Sinolink: The innovative pharmaceutical sector may significantly benefit from the Federal Reserve's easing of monetary policy.

Sinolink released a research report stating that as a capital-sensitive industry, innovative drugs may significantly benefit from the easing of monetary policy by the Federal Reserve. With the cooling of US economic data, the September rate cut by the Fed is almost certain, which will help lower the financing costs for innovative drugs, improve cash flow, repair expectations on the molecular end, and lead to a rebound in valuation on the denominator end. Domestically, the innovation drug industry chain is favored by policies, especially in the context of falling financing rates and the expected recovery of industry prosperity, policy support may help boost investor risk appetite. Sinolink's main viewpoints are as follows: The important window for choosing between offense and defense is approaching: the September rate cut is crucial. Domestic PPI pressures are rising, indicating that consumer and business spending intentions and economic activities have entered a relatively sluggish level. Whether PPI or "profit bottom" as a lagging indicator of credit, their recovery point will be further delayed at least until 2025Q3. The Fed is expected to cut rates by 25bp in September, with the risk of a "hard landing" in the US economy gradually confirmed around November. Maintain prediction: Only if the US economy has not yet experienced a "hard landing," the domestic central bank may cut rates in advance, especially lowering the LPR by at least 50bp, to keep the real return rate for companies in a controllable range (-1% to 0%). This may help avoid domestic liquidity risks, control real estate risks, and promote M1 recovery within the year, leading to the appearance of a market bottom. Recommendation on the "right-side trading rate cut logic": If a 25bp rate cut occurs domestically in September, it is expected that the A-share market will experience a "safe period" rebound for at least one month. It is still necessary to wait for another 25bp cut in October for the upward trend to continue until the confirmation of a "hard landing" in the US economy (around November), otherwise, it will stop. If there is a 50bp rate cut in September, the A-share market may see a "safe period" rebound for at least one quarter until the risk of a "hard landing" in the US economy is confirmed or even spreads. If there is a 25bp rate cut in September, the corresponding investment style should focus on shifting positions to small and medium-sized companies with lower valuations and expected dividend yield increases, such as "CKH HOLDINGS consumption." If there is a rate cut of 50bp or more in September, a comprehensive shift to an offensive approach is recommended. If there is no rate cut or a cut lower than 25bp in September, market volatility may enter an "accelerated upward" channel. It is suggested to maintain a bottom position in "gold + innovation drugs" and focus on large-cap defensive stocks like banks and high dividend yields. Why is a bottom position in innovative drugs favored? How do you select innovative drugs? As a capital-sensitive industry, innovative drugs may benefit significantly from the easing of monetary policy by the Federal Reserve. Innovative drug companies rely heavily on financing activities to support their cash flow due to long research and development cycles and large initial capital investments before achieving commercialization. Historical patterns show that during previous Federal Reserve rate cut cycles, US bond rates tend to fall, leading to growth opportunities and excess returns for innovative drug companies in both A-share and Hong Kong stock markets. Selecting innovative drug stocks based on three dimensions: internal and external demand separation, leadership and non-leadership factors, and ROE factors. Based on historical review conclusions, the following can be determined: For the A-share market, the three factors of "external demand dependence + non-leadership + high ROE" all demonstrate the effectiveness of this strategy in constructing a portfolio. For the Hong Kong market, the effectiveness of the ROE factor selection strategy is not significant, but the factors "external demand dependence + leadership" still show effectiveness. Looking ahead, there are two levels of positive factors supporting the future innovative drug market: with the cooling of US economic data, the Fed's rate cut in September is almost certain, which will help lower the financing costs for innovative drugs, improve cash flow, repair expectations on the molecular end, and lead to a rebound in valuation on the denominator end. Domestically, the innovative drug industry chain is favored by policies, especially in the context of falling financing rates and the expected recovery of industry prosperity, policy support may help boost investor risk appetite. Style and industry allocation: Maintain a "large-cap defensive" strategy before the significant rate cut in September. Maintain the "large-cap defensive" strategy and recommend: maintaining bank positions; taking an offensive stance with gold and innovative drugs; potential sustained high dividend yield industries that are non-cyclical in nature. Risk warning Domestic exports slow down more than expected; the pace and intensity of domestic "loose monetary policy" is lower than expected; US bond yields rebound more than expected; historical experiences have limitations.