CICC: Trump 2.0 accelerates economic recovery, CKH Holdings has an advantage in small-cap style.

CICC released a research report stating that with the dust settled from the November US election, Trump was re-elected, the Fed's interest rate meeting proceeded as scheduled with a 25bp rate cut, leading to a rebound in US stocks. Overseas assets continued to exhibit pro-cyclical characteristics. Domestically, growth-stabilizing policies continued to intensify, with multiple ministries holding press conferences in October to introduce a series of additional policies. In November, the National People's Congress Standing Committee approved large-scale local government debt programs. Market sentiment was relatively positive, with CKH HOLDINGS benefiting from small-cap stock styles. Key points from CICC: Overseas, positive economic data in the US since October led to a gradual decrease in expectations of an interest rate cut. Overseas markets began pricing the possibility of a soft or hard landing for the US economy. Since October, the US economy has shown signs of overheating, with GDP growth reaching 2.8% on an annualized basis in the third quarter. Core CPI in September exceeded expectations, reaching 3.3% year-on-year, while the unemployment rate remained at 4.1% in October. This led to a decrease in expectations of an interest rate cut, with the probability of the federal funds rate falling below 4% by June 2025 dropping from nearly 100% on October 3 to around 50%. Strong economic fundamentals prompted overall growth in US stocks. However, there was volatility in the market before the presidential election results were confirmed, with pressure on stock performance in the two weeks leading up to the election. After Trump secured victory, all three major indices rebounded. Overall, the stock market showed a clear pro-cyclical style, with the Dow Jones almost neck-and-neck with the Nasdaq, similar to the performance during the soft landing period in 1995. US bond rates continued to steepen, with short-term Treasury yields rising while long-term bond rates fell. After Trump's victory, the 10-year Treasury yield briefly rose above 4.4%. Looking ahead, the bank believes that global asset classes may continue to exhibit pro-cyclical and pro-inflation features in the coming month. Within the US stock market, cautious easing by the Federal Reserve will continue to boost corporate profits through fundamental repair. Sectors related to resilient consumer demand, downstream sectors in the property chain (hardware, plumbing, furniture), and sectors related to stabilized manufacturing and raw materials show higher value in allocation. Under pressure from potential tariffs imposed by Trump, domestic export industries may face a surge in demand. The steepening of the US bond yield curve poses challenges, with the ability of the 10-year Treasury yield to surpass the 4.5% mark depending on future inflation and unemployment rate data. Commodities may face short-term suppression. The price of copper is affected by the global economic disruptions caused by Trump's tariffs, with its future prospects depending on the stability of the Chinese economy. Gold has seen adjustments in valuation and trading due to the fading uncertainty of the election, Trump's victory boosting the dollar, and sustained high real interest rates. However, factors supporting the upward trend in gold prices, such as inflation and fiscal policy, remain unchanged, leading to a relatively optimistic outlook. Amid optimism in overseas fundamentals, the bank also cautions that there may be liquidity pressures on the US dollar. Since April, the trend in reserve money (broad liquidity) has been declining, reaching the level of "Ample Reserve" mentioned by Federal Reserve Governor Waller earlier this year, equivalent to about 10%-11% of nominal GDP. Historically, when reserve money falls below this level, it often triggers financial risk outbreaks. As of now, the Federal Reserve has not announced when it will end tapering its balance sheet. If the Fed continues to maintain a tapering limit of $60 billion per month (averaging $44 billion between June and October), reserve money may break the lower limit of "Ample Reserve" by the second quarter of next year, affecting financial market stability. Domestically, positive market sentiment and active funds have driven small-cap and growth styles to continue rising. In the domestic market, trading is mainly influenced by funds and sentiment, with small-cap and growth styles prevailing. Since October, various ministries including the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Housing and Urban-Rural Development have held press conferences to introduce a series of policies to stabilize economic growth. In November, the National People's Congress Standing Committee introduced a package of debt relief measures to bolster market confidence. After a rapid rise at the end of September, the market gradually stabilized in October, with some internal differentiation. Positive market sentiment and active funds have driven small-cap and growth styles to continue rising, while large-cap stocks represented by the Shanghai and Shenzhen 300 index and previously performing well dividend stocks saw minor pullbacks since late October. In terms of funds, there has been a slight decline in capital inflows into the stock market since the peak in early October, with an overall net inflow maintaining an active level in margin trading buying. Firstly, stock ETFs saw net inflows of nearly 40 billion yuan in October, with a net inflow of 150 billion yuan in the first week of October, followed by a slowdown but a gradual decrease in outflows since late October. ETF margin balances increased by a net of 8.2 billion yuan in October, with a net increase of 13.4 billion yuan on October 8, followed by a decline but a recent uptick in net margin balances since late October. Secondly, margin balances in both markets increased by 270 billion yuan in October, with an increase of 110 billion yuan on October 8, followed by a slowdown in growth rate but a continuous increase in net financing. As a percentage of margin buying, the ratio has remained high even after rapid increases, rising nearly 2 percentage points compared to the average before policy announcements in July and August. Industries with high net margin buying, such as finance, defense industry, electronics, and