At the recent Ningbo Bank mid-year strategy meeting, Hong Hao, the Chief Economist of the SiRui Group, shared his insights on the current disconnection between the market and the economic fundamentals. Hong Hao pointed out that although there is a clear divergence between the market and the economic fundamentals at present, this situation will eventually be corrected, with the key being to find an appropriate trigger moment.

Future Market Trend Forecast: Hong Hao believes that as 2024 enters the second half of the year, the Federal Reserve's possible interest rate cut measures will provide relief to the market. This policy change is expected to alleviate the pressure on RMB assets and bring about a positive adjustment in the market. Especially at the turn of the third and fourth quarters, the market may usher in a wave of positive trends.

Market Style Evolution: Hong Hao also pointed out that the huge difference in performance between dividend stocks and other stocks is extremely rare, suggesting that the market style may undergo a significant transformation in the second half of the year. This transformation will break the current market pattern and form a new trend that is completely different from the first half of the year.

Market Opportunities in Pessimistic Sentiment: Hong Hao observed that the market's pessimistic sentiment reached a peak after a wave of rises in May. At present, although the market is generally inclined towards conservative investment methods such as bank deposits and long-term government bonds, he believes that the overly pessimistic market prices do not truly reflect economic data. Against this backdrop, Hong Hao believes that now is a good time to seek and utilize market opportunities, especially those that may reflect the fundamentals of data in the next 3-6 months.

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Multiplicity of Economic Fundamentals: Hong Hao emphasized that for the fundamentals of China's economy, different industries provide different answers. Although the export industry faces challenges, it is still profitable overall, especially exports to the United States and Europe, which have reached new highs. However, the shrinkage of the service industry and the domestic market reflects another side of the market. These cyclical reports of economic data foretell the market's preemptive response.

By deeply analyzing these economic and market dynamics, Hong Hao provided important insights into future trends, reminding investors to go beyond short-term fluctuations and perceive the formation of long-term trends. This provides investors with an important strategic direction in the current complex market environment.

The first question is, what is the current state of China's economic fundamentals?

With the surge in global demand, China's export activities have performed well, especially in the past few months, we have witnessed the continuous growth of China's exports positively driving the economy. The latest data shows that China's export current account surplus in June was as high as nearly 100 billion US dollars, a staggering figure equivalent to the annual GDP of a medium-sized European country.

Shipping Market Response

This export growth is directly reflected in shipping costs. Shipping costs from Shanghai to major global ports such as Rotterdam and New York are continuing to rise. According to the latest data, shipping prices in Shanghai have reached a new high, reflecting the strong global market demand for Chinese products. In fact, many ports are currently facing a shortage of containers, highlighting the prosperity of international trade activities.The Rise of Cryptocurrency

At the same time, the cryptocurrency market is also experiencing a surge. Crypto assets, especially Bitcoin, are constantly setting new highs worldwide. At the Bitcoin conference in 2024, there was even news that if Trump is re-elected, he plans to have the U.S. government stockpile 1 million Bitcoins and never sell them, which would involve a market value of about 70 billion U.S. dollars, arousing great interest in the market.

China's Advantage in the Global Perspective

Despite concerns about the decline in European demand and aging population, as well as the potential adjustment of the U.S. economy, these have not hindered the performance of Chinese manufacturing products in the global market. On the contrary, China's strong exports indicate that its core position in the global supply chain is still unshakable.

Monetary Conditions

The rising phase of the economic cycle usually drives the growth of the real economy, thereby increasing the demand for physical goods. This growth is driven by multiple factors: increased employment, rising wages, and the improvement of disposable income. As consumer purchasing power increases, the demand for goods also increases, which in turn drives upstream manufacturers to increase the import of industrial raw materials to meet market demand.

The Bridging Role of Monetary Policy

Monetary policy plays a crucial role in this process. As the economist Keynes said, money is the channel that connects the past and the future. In China, when analyzing monetary policy, we usually focus on multiple indicators, including M1, M2, and M0, as well as changes in the social financing scale and new credit. These indicators help us understand the growth of household and corporate loans, especially changes in medium and long-term loans.

