Haitong: Federal Reserve's preemptive rate cut may help improve liquidity in A-shares market.

Haitong released a research report stating that the overseas environment of this Fed rate cut is more complex, similar to the US economy in 1995 with the upcoming US election and decreasing coordination of overseas monetary policies. In the past, the economic and monetary policy cycles between China and the US were relatively consistent during Fed rate cuts. However, this time there is a misalignment, with potential positive signals for fundamental improvement in the future. The preemptive rate cut by the Fed may help improve liquidity in A-shares in the short term, but long-term fundamental repair validation is still needed. In the short term, the financial and consumer industries are being watched, while the technology sector is gradually becoming more advantageous in the midterm. Key points from Haitong: More complex overseas environment According to Fed Watch data as of 24/09/14, the market generally expected the Fed to cut rates in September, but there are differences in the pace of rate cuts, with equal probabilities of 25bp and 50bp rate cuts. How does the macro background of this rate cut compare to historical rate cuts? Economically, the current macro environment in the US is similar to that of 1995, with high growth, high inflation easing, and low unemployment. However, unlike 1995, the unemployment rate is on the rise and the government deficit is significantly higher. Politically, this rate cut coincides with a major election year, and historical experience shows that rate cuts are not hindered by election years, but the Fed's actions in election years tend to be more cautious. In terms of overseas monetary policy, the Fed has usually led the global central banks in starting rate cut cycles in the past, but this time global central bank policy coordination has decreased. In this environment, the Fed's rate cut this time may be more precautionary, with a relatively gradual pace of rate cuts. Slow domestic economic recovery Historically, during Fed rate cuts, the economic and monetary policy cycles between China and the US were relatively consistent, but this time there is a misalignment. Before previous rate cuts by the Fed, the Chinese economy was usually weak, and after the rate cuts, the People's Bank of China often followed suit. Prior to this Fed rate cut, the domestic economy was also weak, but this time the PBOC started rate cuts before the Fed. In fact, since the end of 2021, the PBOC has been continuously exerting countercyclical adjustments to stimulate domestic economic recovery. At this point in time, the Fed rate cut is expected to happen soon, and domestic economic growth is similarly weak as in the past. However, the difference now is that the PBOC started rate cuts before the end of 2021, while the Fed will begin raising rates from March 2022, resulting in a misalignment of the monetary policy cycles between China and the US. The economy may be transitioning from a predicament to a turning point, with a focus on accumulating positive signals: first, regulatory authorities releasing signals of stable growth, with fiscal policy likely boosting domestic demand; second, since the beginning of the year, exports have shown good performance, with manufacturing advantages supporting new growth points in external demand. How the Fed rate cut affects A-shares Trend: The preemptive rate cut by the Fed may help improve liquidity in A-shares in the short term, while the long-term focus is on validating fundamental repair. In terms of liquidity, the Fed rate cut may improve macro and micro liquidity in A-shares in the short to medium term, aiding the uptrend in A-shares. In terms of fundamentals, the long-term trend of A-shares is related to fundamentals, and further observation is needed to see how the rate cuts affect the fundamentals of A-shares. Style: During a preemptive rate cut by the Fed, growth-oriented A-shares outperform, while during a relief rate cut, value stocks are more advantageous. Specifically, during a preemptive rate cut period, growth-oriented A-shares have a higher win rate, with no significant differences in large and small cap styles. During a relief rate cut period, value stocks and small cap styles perform better. Within the first month of the rate cut landing, growth and large cap styles perform better. Industry: In the short term, the financial industry, directly benefiting from the improvement in macro liquidity, leads the way, while the consumer industries such as food and beauty favored by foreign investors consistently show strong performance. In the medium term, the social services and power equipment industries gradually outperform, with interest-rate sensitive sectors such as electronics and computer technology gradually becoming more advantageous. Looking ahead, China's high-quality manufacturing with better fundamentals may become a main theme in the mid-term for A-shares. Risk factors: The Fed rate cut may come later than expected, the progress of growth-stabilizing policies may not meet expectations, and the recovery of the domestic economy may lag behind expectations.