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[Introduction] The world is in the "recession trade" stage, and the attractiveness of Chinese assets is becoming increasingly prominent.

China Fund News reporter Li Shuchao Cao Wenjing Zhang Ling

Overseas markets have been on a roller coaster ride recently. On August 5, global stock markets suffered a "Black Monday", with the Nikkei 225 index falling 12.4%, the South Korean KOSPI index falling more than 8%, and the Nasdaq, S&P 500, Dow Jones Industrial Average, and the UK FTSE 100 all falling more than 2%. However, after a round of plunges, most global markets reversed their decline and rebounded.

What is the reason for the violent fluctuations in overseas stock markets? How will the subsequent market develop? In the face of an uncertain market environment, what risks should overseas investment pay attention to? To this end, China Fund News interviewed Zhang Zili, managing director of Harvest Fund and manager of Harvest US Growth Fund, Guo Beibei, deputy director of the index and quantitative investment department of China Universal Asset Management, Zhang Xiaonan, fund manager of Invesco Great Wall ETF and Innovation Investment Department, Zhao Xiancheng, fund manager of Bosera Overseas Investment Department, Zhang Ronghe, manager of Guotai Central Enterprise Reform Fund, and He Siyao, QDII Multi-Asset Investment Manager of HSBC Jinxin Fund, to jointly take the pulse of the global capital market and explore investment opportunities.

Zhang Zili:Short-term uncertainty cannot be accurately predicted, and investment is bound to face risk events. “Don’t put all your eggs in one basket” is the most basic common sense, and it often contains the most profound foresight.

Guo Beibei:Currently, whether from the perspective of price-to-earnings ratio or equity risk premium, the valuation of China's equity assets is lower than that of other major developed countries. When the global economic growth rate is lower than expected, the risk of recession increases, and the overvaluation of developed markets is difficult to sustain, the relative security of Chinese assets will be highlighted.

Zhang Xiaonan:Currently, Chinese assets are in a valuation trough, and A-shares and Hong Kong stocks have shown very good investment cost performance after the correction. my country is steadily promoting high-quality economic development, and with the improvement of the performance of listed companies, the attractiveness of Chinese assets will be further enhanced.

Zhao Xiancheng:Although the domestic economy still faces challenges in the short term, the Chinese market is expected to show resilience and growth potential driven by marginal monetary easing, policy support and internal growth momentum.

Zhang Ronghe:A-shares have already fully traded the biggest negative factor of overseas recession in advance, and overseas easing is also opening up policy space for us. The successful convening of the Third Plenary Session of the 20th CPC Central Committee has pointed out the direction for China's economic development. Combined with the risk-free rate of return, the current valuation level of A-shares is very cost-effective and has a very high investment value.

He Siyao:At present, the valuation of some assets in the A-share market, including the Hong Kong stock market, is outstanding in terms of cost-effectiveness in the world. In addition, since the Chinese market has a low correlation with other overseas markets, funds may be allocated to a certain extent from a diversified perspective.

Multiple factors lead to severe fluctuations in overseas stock markets

China Fund News: How do you view the current round of drastic fluctuations in the global capital market? What are the reasons for the drastic fluctuations in overseas stock markets?

Zhang Zili:Since July, the global capital market has experienced multiple macro events, and the U.S. stock market began to strengthen sharply in the small-cap style in mid-July. In late July and early August, with the sudden introduction of the Bank of Japan's interest rate hike measures, Japan's interest rates rose and the yen appreciated, which directly led to the reversal of the global carry trade based on the yen and Japanese bonds, triggering "Black Monday". Japan has maintained a low interest rate environment for 30 years, including negative interest rates for some time. A large amount of funds around the world have carried out carry trades in borrowing yen. After this interest rate hike in Japan, there will be a short-term sharp impact on the global capital market.

Zhao Xiancheng:First, weak U.S. economic data, such as the manufacturing PMI and non-farm payrolls data, were both below market expectations, exacerbating market concerns about a U.S. recession in a high-interest rate environment. Second, the U.S. stock market is in the second quarter earnings season, and some U.S. tech stocks that had seen large gains in the previous period reported second quarter results below expectations or provided weak guidance for third quarter results. In particular, market concerns were aroused by the uncertainty over the return on investment in artificial intelligence. Third, the Bank of Japan raised interest rates by 15BP at the end of July, exceeding expectations. At the same time, weaker U.S. economic data exacerbated market expectations for a September rate cut by the Federal Reserve, driving down U.S. Treasury bond yields, narrowing the U.S.-Japan interest rate gap rapidly, and appreciating the yen substantially, leading to the liquidation of large-scale yen carry trades. Liquidity shocks and the spread of panic increased selling pressure on global stock markets, causing the market to fall sharply.

Zhang Ronghe:The overseas environment has experienced huge fluctuations in the past month, starting with Trump's assassination, Biden's withdrawal from the election and Harris's candidacy, and then the fact that a number of US economic data were lower than expected, which led to the rise in interest rate cut transactions, while the appreciation of the yen caused by the Bank of Japan's interest rate hike became the fuse. We believe that the reversal of the so-called carry trade is the superficial reason for the recent sharp fluctuations in overseas markets, but the imminent repair of the inversion of the US Treasury yield curve may be the deeper reason.