Observing Changes in Capital Prices

However, relying solely on the central bank's official data may not reflect the liquidity conditions of the real economy in a timely manner. The slowdown in the growth rate of broad money M2 and the negative growth of M0 show that deposits are flowing from banks to fields such as wealth management and bond funds. In order to more sensitively capture changes in liquidity conditions, the dynamic changes in capital prices have become a key observation point. The continuous rise in asset prices indicates that the actual monetary conditions may be more relaxed than most people think.Economic Outlook and Market Performance

If the economic fundamentals remain stable and liquidity conditions improve, the capital market should not perform so poorly. Therefore, the importance of in-depth study of the economic cycle is not only in predicting short-term market trends but also in correctly configuring long-term investment strategies to avoid directional errors, even in adverse market environments, to maintain asset stability.

We are at the bottom of the cycle.

The operation of China's economic cycle shows a clear cyclical fluctuation of 3 to 4 years, which can be observed through the simulated proxy indicator - the yellow curve. We can see from historical data that each short economic cycle lasts about 720 days, from one low point to the next.

Specifically, important economic cycle lows include:

November 2008: The trough of the global subprime mortgage crisis.

August 2012: The European debt crisis and the historical downgrade of the U.S. sovereign debt rating.

2016: The domestic stock market broke from the high point of 5,000 points to about 2,600 points.

The first quarter of 2020: The global outbreak of the COVID-19 pandemic.

The fourth quarter of 2023 to the present: At present, China's economy is in the stage of bottoming and recovery.It is particularly noteworthy that the real estate cycle has always been an important driver of China's economic cycle. By the first quarter of 2024, the inventory liquidation rate of China's real estate market has basically returned to the level when the pandemic broke out in 2020, which may contain some irrational elements, and there can be different interpretations for this.

The Relationship Between the Stock Market and Economic Cycles

Observing the Shanghai Composite Index (represented by the blue line), we can find a strong correlation between it and the yellow line of the economic cycle. Although it is often said that China's stock market seems to be decoupled from economic performance, from these data, the connection between the stock market cycle and the economic cycle is very close, showing a cyclical fluctuation every 3-4 years.

At present, we are at the bottom of an economic and stock market cycle, which means that the next stage may be one of recovery and rise. Therefore, the current situation may not be as bad as everyone thinks.

Looking Forward to the Inflation Cycles of China and the United States

Next, analyzing the inflation cycles of China and the United States is also extremely important, which will further affect the economic strategies and market performance of both countries.

The correlation between China's Producer Price Index (PPI) and the United States' Consumer Price Index (CPI) is strong, indicating that China's upstream inflation and the United States' downstream inflation are closely related. This can be clearly seen from the historical data of the inflation indices of both countries.

Expectations for the Federal Reserve's Interest Rate Cut and Market Response

With the expectation of a decrease in U.S. inflation, the market generally expects the Federal Reserve to cut interest rates in September, although the possibility in August is considered overly optimistic. This policy expectation has brought new dynamics to the global capital market.The Economic Cycle of China and Investment Opportunities

China's economy is currently undergoing a cyclical bottom-up repair, especially in the real estate market. Contrary to the general pessimistic expectations, certain areas such as the luxury housing market in Shanghai have performed exceptionally well. This indicates that despite the economic challenges, market opportunities still exist.

Performance of Commodities and Stock Markets

In the first half of 2024, commodities, particularly precious metals and energy products, have shown strong performance. At the same time, although the overall performance of the stock market has been average, the technology stocks of the Shanghai Composite Index and the Hang Seng Index experienced significant increases between February and May.

Policy Trends and Future Expectations

The People's Bank of China has begun to implement a moderate interest rate reduction strategy, indicating a loose policy environment. This move may bring a second wave of growth opportunities to the Chinese stock market in the coming months, especially during the Golden Week in October.

If the Federal Reserve Begins the Interest Rate Reduction Window

During the repair process of China's economic cycle, it is common to see different performances of growth and cyclical sectors. According to analysis, growth sectors usually rebound when the economy begins to recover, while cyclical sectors perform more prominently. This pattern continued until the end of 2023. However, despite strong profits and export performance, the performance of growth sectors remains poor, especially small and medium-sized stocks during the Spring Festival, showing a lack of market confidence in the fundamentals.

