Haver, China International Capital Corporation Research Department

Figure 21: downward wage growth leads to improvement in inflation in other core services

Source: Haver, China International Capital Corporation Research Department

At the same time, we note that there are often abnormal fluctuations in recent US data, which cause great difficulties to statistical model forecasts, and the probability of error in individual data forecasts increases, so we suggest paying more attention to inflation trend forecasts. The model shows that US inflation is approaching a downward inflection point, and even if inflation is unexpectedly higher than expected in April, it may still enter the downward channel in the coming months, and no obvious risk of secondary inflation is observed.

Figure 22: we expect US inflation to continue to decline in the coming quarter.

Source: Haver, China International Capital Corporation Research Department

We have been cautious about US economic resilience, with recent key US economic data (first quarter GDP, April PMI, April non-farm payrolls) all lower than expected, combined with San Francisco Fed estimates that US excess savings have been exhausted in March, or increase the risk of a non-linear downturn in the US economy ("the Challenge and turnaround of interest rate cuts"). Therefore, we suggest that we should not underestimate the timing and extent of the Fed's rate cut and continue to allocate more Treasuries and gold. Overseas interest rate cuts are heating up, while benefiting overseas stocks and commodities, it is also conducive to the inflow of funds into the Chinese market and the formation of phased support for Chinese assets.

Chart 23: the San Francisco Fed estimates that US household excess savings were exhausted in March

Source: San Francisco Fed, China International Capital Corporation Research Department

Recommendations for asset allocation in May

► domestic stocks: medium-term opportunities outweigh risks, short-term focus on phased and structural opportunities

In the context of stable domestic growth, the current Chinese stock market is at a low level compared with its own history and horizontal comparison, and the advantage of low valuation makes the domestic stock market have a better margin of safety and flexibility. The CSI 300's non-financial forward price-to-earnings ratio is about 14 times, below the average over the past decade. If monetary policy is coordinated with fiscal policy to drive the marginal upside of the growth cycle, or it can drive the risk premium to decline periodically. Therefore, we believe that the medium-term opportunities of the Chinese stock market outweigh the risks.

Chart 24: Shanghai and Shenzhen 300 non-financial valuations are lower than the historical average

Source: Chaoyang Yongxu, China International Capital Corporation Research Department

In the policy dimension, the Politburo meeting sets a positive tone, and the policy is expected to continue to make efforts. The Politburo meeting held at the end of April made a positive evaluation of the current economic situation [1], believing that the number of positive factors in economic operation increased and social expectations improved, but also pointed out the challenges such as insufficient effective demand, high operating pressure of enterprises, and hidden risks. In terms of policy, we will continue to implement a proactive fiscal policy and a prudent monetary policy, accelerate the issuance of special treasury bonds and the use of special bonds, and flexibly use interest rates and other tools to support the real economy. Pay special attention to the changes in supply and demand of the real estate market, promote the construction of a new development model, promote the healthy development of the capital market, and emphasize the importance of venture capital and patient capital.

Structurally, it is recommended to pay attention to high dividends, upstream resources and growth style sectors. Under the macro combination of the improvement of China's growth expectations and the reallocation of global funds, we believe that the A-share repair market is expected to continue. Industry segments: 1) some high dividend assets with relatively low valuations in upstream resources and marginal recovery of the industry boom. 2) benefit from the scientific and technological growth plate with domestic industrial policy support and clear industrial trend. 3) industries with high industrial prosperity and high certainty of performance. (for details, see CICC's "assets revelation of overcapacity", "growth style is expected to be repaired")

► interest rate debt: maintain overallocation, recommend appropriate shortening of duration

There may still be room for the central bank to cut interest rates and reserve requirements later, and the overall upward risk of interest rates is small. Although the central bank continues to warn of long-term interest rate risks, to a certain extent, it has widened interest rate spreads on ultra-long-term bonds, but on the whole, the Politburo meeting set a positive tone, and after the banks continuously cut deposit rates, the policy side opened the room for interest rate reduction and reserve reduction again. Therefore, we believe that there is still room for domestic interest rates to go down. However, it is recommended to pay attention to the ultra-long-end interest rate risk and appropriately reduce the duration of positions.

From the perspective of economic fundamentals, the effect of repair needs to be further observed. Although recent policy-side statements are positive, economic data have not yet shown obvious repair, although PMI and enterprise-side data have basically stabilized, but the upward slope is not clear. At the same time, April social finance data show that China's domestic demand is still weak, and the effect of economic recovery may need to be further observed.

