To The Moon

Global Outlook: US Still Matters

Inflation Crisis will End Soon? Beware of Reflation

High inflation has been a common predicament for countries in the post-pandemic era, leading to an expansion of the wealth gap and an intensification of social conflicts. Many voters have sought new governments to solve the problem of inflation, which was also the reason for the failure of incumbent parties around the world in the past 2024 election year.

However, Trump's policy advocacy seems to contradict his campaign promise to fight inflation: controlling inflation is a key goal, but trade and immigration policies are detrimental to controlling inflation: under the background of Trump's various policies, the US inflation rate in 2026 will be more than 4 percentage points^ higher than before. ^

^ Peterson Institute for International Economics

Policy Volatility is Increasing; Policy Duration is a Question Mark

Source: CSOP

Tariff Hike: Suppress Demand Further. Who will bear the ultimate burden of the tariffs?

Countermeasures by exporters could lead to a stronger dollar, as exporters may devalue their currencies to combat US tariffs. Countries targeted by tariffs may retaliate against the escalating trade tariffs. Looking back at history, from the perspective of exporters, there are two possible retaliations: retaliatory tariffs against the United States, and currency devaluation to offset tariffs. The uncertain outlook will suppress the willingness of companies to expand capital expenditure.

The expectation of tariff increases has added uncertainty on the demand side and policy side, hindering the growth of global trade and capital expenditure. According to Goldman Sachs' estimates, research manufacturing expenditure funded by the Chips Act has already peaked, and will drag down total capital investment by 1% each year in the future; the only growth point is in the field of AI.

Source: CSOP; Image from Pixabay

Japan’s Equities May be a Ray of Hope in a Strong USD Environment. Arbitrage trades that use low-yield currencies like the Japanese yen to fund high-yield investments will continue. In a turbulent external environment, the Japanese stock market is expected to show stronger resilience.

Source: *Bloomberg. As of 2024/8/6.

China Outlook: More stimulus needed

The stimulating effect of the September policy on the market is fading, and the market needs to see more stimulating policies: Affected by the unexpectedly strong stimulus policy in September, the Chinese stock market experienced one of the strongest rebounds in history, but this rebound did not last. Defensive trading strategies in the domestic Chinese market are still prevalent, with high-dividend strategies and government bonds attracting a large influx of funds.

After the policy shift in late September sparked market excitement, the policy cycle may have moved from the expectation stage to the confirmation/implementation stage, and the market rebound brought about by policy expectations continues to need further policy details to support.

Source: Government official website. *Unconfirmed measures reported by the media. Blue indicates demand-side stimulus policies.

When will the next policy catalyst come?

 The market expects the growth target for 2025 to remain around 5%[1].

The market is betting on the introduction of "extraordinary" policies[2], with the budget fiscal deficit expected to exceed the implied 3% cap, reaching 3.6-3.8% of GDP. The issuance of government bonds in 2025 is expected to reach a new high, reaching 12.2-13.16 trillion yuan: the central government's special bond quota is 2-2.5 trillion yuan, and the local government's special bond issuance quota is 4-4.7 trillion yuan.

The negative effects of real estate and local government deleveraging still drag on economic growth, but the effects of fiscal stimulus policies have not yet manifested. The real estate market lacks encouragement and strong stimulus, and the fragile real estate industry means that the structural resistance to China's economic growth prospects is difficult to disappear quickly. The turbulence in the external environment in 2025 and the uncertainty of Trump's policies will bring further downward pressure on growth.

Unlike most developed markets and emerging market economies, China's inflation pressure was low in 2024, and the overall CPI and PPI are likely to be around 0% or in the negative zone. Goldman Sachs' calculations show that low inflation may be a key factor in the revenue growth rate of Chinese listed companies being only 3% in 2024, the fourth lowest in history. China is exporting low inflation to the world, with export prices falling 18% from their peak after the COVID-19 outbreak, while global export prices have fallen 5%.

Source: *FactSet, Haver Analytics, MSCI, Goldman Sachs. 2024/25E GDP deflator numbers are proxied by average of CPI and PPI; Historical data from Haver Analytics. 

At the end of July 2024, the issuance of ultra-long-term government bonds supporting the "Two New" policy with 300 billion yuan has been carried out, and the policy of replacing old consumer goods with new ones has significantly accelerated since August. The policy of replacing old with new has significantly stimulated consumption in the involved sectors. From June to August, the growth rate of retail sales of consumer goods supported by the old-for-new policy has increased, while the growth rate of retail sales of consumer goods not supported by the old-for-new policy has fallen from 3.6% to 3.2%.

Export growth was a solid and important driver of economic growth last year. Affected by the "rush to export" effect, export growth accelerated in December 2024. However, the huge uncertainty of tariffs and the entry of external demand into a weaker growth stage may put pressure on export growth in 2025. Early investment may further support export growth, but overall export growth may slow down in the coming quarters.

Source: ^CEIC, UBS.

How to determine the conditions for an upward trend? If any of the following situations occur, Chinese assets may gain upward momentum:

1.      Concrete fiscal stimulus policies: The rise and fall of the Chinese stock market in the fourth quarter of 2024 was largely influenced by the news of stimulus policies, especially those stimulating demand. The policy cycle has reached the confirmation/implementation stage, and policy details are crucial for validating a more optimistic policy view among investors and boosting market sentiment.

2.      Easing of China-US relations: US tariffs may be the biggest external shock facing China. If the final tariffs are not as severe as expected, and there are signs of easing in China-US relations, Chinese assets may be boosted.

3.      Return of inflation: A strong recovery on the supply side and sluggish consumer demand have led to a slump in inflation. Once large-scale stimulus measures support the recovery of demand, inflation is expected to rise healthily, adding momentum to the economic recovery.

Asset Views：Risk compensation is not attractive

The credit spread of US BBB-rated corporate bonds has reached its narrowest level since mid-1998; the credit spread of US high-yield corporate bonds has also reached the second narrowest position in the past 26 years, second only to the period before the financial crisis.

Credit spreads are at historical lows: The credit spread of US BBB-rated corporate bonds has reached its narrowest level since mid-1998; the credit spread of US high-yield corporate bonds has also reached the second narrowest position in the past 26 years, second only to the period before the financial crisis

Source: ^ Federal Reserve Economic Data, 1998/5/18-2025/1/10.

The willingness to take risks is decreasing. The efficient frontier of dollar assets showed a trend of flattening decline in 2024, indicating that the proportion of high-risk assets allocated in the dollar asset portfolio is decreasing.

Source: ^Morgan Stanley. “Efficient Frontier” is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.

The Hang Seng Tech Index is the top choice for investing in China, and the emergence of DeepSeek strengthens the AI competitiveness of Chinese tech companies.

 DeepSeek provides a new AI development approach that is different from the existing heavy capital investment model, greatly lowering the threshold for AI. This challenges the future monopoly and pricing power of the United States in the AI field:

·       On the one hand, the irreplaceability of high-end semiconductor hardware is weakened.

·       And on the other hand, cloud computing and software applications are expected to see great development.

This signifies that China has narrowed the gap with the United States in the wave of AI competition and provides the possibility of surpassing in the future. This is because China has always been very competitive at the application level (as proven in areas such as e-commerce, instant messaging, short videos, etc.), and most of the Hang Seng Tech Index is also application-end software products.

2024 Market Review- Total Returns

[1] Goldman Sachs, JP Morgan

[2] Goldman Sachs, JP Morgan

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[1] Goldman Sachs, JP Morgan

[2] Goldman Sachs, JP Morgan