Sinolink: The unexpected interest rate cut by the Federal Reserve, what asset allocation opportunities are there?

1. Is the probability of a "hard landing" of the US economy increasing? The 50bps initial cut exceeds the expectations of most market participants. According to a survey conducted by Bloomberg before the meeting, out of 113 analysts, only 9 predicted a rate cut of 50bps. Federal Reserve Chairman Powell stated that the 50bps initial cut can be seen as the Fed's commitment to not lag behind the curve, calling it a good and forceful start to the rate-cutting cycle. This further confirms that for the Fed, the risk of a slowdown in growth has surpassed the risk of inflation rising. The rise in unemployment rate and significant decline in new job additions are causing concern. Taking into account the incremental information from the meeting, we maintain our assessment that the risk of a "hard landing" of the US economy is still on the rise, with the probability of confirming a "hard landing" around November estimated to be around 60%-70%. Considering that the meeting further confirmed the downside risks in the labor market, we advise continuing to pay attention to three indicators: the unemployment rate - natural unemployment rate gap, the Samuelson Rule, global economic conditions, which will affect the pace of rate cuts in future Fed meetings. Asset allocation recommendations: Gold: Although short-term profit-taking may occur due to the impact of the rate cut, with the risk of a "hard landing" intensifying, its upward space is expected to further open up. Historical experience shows that apart from gold, most commodities are cautious before the first rate cut by the Fed. With further weakening of US labor data, gold will continue to benefit from the downward trend in real interest rates and a weakening US dollar. Pharmaceuticals (especially innovative drugs): As a sector sensitive to funding, innovative drugs may significantly benefit from the Fed's easing of monetary policy. Due to the long research and development cycles and large capital investments required by innovative drug companies, they cannot generate stable cash flow through sales until commercialization is achieved. This model makes innovative drug companies highly dependent on financing activities to support their cash flow. Historical trends show that after each Fed rate cut cycle begins, US bond yields tend to fall, and both A-share and Hong Kong stocks in the pharmaceutical industry have opportunities for growth and excess returns. US Treasuries: The opening of the rate-cutting cycle confirms the continued downward trend in the medium term, with short-term risks of a rebound. US stocks: Under the impact of expectations of a "weak economy", US stocks are likely to undergo another round of adjustments. 2. Gold companies with refining processes have a higher chance of releasing their performance, and stock prices have the basis to rebound to the gold price. Based on our previously established two-stage six-factor model, we predict that the central operating price range of gold for the next 25 years is likely to climb to $2600-$2700 per ounce. According to the exchange rate of 7.12, the corresponding domestic gold price range is approximately 595-620 yuan per gram. Assuming no exchange rate risk, the central operating price range of domestic gold may further rise from the high point earlier this year. Based on our research on timing the gold stock market, the Fed's official rate cut signals a significant increase in the volatility of domestic gold stocks, making it more challenging to achieve relative and absolute returns. Gold companies with refining processes are more likely to release their performance in Q4 of this year, as can be verified from the performance forecast for the end of January 2025. Currently, the stock prices of gold companies have the basis to rebound to the gold price. 3. Innovative drugs for gastric and lung cancer (1) Gastric Cancer - Existing targeted therapies have limited coverage, and breakthroughs have been made in clinical research on multiple innovative drug targets. There is a large number of gastric cancer patients, with public data showing that nearly 500,000 new cases of gastric cancer are reported in China every year, and the number of cases has been increasing year by year. Due to the similarity of symptoms of early gastric cancer to various relatively benign gastric diseases, combined with the relatively low colonoscopy rate in China, most gastric cancer patients are diagnosed in the late stage or metastatic stage. Immunotherapy, VEGF/VEGFR, and other broad-spectrum cancer therapies have made breakthroughs in first-line and second-line gastric cancer treatment: In 2021, BMS's nivolumab in combination with chemotherapy in the pivotal phase III clinical trial CheckMate-649 for gastric cancer was shown to improve mPFS (7.7 vs 6.9, HR 0.77) and mOS (13.8 vs 11.6, HR 0.80) for first-line patients, making it the first global phase III study to confirm that immune therapy combined with chemotherapy can improve patient survival benefits in first-line gastric cancer indication. As of now, six PD-1/PD-L1 inhibitors have been approved or submitted for marketing applications in China. Immunotherapy combined with chemotherapy has been listed as the first-line treatment for gastric cancer in the CSCO guidelines. INNOVENT BIO's sintilimab and BEIGENE's tislelizumab have shown the best potential in their class and can benefit patients regardless of their PD-L1 expression status, with significant market potential. Regarding second-line treatment, Eli Lilly's ramucirumab in combination with paclitaxel was approved for marketing in China in March 2022, providing a new option for second-line