In the long-term dimension, China's population and financial cycle are downward, the inflection point of superimposed anti-globalization is coming, the differentiation of interest rates between China and the United States may become a long-term phenomenon, and the downward shift of China's economic growth center may open up a new space for the downward trend of China's interest rates. To sum up, we propose to maintain over-allotted interest rate debt, but we should pay attention to the adjustment risk caused by policy fluctuations.

► credit debt: maintain the standard allocation

In the short term, the supply and demand of the credit bond market is expected to remain positive. on the one hand, the reduction in deposit interest rates may promote the flow of residents' funds into wealth management products, on the other hand, the supply of credit bonds may be on the low side in May. However, in the medium-and long-term dimension, the overall decline in the rate of return on assets may lead to large fluctuations in the high returns of financial products, while the current credit spreads are low, the overall valuation of credit debt remains high, and the overall volatility of the bond market may increase.

We believe that the allocation value of the credit bond market under the desolation of assets is still high, but the valuation of credit debt is already on the high side, so we need to pay attention to the investment opportunities in subdivided areas. if the economy improves faster than expected, credit spreads may still face greater upward pressure. considering the long and short factors, we suggest that credit bonds should be maintained as standard allocation and pay attention to the disturbance caused by the issuance of short-term treasury bonds. (for details, see CICC's "demand for credit debt is still strong and credit spreads are low.")

► overseas assets: over-allotment of bonds, low allocation of stocks as a whole, focus on artificial intelligence industry opportunities

The expected return of US stocks is still lower than that of US Treasuries, the problem of high valuations has not improved, and there is a certain risk of adjustment. Overall, despite some recent correction in US stocks, the three-month short-term bond yield is still higher than the forward profit-to-capital ratio of the S & P 500 (expected earnings / stock index prices for the next 12 months). The expected return on medium-risk assets suggests that investor sentiment may be relatively optimistic and that capital markets may have overvalued equity asset prices to some extent.

The chart shows that the interest rate on US Treasuries at 25:3 is higher than the forward profit-to-cost ratio of S & P

Source: Bloomberg, China International Capital Corporation Research Department

The uncertainty of the US economic situation still exists, and linear extrapolation may underestimate the risk of weakening the US economy. Although US economic growth remains resilient for the time being, we are also seeing signs of weakening the margins of some data. First of all, the San Francisco Fed's calculations show that American residents' excess savings have been exhausted, and household consumption may weaken significantly, weakening the support for economic growth. The fiscal pulse we have constructed also shows that the support of US fiscal expenditure to the economy has peaked. Under the budget constraints of the Fiscal responsibility Act, the US fiscal deficit is likely to converge in 2024 compared with 2023, which may lead to further economic growth.

In terms of stock assets, we can pay attention to the industrial opportunities brought about by the development of artificial intelligence. Although the US stock market has accumulated a large increase and the overall valuation is on the high side, the degree of bubble in the field of artificial intelligence is not serious, and the strong profit growth makes the valuation of the main leading companies in the field of artificial intelligence generally located around 30X. Compared with the Internet bubble near 2000, the current valuation of the leading companies in the field of artificial intelligence is only in its infancy, with the further development of the industry. The head company has the possibility of long-term improvement, it is recommended to pay attention to.

Overall, US Treasuries may be a better choice among all kinds of assets. We review the performance of a large category of assets in 14 rounds of history after the Fed stopped raising interest rates and before they began to cut interest rates, and found that US debt has the highest winning rate, even at a time when it may be difficult for us to determine whether the US economy will fall into recession in the future. judging from the neutral situation, the probability of US debt rising is also nearly 70%, and the current US debt interest rate has rebounded to 4.5%. Given the prospect of falling inflation in the US and the risk that the economy could slip into recession, US bond interest rates are less likely to rise again in the future. If the United States starts to cut interest rates, the victory rate and increase of US debt will be further improved, so we propose to overallocate US debt.

► merchandise: keep low configuration

In April, geopolitical risks in the Middle East pushed crude oil prices up rapidly, and non-ferrous metals also strengthened significantly in anticipation of tighter supply. But as geopolitical risks cool, oil prices fall back to the $80-$90 range. In the follow-up, we believe that under the background of no obvious improvement in industrial demand at home and abroad, the rapid rise in industrial metal prices may not be sustainable, and the current inventory of commodities such as copper is still on the high side. if high prices form obvious negative feedback to downstream demand, metal prices may gradually peak and fall. In the current weak demand reality, the inflection point for a sharp upside in commodities may not yet be here. Therefore, we suggest that the overall distribution of commodities should be kept low, but we can pay attention to the opportunities brought by overcapacity in the middle and lower reaches of the country to the upstream resources.

