Zhongjin: How will the interest rate cut by the Federal Reserve impact the A-share market?

, CICC released a research report stating that the recent rate cut by the Federal Reserve in the United States may to some extent benefit the performance of Chinese assets. However, the core of the trend stabilization in the Chinese market, especially the A-share market, still lies in its own fundamental conditions. The impact of the US rate cut on Hong Kong stocks, which are more sensitive to external liquidity, may be greater than on A-shares. From the perspective of the A-share market, the most crucial factor for the trend to stabilize is the appearance of a turning point or marginal improvement in the fundamentals. The current valuation of the A-share market is already at an extreme level, and there are historical common features in trading and behavior that appear to be near the bottom. In this context, the rate cut by the Federal Reserve may to some extent help stabilize investor risk appetite, but future performance may need to focus more on changes in China's growth stabilization policies and whether there is a potential improvement in fundamental expectations in the medium term. Event: On the afternoon of September 18th local time in the United States, the Federal Reserve announced a 50 basis point cut in the federal funds rate to 4.75%-5.0%, marking the first rate cut in the United States since March 2020. Main points of CICC: The asset pricing logic of the impact of the Federal Reserve rate cut on Chinese assets: The impact of the Federal Reserve rate cut on the Chinese market can be roughly divided into three levels. 1) Rate cuts by the Federal Reserve often accompany global fund reallocation, which may to some extent benefit Chinese assets. Historical experience shows that the rate hike and rate cut cycles in the United States may affect global capital flows. Assuming other conditions remain unchanged, global fund reallocation may bring about a certain degree of foreign inflows, providing support to Chinese assets from a capital perspective; 2) A rate cut in the US may lead to a weakened US dollar, and in the context of a relatively stronger renminbi, its impact on A-shares may be more structural. Without considering relative changes in fundamentals, a weakened US dollar may create some pressure on export-oriented and overseas companies, but there will also be a reduction in debt repayment pressure for companies with USD borrowings. Financial considerations need to take into account the impact of exchange rate gains and losses on different companies; 3) The rate cut by the Federal Reserve may to some extent help alleviate external constraints on China's monetary policy. Affected by the China-US interest rate differential, during the US rate cut cycle, external constraints on Chinese policy environment, especially monetary policy, are relatively small, especially during periods of weak expectations for economic growth in China, policy stabilization has room to increase. Combining these three aspects, the rate cut by the Federal Reserve may to some extent benefit the performance of Chinese assets. However, reality is often more complex: Looking back at the performance of Chinese assets especially the A-share market during the US rate cut cycles since 1995, including five rate cut cycles: (1) from July 1995 to January 1996, (2) from September 1998 to November, (3) from January 2001 to June 2003, (4) from September 2007 to December 2008, (5) from July 2019 to March 2020. It is necessary to understand the differentiated performance of Chinese assets during these periods from two dimensions: 1) Globalization process. Prior to China's accession to the WTO in 2002, the impact of the US rate cut on the Chinese economy and market, especially A-shares, may have been relatively limited. Reviewing the first two rate cut cycles, the performance of A-shares was more influenced by the domestic environment, with a correlation coefficient between the Chinese and US stock markets of -0.19 and -0.7, with no significant effects on style and industry; (3)(4)(5) In these periods, the correlation between US policy cycles and stock market performance in China and the US has significantly increased, with coefficients above +0.7. 2) Economic environment or event factors superimposed, the impact of other factors in individual stages may exceed the US rate cut, resulting in a comprehensive impact on global assets that may even be reversed. For example, the more important background of the US rate cut cycle in 2007 was the evolution of the subprime mortgage crisis into the global financial crisis, during which both the Chinese and US stock markets initially declined before rebounding; and in the 2019 to 2020 market environment, it was the policy response to the epidemic, with both the Chinese and US markets experiencing fluctuations before recovery. How is the impact of this US rate cut on the Chinese market different from previous ones? The biggest difference between this US rate cut and previous ones lies in the new changes in the global macro paradigm. In recent years, there has been a major shift in the global macro paradigm, with the world economy entering an era of "great differentiation," where the linkage between China and some major overseas economies in terms of macro cycles has weakened, with continued differentiation in growth, inflation, interest rates, and leverage in the private sector between the two. The endogenous force of differentiation creates an asynchronous financial cycle between China and Western countries, leading to a mirror image of internal supply-demand imbalances between China and the US, where China's demand is insufficient and the US is undersupplied, resulting in profound structural impacts on China's economy. In this context, the impact of the Federal Reserve rate cut on China's financial environment opened with this time may be milder compared to previous cycles (4)(5). In conclusion, while this US rate cut may to some extent benefit the performance of Chinese assets, the core of trend stabilization in the Chinese market, especially the A-share market, still lies in its own fundamental conditions. The impact of the US rate cut on Hong Kong stocks, which are more sensitive to external liquidity, may be greater than on A shares. From the perspective of the A-share market, the most crucial factor for trend stabilization is the appearance of a turning point or marginal improvement in the fundamentals. The A-share market is currently at an extreme valuation, and there are historical common features in trading and behavior that resemble a bottom. In this context, the US rate cut may to some extent help stabilize investor risk appetite, but future performance may need to focus more on changes in China's growth policy and whether there is a potential improvement in fundamental expectations in the medium term. With the US rate cut opening, attention will be paid to three types of asset performance that may affect A-shares. Considering the marginal changes brought about by the US rate cut, it is recommended to pay attention to the performance of the following assets in the near future: 1) Stocks with heavy foreign holdings. The US rate cut may continue to drive global fund reallocation, which may bring about marginal impact on the flow of foreign funds into A-shares. Pay attention to foreign holdings of A-share benchmarks, especially leading companies in sectors such as new energy, food and beverage, household appliances, automotive, electronics, and machinery; 2) Companies that may benefit from renminbi appreciation. If the rate cut leads to a weaker US dollar, the renminbi is expected to appreciate relative to the US dollar, reducing repayment pressure for companies with significant USD borrowings, making them more likely to benefit. Companies in sectors such as base metals, especially gold, electronics, agriculture, forestry, animal husbandry, fisheries, and retail trade may be worth watching. Companies that are expected to generate exchange gains from renminbi appreciation are also worth monitoring; 3) Targets with high sensitivity to policy changes or with phased opportunities. If the US rate cut alleviates external constraints on policies, and growth stabilization policies are strengthened,...Areas that may benefit are also worth paying attention to, such as finance, real estate, and some consumer sectors. It is necessary to observe the direction and intensity of China's policy response in the future.Risk warning: Changes in the US election situation, changes in overseas trade policies, geopolitical risks, China's stable growth policies and related reform efforts, etc.