This week, the domestic Central Economic Work Conference set the tone, while the Fed's "dovish action with hawkish rhetoric" led to divergent performances in A-shares and Hong Kong stocks. A-shares saw capital flow toward high-growth tech sectors in anticipation of a spring rally, whereas Hong Kong stocks remained sluggish due to weak earnings expectations, the Fed's hawkish rate-cut guidance, and rebounding U.S. Treasury yields.
Despite the Fed's rate cut, rising Treasury yields suggest liquidity conditions may not be as favorable. U.S. markets exhibited a style shift, reflecting concerns that AI commercialization may lag behind reflation, dampening risk appetite. Beyond tracking AI developments, attention should focus on the new Fed chair nomination and upcoming economic data. On December 12, Trump disrupted expectations of a "super-dovish" Kevin Hassett appointment, favoring the more hawkish Kevin Warsh instead, impacting market expectations for monetary easing. Next week’s "super data week"—featuring November CPI and employment reports—will be critical in assessing inflation risks and policy effectiveness after October’s data gap. Overall, U.S. market volatility may remain elevated, potentially affecting A-share sentiment.
The Bank of Japan (BOJ) is poised to hike rates soon, likely next week, alongside a large stimulus package. This could push Japanese bond yields higher and raise capital repatriation concerns, but markets may have already priced in a 0.75% rate. While Hong Kong, as an offshore market, is more sensitive to global liquidity shifts, the overall impact is expected to be limited.
Investors should stay alert to external disturbances while patiently positioning for opportunities in both tech and cyclical sectors. We agree that gradual liquidity improvements are likely, though near-term inflows may favor lower-risk financial and dividend plays. The most significant liquidity boost typically arrives post-Lunar New Year. For now, maintain defensive exposure to financials and high-dividend sectors, while preparing to pivot toward: 1) **AI-related chains**: Semiconductors, overseas computing, internet, non-ferrous metals, grid equipment, and edge AI; 2) **Cyclical recovery**: New energy; 3) **Globalization plays**: Innovative pharma.
**Key risks**: Disappointing domestic demand policies, escalating U.S. tariffs beyond expectations, and liquidity crises.
### Policy Boost Lifts A-Shares; Hong Kong Lags The Central Economic Work Conference’s pro-growth stance and the Fed’s mixed signals (hawkish talk, dovish action) bolstered Chinese assets. A-shares rebounded sharply, with funds favoring high-beta tech, while Hong Kong’s Hang Seng and TECH indexes fell under pressure from Fed rhetoric and yield rebounds.
### U.S. Uncertainty: Fed Leadership and Data Test The 2026 rate-cut path remains highly contested. Trump’s endorsement of hawkish candidate Kevin Warsh has heightened policy uncertainty. Meanwhile, next week’s delayed November CPI/jobs data—the first post-cut "health check"—could trigger market repricing if it signals inflation resurgence or weak labor markets.
### BOJ Hike: Carry Trade Impact Likely Muted Unlike past surprises, the BOJ’s well-telegraphed 0.75% hike should limit spillovers. While yen-funded carry trades may unwind from crowded U.S. tech/crypto positions, A-shares face minimal exposure. Hong Kong’s offshore status makes it more vulnerable to global liquidity shifts, but low valuations offer a buffer.
### Spring Rally Playbook: Tech + Cyclicals Historical trends show spring rallies are likely (absent shocks like 2022’s pandemic/Ukraine war), with tech and cyclicals leading. Current strategy: - **Defensive base**: Banks/insurers with high dividends; - **Growth pivot**: Gradually shift to undervalued sectors with clear 2025 trends—AI, new energy, and biotech.
**Risks to watch**: Weak domestic policy traction, U.S. tariff escalation, and liquidity crunches.
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