The expectation of interest rate cuts by the Federal Reserve continues to increase, causing turbulence in the global capital market.
Recently, the US Department of Labor released non farm payroll data for July 2024, showing that 114000 new non farm jobs were added in July, with an expected 175000; The unemployment rate unexpectedly rose by 0.2 percentage points to 4.3%, reaching a new high since October 2021. The year-on-year growth rate of hourly wages decreased by 0.2 percentage points to 3.6% compared to the previous value, and the month on month growth rate decreased by 0.1 percentage points.
The weak employment report has intensified investors' concerns about further economic slowdown, further strengthened expectations of Fed interest rate cuts, and triggered a series of chain reactions in the capital market. Recently, gold futures have hit new highs, while US bond yields have sharply declined, leading to a global stock market correction. The impact of whether the Federal Reserve cuts interest rates or not on the capital market is evident. The logic of asset allocation has changed, how should domestic public funds respond?
The Federal Reserve's interest rate cut window is approaching, and market volatility is increasing
Many institutions believe that the Federal Reserve will start cutting interest rates from September. At present, the target range for the US federal funds rate is 5.25% to 5.5%, the highest level in 23 years. Since the Federal Reserve began its current interest rate hike cycle in March 2022, the federal funds rate has risen from near zero to its current level at a speed not seen in over 40 years.
Next, before the September monetary policy meeting of the Federal Reserve, the release of data such as July CPI, August non farm payroll, and August CPI will further confirm the expectation and pace of the Fed's interest rate cuts.
At the same time, the market believes that the Fed's interest rate cut implies a "recession" signal and has begun to continuously monitor whether the risk of recession in the US economy has escalated.
Under this series of expectations, funds began to act ahead of schedule and triggered price fluctuations in the capital market. Tianfeng Securities believes that the current timing of the Federal Reserve's interest rate cut may continue to approach, and the subsequent trend of various assets mainly depends on whether the US economy is heading towards recession. It should be noted that the volatility of risk assets may be amplified, and the contraction and reversal of global political trends and carry trades may be one of the important risk points at present.
On August 2, long-term US bonds soared, for example, long-term US bond futures rose by more than 2%, super treasury bond bond futures rose by 2.74%, and 10-year US bond futures rose by 1.25%.
In terms of the stock market, as of the close on August 2nd, the Dow Jones Industrial Average had a weekly decline of 2.1%, ending its previous four week trend of continuous gains; The weekly decline of the Nasdaq was 3.35%, and the weekly decline of the S&P 500 index was 2.06%, both for three consecutive weeks of decline.
Precious metals have experienced a significant surge, with COMEX gold futures experiencing a 4.41% weekly increase, reaching a new historical high.
The logic of asset allocation has changed
From the perspective of asset allocation logic, institutions generally believe that the main line of the Federal Reserve's interest rate cuts is gradually becoming clear, and the performance of various assets is gradually shifting from hesitation to redemption.
In terms of macro environment, Huaxia Fund believes that the Federal Reserve may enter a loose cycle, and domestic monetary policy tends to relax. Recently, the RMB exchange rate has appreciated to a certain extent, and "stable growth" has returned to everyone's vision. The successive reductions of important interest rates such as MLF and LPR in the previous period have indicated the attitude of the decision-making level. Combined with the objective expression of the current economic environment in important meeting documents, the domestic monetary environment will still remain relatively loose in the future.
Looking ahead to the future, Huaxia Fund believes that with the increase in market risk appetite, the market may usher in a style rebalancing, and the valuation of growth stocks is expected to further rise in the future. The companies listed on the Science and Technology Innovation Board are mainly concentrated in the new generation information technology industry. Currently, they are facing a triple resonance of strong policy support, the recovery of the technology industry's own prosperity, and the expectation of loose domestic and foreign monetary environment. It is recommended to pay long-term attention to investment opportunities on the Science and Technology Innovation Board.
