CICC: How does a Fed rate hike affect A-shares?

CICC released a research report stating that at the September FOMC meeting, the Federal Reserve announced a 25bp rate hike, raising the benchmark rate to 3.75%-4.00%, in line with market expectations. This is the first adjustment to the federal funds target rate since December 2025, and the first rate hike since July 2023. Previously, the Fed had cut rates six times from September 2024 to December 2025, for a cumulative reduction of 175bp. On allocation, CICC recommends focusing on: 1) technology growth stocks; 2) taking into account the geopolitical situation and the position in the capacity cycle, focus on areas with improving earnings and supply-demand dynamics. The progress of fundamental recovery in purely domestic-demand industries remains relatively slow and requires further observation. CICC's main views are as follows: How does a Fed rate hike affect A-shares? This rate hike may not be equivalent to the start of a Fed hiking cycle, and the two have different implications for A-shares From the perspective of general transmission mechanisms, if the Fed continues to raise rates, it could affect A-shares through three channels: 1) On the liquidity front, Fed rate hikes may lead to tighter global liquidity. Rate hikes raise overseas financing costs, and under normal circumstances the dollar tends to strengthen, bringing marginal changes in exchange rates and capital flows, affecting expectations for A-share liquidity. 2) On the fundamentals front, Fed rate hikes may affect exports. Especially at a stage when US interest rates may already be elevated, rate hikes may dampen demand in traditional overseas industries, thereby suppressing export demand for some Chinese companies that serve as suppliers. 3) On the policy front, under normal circumstances, Fed rate hikes may influence expectations for China's monetary policy through external conditions. However, this US rate hike may differ from the start of a typical Fed hiking cycle, and whether it will have a sustained impact on A-shares remains to be seen. If it is only a short-term or even one-off hike, its impact will be relatively limited, and A-shares have already reacted fairly fully in the recent period. Combined with the rebound in US inflation and strong nonfarm payroll data over the past two months (Exhibit 1), the market had largely priced in this US rate hike. According to CME FedWatch, before this US rate hike, the market-implied probability of a hike had already exceeded 90% (Exhibit 2). The recent weak performance of the A-share market has been partly due to US rate hike expectations as one of the main external drags. However, it should be noted that whether this US rate hike can continue and form a longer hiking cycle still faces significant uncertainty. This year's rise in US inflation has been largely related to oil price increases caused by geopolitical conflicts. In particular, the recent escalation of US-Iran geopolitical tensions has widened the scope of impact, with Brent crude oil prices once again breaking above $100/barrel. But in the medium term, the impact of geopolitical risks on oil prices is highly uncertain, and the current US economic environment may not support sustained and sizable rate hikes. In addition, CICC argued in a previously published article that the Fed currently faces "triple constraints" (inflation target and market constraints, FOMC committee constraints, and political and high-debt constraints), and that current US monetary policy actions may instead accelerate the restructuring of the international monetary order, further bringing diversification and fragmentation to global asset allocation. Against this backdrop, if US rate hikes face major constraints in the medium term and are difficult to sustain, the bank believes the impact on A-shares may be relatively limited and has already been fairly fully reflected earlier. How to allocate going forward? Recent volatility in the A-share market has been mainly driven by external factors, including the Middle East situation, Fed rate hike expectations, and rising US Treasury yields, but the impact of these external disturbances on A-shares is mostly short-term and temporary. This year, A-share fundamentals are relatively good, and listed companies' earnings growth is expected to be the best in the past five years; overall A-share market valuations are relatively attractive, and the structural overvaluation seen in the first half of the year has already improved substantially. In the medium term, the restructuring of the global monetary order and the technology narrative supporting A-shares have not changed. At the current point, the bank believes there is no need to be pessimistic about the A-share market outlook, and the long-term, steady-progress trend since "9.24" is still expected to continue. On allocation, CICC recommends focusing on: 1) Technology growth. The performance of growth stocks still hinges on the industry's own prosperity and earnings delivery. With solid fundamentals, US rate hikes may not necessarily have a greater impact on global growth stocks. The A-share technology sector may show divergent trends going forward and requires careful selection: AI infrastructure-related segments, such as optical communications and PCBs, still have relatively strong certainty of remaining highly prosperous this year and are expected to rebound after an earlier slump. For many companies in semiconductors and computing power, attention still needs to be paid to the match between fundamentals and valuations; many innovative drug companies have entered the stage of clinical data validation and are worth bottom-up attention. 2) Taking into account the geopolitical situation and the position in the capacity cycle, focus on areas with improving earnings and supply-demand dynamics, such as power grid equipment and petrochemicals/chemicals. The progress of fundamental recovery in purely domestic-demand industries remains relatively slow and requires further observation. Exhibit 1: US inflation has rebounded recently, and employment data are relatively strong Source: Wind, CICC Research Department Exhibit 2: Before this rate hike, the market-implied probability of a hike exceeded 90%