computers, have also performed well. Finally, foreign capital saw a net inflow of $24.1 billion in October, with passive funds seeing a net inflow of $25 billion while active funds saw an outflow of $0.9 billion. The first week of October saw a net inflow of $39.4 billion, followed by small outflows in the subsequent three weeks. Foreign capital mainly flowed into the technology, healthcare, and consumer goods sectors, with a higher net outflow in the finance sector. In terms of market sentiment, overall market sentiment indicators remained high in October. According to relevant media reports, the bank examined market sentiment in the A-share market through three indicators: turnover rate, ETF premium, and dividend premium. Firstly, in October, A-share trading volume and turnover rate were higher than previous levels. The average daily turnover of A shares in October was around 2 trillion yuan, higher than the level of around 600 billion yuan before policy announcements, with October 8 seeing a historical high turnover of nearly 3.5 trillion yuan. Turnover has since slowed down but remains at high levels overall.The turnover rate of A shares has increased significantly from 2% to 5% compared to before.The high turnover rate in September and October did not weaken the overall performance of the A-shares market. The high turnover rates of the BSE 50, CSI 1000, and CSI 2000 supported the index performance. In addition, the weighted premium-discount rate of stock ETFs in October slightly turned positive, although it fell from the over 1% premium rate at the beginning of October, there was still a slight premium overall, indicating an improvement in market sentiment. Finally, the dividend premium in October remained high. The dividend premium is the the difference between the price-to-book ratio (PB) of all A-shares and dividend stocks. Dividend stocks are generally considered defensive, so they perform well when market sentiment is weak, leading to an increase in PB values and a certain premium compared to the overall market. Conversely, when market sentiment improves, the dividend premium decreases. Since mid-October, the dividend premium for A-shares has continued to decrease, driving an improvement in the overall performance of A-shares. Additionally, research shows that the performance of small-cap stocks and less profitable growth stocks can also reflect market sentiment. The strong performance of small-cap stocks such as the BSE 50, CSI 1000, and CSI 2000 is a strong indicator of the improvement in market sentiment. The improvement in market sentiment and the inflow of funds are the main drivers of the market, with the improvement in market sentiment being stronger than the flow of funds. Currently, monetary and fiscal policies are working together, and future policies are expected to further boost market fundamentals. In terms of monetary policy, multiple monetary support policies were implemented in October, including the Securities, Funds, Insurance Companies Interbank Financial Information System (SFISF), repurchase agreements, and reverse repurchases. The People's Bank of China's third-quarter monetary policy report stated its commitment to a supportive monetary policy, increasing counter-cyclical adjustment efforts, and promoting a reasonable rebound in prices as an important consideration for monetary policy. Additionally, the Federal Reserve's rate cut by 25 basis points in November will create a favorable internal and external environment for maintaining loose monetary policy in the future. Regarding fiscal policy, on November 8th, the Standing Committee of the National People's Congress approved a large-scale local debt swap program. This one-time increase in the swap amount eased the burden of local debts, saved interest expenditures, and released incremental fiscal space. Next year, the intensity of stabilizing economic growth policies is expected to increase, including tax and land policies to support real estate market development, utilizing additional deficit space, expanding the scale of special bond issuance, continuing to issue special long-term government bonds to support "two focuses", and increasing support for emerging industries, all of which will help boost investment and consumption. In the latter part of the financial cycle, with prominent contradictions in insufficient demand, the importance and necessity of fiscal expansion for boosting economic growth and alleviating financial risks are more significant. The consolidation of fiscal policy will help improve market expectations, shape the future economic bottom, and transition short-term market trends driven by sentiment and funds into a medium-to-long term trend driven by fundamentals. Looking at the historical interest rate cuts and literature research, the depth of the US rate cut and the speed of economic rebound are influenced by the economic status before the rate cut. Particularly, a relatively healthy household balance sheet and real estate market often correspond to faster rebounds. Before this round of rate cuts, residential cash reserves were high, leverage ratios were low, real estate vacancy rates were low, and the economy was in the first half of the financial real estate cycle, these four key factors will accelerate the pace of the economic rebound. Based on quantitative analysis of all 17 interest rate cut cycles since 1965, the bank estimates that the US economy is expected to rebound 4-5 months after this rate cut, corresponding to the first and second quarters of next year as the time window for the cyclical rebound. In fact, under the dual stimuli of rate cuts and fiscal incentives, the resilience of the US endogenous growth has already been realized to some extent, with consumption and capital investment showing signs of bottoming out and rebounding, and the labor market also showing positive signals, suggesting a lower likelihood of economic stagnation. In terms of asset allocation, it is advisable to continue to favor pro-cyclical and inflation-driven styles, and be cautious about assets driven by liquidity. Fundamental improvement will continue to drive the blossoming of pro-cyclical sectors such as consumer discretionary, capital goods, and commodities, and benefit domestic export sectors before Trump's tariffs are enforced. However, the ongoing balance sheet reduction may lead to a tightening of US dollar liquidity.