The expectation that the Federal Reserve will soon start a cycle of interest rate cuts, according to Fu Beijia, a fund manager at HSBC Jinxin, is that high growth sectors that are more sensitive to interest rates are expected to benefit. This can be achieved by investing in sectors such as consumer electronics and innovative drugs that are less correlated with domestic demand, in order to enhance the aggressiveness of the investment portfolio.
The current round of interest rate cuts may have a shorter cycle and severe market competition, which makes the impact of interest rate cuts on assets more prominent. Regarding Hong Kong stocks, Hua'an Fund believes that in the context of strong uncertainty at home and abroad, the dividends of central enterprises in Hong Kong stocks are expected to receive more attention from funds due to their high dividends and low valuations. After a short-term correction, the dividend yield will further rise, and the allocation value of high dividend strategies in Hong Kong stocks will become more prominent.
In terms of gold, Hua'an Fund stated that recent signals of a US recession have strengthened, with PMI sentiment and non farm payroll data falling short of expectations, and inflation significantly declining, strengthening market confidence in interest rate cuts in the second half of the year. In the long term, the global central bank's de dollarization process is accelerating, and gold holdings are still replacing US dollar reserves. In addition, there is still uncertainty in geopolitical conflicts, highlighting the value of gold allocation.
In terms of the bond market, Boshi Fund analyzed that the Federal Reserve hinted at a rate cut in September, and there may be more room for domestic monetary policy relaxation in the future. In this situation, short-term interest rate bonds still have high allocation value. The downward trend of short-term interest rates will also open up more space for the downward trend of long-term interest rates, and more attention can still be paid to the allocation value of ultra long bonds.
Fund manager seeks change
In recent years, the investment style of the A-share market has undergone significant changes, and more and more fund managers have begun to pay attention to investment opportunities arising from macroeconomic fluctuations. Southern Fund's Gong Tao stated that in the second quarter of 2024, the market will still revolve around domestic and overseas macro fluctuations.
Paying attention to changes in the macro environment has become an important part of many fund managers' investment strategies. A fund manager from South China Public Fund previously stated in an interview with a reporter from a securities firm in China that he has trained his ability to allocate funds to the industry through observing the changes in the industry under the macro background. He believes that industry allocation ability is one of the most important abilities for public fund managers.
Investing requires a macro strategic mindset, "said Liu Yuanhai, a fund manager at Dongwu Fund. Fund managers should first be industry comparative strategy analysts. Only by comparing various industries can they know the cost-effectiveness of their ability circle. Otherwise, it is easy to become addicted to their ability circle and always think that the assets within their ability circle are good, which is fatal. With a comparative perspective, one knows if there is a chance in their ability circle. If not, they need to consider reducing their position.
The expectation of the Federal Reserve cutting interest rates has long been present, but as time approaches, the disturbance to capital market price changes becomes increasingly apparent. Whether the Federal Reserve will cut interest rates or not is an important macro event that public funds will pay attention to in the second half of the year, and fund managers' investment strategies will continue to change to adapt to changes in macro factors.
The pace of the Federal Reserve's interest rate cuts will have a significant impact on market style. A fund manager from Huabei Public Fund said that the market is in the early stages of a turning point, and fragile confidence is still unstable. It is not surprising if there are ups and downs.
The improvement of the interest rate differential between China and the United States in the second half of the year will be an opportunity to unlock structural opportunities in A-shares, "said an analyst from Open Source Securities. In August, new domestic and overseas clues will unlock a new round of structural opportunities in A-shares. However, both the transmission of domestic policies and the interest rate cuts by the Federal Reserve overseas still need to wait for time to ferment.
Looking ahead to the market situation, Gao Nan, fund manager of Yongying Fund, believes that the market may still be dominated by structural opportunities. In addition to the actual recovery progress and potential policies of the domestic economy, the pace of interest rate cuts by the Federal Reserve overseas will also become the pricing mainline of the A-share market.