gastric cancer patients. In addition, HUTCHMED's fruquintinib in combination with paclitaxel for the treatment of second-line gastric cancer has been accepted for supplementary application by the NMPA in April 2023. Claudin 18.2 targeted therapy is expected to rewrite the gastric cancer treatment guidelines: Claudin 18.2 is present on the cell membrane, with a high expression in approximately 55% of HER2-negative gastric cancer patients and 38% of patients showing high expression. AnestaLife's Zolbetuximab in combination with chemotherapy was approved in Japan in March 2024, becoming the world's first and only approved CLDN18.2 targeted therapy. Its marketing application submitted in China is currently under review, and phase III studies have shown that mPFS for HER2-negative and CLDN18.2 high-expression gastric cancer patients in the first-line treatment can reach 8 months, superior to current standard care. Several domestic companies are also actively deploying CLDN18.2 targeted therapy, involving various types of drugs. Significant progress has been made in FGFR2b targeted therapy in the gastric cancer field: FGFR2b belongs to the receptor tyrosine kinase, with overexpression in approximately 30% of HER2-negative gastric cancer patients. Bemarituzumab, an FGFR2b monoclonal antibody developed by Anjeff, is owned by ZAI LAB in China and has undergone phase II clinical research.The combination of Bemarituzumab with chemotherapy significantly prolongs the mPFS (14.0 vs 7.3, HR 0.43) and mOS (24.7 vs 11.1, HR 0.52) of first-line advanced FGFR2b high-expressing G/GEJ patients. Currently, the drug is being studied in a Phase III clinical trial for gastric cancer in combination with chemotherapy or in combination with nivolumab, with progress leading globally.Lung cancer - at the current stage, the treatment plan is mainly selected based on the specific histological subtypes and driver gene mutations of lung cancer. According to data released by the International Agency for Research on Cancer (IARC) of the World Health Organization, the number of new lung cancer patients in 2022 is close to 2.5 million, making it the most common type of cancer globally in 2022. The number of lung cancer patients who died reached 1.82 million, making it the most deadly type of cancer worldwide. In clinical practice, lung cancer is roughly classified based on its pathological morphology into two categories: non-small cell lung cancer (NSCLC) and small cell lung cancer (SCLC), accounting for 85% and 15% respectively. The treatment plans for these two types of diseases differ significantly: For NSCLC patients, it is recommended that patients undergo relevant biomarker testing and choose targeted therapy based on specific gene mutation conditions; for small cell lung cancer, the main treatment currently relies on PD-1/PD-L1 combination chemotherapy. In the field of non-small cell lung cancer, recent attention has been focused on the progress of domestic EGFR, ALK, ROS1, KRAS, MET, PD-1/PD-L1 targeted drugs: 1) EGFR: Approximately 50% of Asian patients and 19% of Western patients have positive EGFR mutations. EGFR TKI monotherapy is currently the standard first-line treatment, with sales of Osimertinib reaching $3.2 billion globally in the first half of 2024. Recently, Avelumab in combination with Lanzopadib has outperformed Osimertinib in a phase III trial and is expected to update the NSCLC first-line treatment guidelines. For the population resistant to third-generation EGFR TKI, attention should be focused on Kolonbotai TROP2 ADC, Akeso Ivosutamab, and Hutchmed Savolitinib. 2) ALK: Third-generation inhibitors have shown clearer efficacy in patients with accompanying brain metastases. Sales of the representative drug Alectinib reached $1.7 billion in 2023. Iruac (Qilu Pharmaceuticals) has shown outstanding efficacy compared to competitors, and its commercial progress is worth noting. 3) ROS1: Ripotinib (ZAI LAB) delays the occurrence of resistance through structural optimization, further extending patients' mPFS, demonstrating its potential. 4) KRAS: KRAS G12C is a key target for domestic pharmaceutical companies in recent years. Currently, only Xinda/Jinfang's Fulzuretinib has been approved domestically. Other companies that have submitted listing applications in China include Gaxo, Yifang Biomedical. 5) MET: MET targeted drugs target MET14 skipping populations as a starting point. MET abnormalities in EGFR TKI-resistant patients are a core indication for the future. Hutchmed's Savolitinib in combination with Astrazeneca's third-generation EGFR TKI Osimertinib for the treatment of MET-abnormal EGFR TKI-resistant patients has shown positive Phase II global trial data and is expected to submit a NDA globally by the end of 2024. 6) PD-1/PD-L1 has a stable position in driver gene-negative 1L patients. Ivosutumab monotherapy in a phase III head-to-head trial has outperformed Pembrolizumab monotherapy, providing patients with a treatment choice of "no chemotherapy" with enormous application potential. In SCLC, first-line treatment focuses on PD-1/PD-L1, while second-line treatment focuses on DLL3 and B7H3 targeted drugs: SCLC patients have poor prognosis, and the development of targeted drugs is more difficult. In first-line therapy, the effect of Pembrolizumab (Sinopharm) is outstanding. The combination of Adebilumab (Jiangsu Hengrui Pharmaceuticals) with sequential chest radiotherapy is expected to further extend patients' PFS. In treated patients, the ongoing research and development progress of Anjene/Baiji DLL-3/CD3 bispecific antibody Tarlatamab and Hansoh Pharma B7H3 ADC is a key focus. Source: WeChat official account "Sinolink Research", authors Zhang Chi, Li Chao, Yuan Wei, GMTEight editor: Chen Qiuda.