Mutual Influence of Sino-American Inflation and Monetary Policy

The United States is currently in a clear interest rate reduction window, which has a broad impact on the global economy and market. Although China's economic cycle is closely related to that of the United States, China's operations in monetary policy are relatively cautious, usually only making small adjustments to interest rates to avoid significant impacts on the renminbi and capital flows. This strategy reflects concerns about market instability and capital outflows that rapid or large-scale interest rate reductions may cause.Market Trends and Monetary Policy Outlook

With the potential rate cut by the Federal Reserve, it is anticipated that the pressure on Chinese asset prices will be alleviated. This could not only improve market sentiment but also provide a more accommodative monetary environment for the Chinese market. Under such conditions, both growth sectors and large-cap stocks may see an improvement in performance.

Future Market Observations and Strategies

Despite the current uncertainties, understanding the relationship between the monetary policy choices and economic cycles of China and the United States is crucial for formulating investment strategies. It is expected that if the Federal Reserve implements a rate cut, it will provide more positive support for the global market, especially the Chinese market. Investors should closely monitor the policy dynamics between China and the United States and adjust their investment portfolios to adapt to these changes.

We have returned to a period where

The implied volatility of the U.S. market provides profound insights into the cyclicality of the global financial cycle. This cyclicality of volatility shows that every few years, the global market experiences a transition from low to high volatility, reflecting the profound impact of economic and political events.

Key Historical Milestones and Economic Policies:

1996-1997: The United States achieved a fiscal surplus during President Clinton's tenure, with market volatility at a low point.

2001: After the 9/11 terrorist attacks, volatility peaked.

2005: The United States maintained a low-interest-rate policy, with the economy gradually recovering. China implemented equity and exchange rate reforms, and market volatility decreased once again.2023: The world enters a high volatility phase once again, with the implied volatility in the United States surging by 50%.

Market Bubbles and Speculative Strategies: Soros once said that the primary task of financial investors is to identify and exploit market bubbles, then withdraw before the bubble bursts. Current market conditions, such as historically loose monetary policy, optimistic expectations for the future AI revolution, and possible relaxation of financial regulation, all provide ample conditions for the formation of bubbles.

Current Market Conditions and Future Outlook: Although there is a significant divergence between current market prices and economic fundamentals, this divergence indicates a possible positive adjustment in the future. Especially in the context of Sino-American monetary policy, the potential rate cut by the Federal Reserve is expected to bring relief to global asset prices, alleviating the current market pressure.

Gold: The asset with an eye-catching performance of the year

Hong Hao pointed out that gold has performed exceptionally well this year, becoming one of the best asset categories. Gold is traditionally seen as an anti-inflation and risk-averse asset, and the current global geopolitical tensions have intensified the preference for certain assets. He emphasized that when the money supply is abundant and physical assets are relatively scarce, the value of gold is significantly enhanced. This phenomenon reflects a simple but powerful logic: in an environment of monetary flooding, the most scarce assets often have the strongest price performance.

Hong Kong Stocks: A market with both potential and challenges

Regarding Hong Kong stocks, Hong Hao believes it is a very interesting and resilient market. The characteristics of Hong Kong stocks are high openness and lack of capital flow restrictions, making it more attractive than A-shares. He pointed out that although the Hong Kong stock market has experienced multiple fluctuations, its bottom is gradually rising, showing the resilience of the market. Especially in the context of global monetary easing, with the possible rate cut by the Federal Reserve, it is expected that Hong Kong's monetary environment will become more relaxed, which may further enhance the attractiveness of the Hong Kong stock market.

Future Outlook for the Global Market

Hong Hao is cautiously optimistic about the future global market. Although there is a huge divergence between current market prices and economic fundamentals, he believes that this unreasonable pattern will eventually be corrected. He emphasized that the historical relaxation of global liquidity is a prerequisite for the emergence of capital market bubbles, and in this environment, any slight fluctuation in the market may become a catalyst for a large-scale adjustment.

Strategy and OpportunitiesAs the year draws to a close, with the changing market style and potential macroeconomic adjustments, investors should closely monitor possible turning points and emerging trading opportunities. Hong Hao specifically mentioned that mean reversion and trend reversal will be key trading strategies, and investors should be prepared to seize the rebound opportunities of assets that have been hovering at extreme positions.