► Gold: maintain overmatch

Gold rose rapidly in April, and although higher-than-expected US inflation data led to a rise in US bond interest rates, the price of gold was not significantly affected, but rose to an all-time high. In the follow-up, we believe that short-term gold may be slightly overshoot, but in the medium-and long-term dimensions, gold prices still have room for upside. It is recommended that overallocation be maintained and bargain-seeking additional allocation should be made in the short term.

We use real interest rates on US debt, central bank net purchases, dollar index and US debt size to build a four-factor model to explain the price of gold. The model shows that in the current macro environment, the equilibrium price of gold is around $2000 / oz. At present, US bond interest rates have not yet fallen significantly, but gold hit $2400 / oz at one point, and the model residual reached a historically high level, or indicated that the short-term gold valuation was relatively high. Factors such as the fermentation of geopolitical problems in the Middle East, speculative long-term capital inflows and seasonal gold demand in India's Vesar Festival may be short-term drivers of the rapid rise in gold prices. If geopolitical risks cool down or speculative funds take profits, gold is at risk of high volatility.

But from the perspective of the next 1-2 quarters, we think that the rally in gold may not be over yet. First of all, looking at the cyclical factors, the strong growth in the United States in the first quarter may benefit from the improvement on the supply side, or it may only reflect the disturbance of short-term data, which may not necessarily lead to secondary inflationary pressure. The CPI forecast model of CICC's large categories of assets shows that the recent US CPI is greatly affected by individual abnormal fluctuations, and inflation is still in the downward channel. If US inflation improves as scheduled and the Federal Reserve starts to cut interest rates, it will drive interest rates down. Gold has not really decoupled from US bond interest rates and is still suppressed by high interest rates, which may provide new support for gold's performance. From the perspective of structural factors, the long-term accumulation of US debt problems is not easy to solve, geopolitical events occur frequently, and the pattern of anti-globalization and de-dollarization may be further deepened, or encourage global central banks to continue to increase their holdings of gold to provide support for gold prices. To sum up, we suggest the short-term volatility risk of gold, but we are still optimistic about the medium-and long-term allocation value of gold (see "can you still buy gold?" New Trends and New opportunities in Gold)

Figure 26: the four-factor model has better explanatory power to the price of gold.

Source: Wind, China International Capital Corporation Research Department

CICC large category assets depth special topic research series:

"prospects for large categories of assets in 2024: risks and opportunities for valuation changes" (2023.11.12)

"how much is the interest rate overshoot on US debt" (2023.10.23)

"has the United States entered the era of high interest rates? "(2023.9.25.)

"prospects for large categories of assets in the second half of 2023: expected backswing" (2023.6.12)

"A New Perspective on Financial risks in Europe and the United States" (2023.4.25)

"prospects for large categories of assets in 2023: extreme changes" (2022.11.14)

"inflation variables and asset changes from a new perspective" (2022.10.30)

"Global Perspective: the Future of individual Pensions" (2022.9.4)

"revealing the rotation of stocks and bonds: a timing signal of risk premium" (2022.8.27)

Outlook for the second half of 2022: the next stop for stagflation Trading (2022.6.1)

"with the acceleration of the contraction, will the interest rate on US debt break 3? "(2022.4.13)

"large categories of asset selection under oil price shocks and recessions" (2022.3.28)

"2022 US Treasury interest rate Outlook:" atypical "interest rate hikes and highly volatile Markets" (2021.12.18)

"Prospect of large asset allocation in 2022: striving for progress in stability" (2021.11.8)

Theme strategy: how much more can interest rates on US debt rise? "(2021.10.11)

Theme Strategy: how do US bond interest rates affect the Chinese market? "(2021.8.18)

"prospects for large categories of asset allocation in 2021: recovery dislocation, asynchronous rotation" (2021.6.15)

"thematic strategy: capturing high-order signals of asset rotation" (2021.5.9)

[1] https://www.gov.cn/yaowen/2023-04/28/content_5753652.htm

Source

Article source

This article is from the May report of large categories of assets: Chinese assets under Global allocation, which has been released on May 14, 2024.

Li Zhao analyst SAC license number: S0080523050001 SFC CE Ref:BTR923

Qu Botao contact SAC license number: S0080123080031

Yang Xiaoqing analyst SAC license number: S0080523040004 SFC CE Ref:BRY559

Analyst Zhang Weihan SAC license number: S0080524010002 SFC CE Ref:BSV497

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