He Siyao:Before the global market plunge, there were actually some signs that risk appetite was weakening. For example, the US economic data in July generally pointed to a weakening trend. Since the US inflation cooled down unexpectedly in mid-July, the Fed's interest rate cut trade has been launched; the very hot yen carry trade has also begun to loosen, the yen has begun to appreciate significantly, and Japanese stocks have also shown a state of high volatility and decline. If we want to find the root cause of this round of market fluctuations, it is still the market's concerns about the US recession, coupled with the large gains of leading companies in the previous period, high valuations, and the fact that the second quarter's earnings did not continue to give big surprises.

Zhang Xiaonan:As Japan ended the era of zero interest rates and began to raise interest rates, arbitrage funds began to flow back, and the sharp appreciation of the yen further promoted the return of funds. At the same time, the expectation of the Fed's interest rate cut has gradually increased, especially the recent data such as the US non-farm employment that exceeded expectations, which has caused the market to worry about the US economic recession and triggered the selling of global risk assets, especially equity assets. In addition, in the financial reports released by recent technology leaders, AI-related capital expenditures have expanded rapidly and have not brought about a proportional increase in current profits, which has also caused investors to question AI technology to a certain extent, exacerbating market volatility to some extent.

Overseas markets may still see a "soft landing" in the future

China Fund News: Considering the global macro environment, monetary policy and other factors, how will overseas markets perform in the future?

Guo Beibei:First, the Bank of Japan recently stated that it will not raise interest rates during market fluctuations, which is conducive to stabilizing global investor sentiment and reducing asset volatility. Secondly, the US employment data was affected to a certain extent by the weather, and more data will be needed in the future to verify whether its economy has indeed entered a recession. The market has previously fully traded the expectation of a "soft landing" of the US economy, and the high volatility during this period can be seen as a repair of the "crowded trade". Moreover, judging from the disclosures in the regular reports of US stocks, the profit growth of most industries has exceeded market expectations, and the high market volatility caused by liquidity risks has obscured the advantages of the fundamentals of listed companies. Therefore, overseas markets may still return to the logic of "soft landing" in the future, and there is still room for upward movement.

Zhang Zili:The interest rate hike by the Bank of Japan was a sudden process, and it is expected that this "gray rhino" event will not happen again. In addition, the market is concerned about the US economy entering a recession, mainly because some economic data are abnormal. With the expectation that the Federal Reserve is also likely to start the interest rate cut channel, the market has already started the interest rate cut transaction in July. It can be expected that the global market will gradually enter a looser monetary environment, which is more favorable to equity assets and growth styles.

Zhao Xiancheng:The short-term volatility of the Japanese stock market may continue, but the magnitude may gradually weaken. The price decline caused by this round of short-term liquidity shock is expected to create a large recovery space for companies with excellent fundamentals in the medium and long term. In the U.S. stock market, if the economic data continues to deteriorate, U.S. stocks, especially the high-valuation sectors, may further adjust; conversely, if the economic data stabilizes or improves, it may provide support for the stock market. In addition, if the Fed maintains a hawkish stance and the interest rate cut is less than expected, it may have a negative impact on the U.S. stock market.

He Siyao:Although this round of adjustments is quite drastic in form, this direction is not surprising from the perspective of fundamental trends. The factors that the market is currently worried about need to be verified by data, and the monetary policy needs to be adjusted to observe the effects. Before seeing clear signals, it may remain volatile. If the subsequent trend continues in the direction of a "soft landing", risky assets will still perform well with the help of interest rate cuts. If more signs indicate that there may be a risk of a "hard landing", it is still necessary to pay attention to the risks.

Zhang Xiaonan:We are still optimistic about the Nasdaq Technology Market Value Weighted Index and the Philadelphia Semiconductor Index, which are represented by technology stocks. Currently, the Federal Reserve is expected to cut interest rates in September. If the US economy can still maintain a mild cooling and "soft landing", the interest rate cut will be conducive to the rise of growth stocks. In the early stage of the interest rate cut cycle, small and medium-sized companies with performance reversal may perform better, and subsequent technology leading companies may still have strong upward momentum.

The current A-share valuation level is very cost-effective

China Fund News: What impact will the sharp fluctuations in overseas markets have on my country's market?

Zhang Zili:China has a relatively more stable economic and social status and security environment in the world. Under the protection of economic size, foreign exchange reserves, exchange and capital policies, the participation of international capital in the domestic market is relatively clear, and there is no related carry trade capital allocation. Overall, it is relatively more immune to the impact of large adjustments in international capital. With the recent continuous introduction of various stimulus policies by the country, including industrial policies, consumption guidance, etc., as well as the central bank's new and more targeted monetary tools, it is expected that the domestic economy in the second half of the year will be more prosperous than in the first half of the year, and the domestic stock market will gradually show its valuation advantages.

Guo Beibei:The main factor affecting the Chinese market is the recovery of domestic macroeconomic fundamentals. The easing of external factors will help release monetary policy space and provide more stable support policies for the economy. At the same time, in the context of increasing global volatility, the low volatility characteristics of Chinese assets will help allocators consider increasing their allocations.

Zhao Xiancheng:As the Fed's expectations of a rate cut in September increase, the gradual easing of global liquidity may provide support for the Chinese market. The low valuation advantage of Chinese stocks and the potential for appreciation of RMB assets during the Fed's rate cut cycle may attract foreign capital inflows, providing the market with medium- and long-term investment potential. Overall, although the domestic economy still faces challenges in the short term, the Chinese market is expected to show resilience and growth potential driven by marginal easing of funds, policy support and internal growth momentum.

Zhang Ronghe:A-shares have already fully traded the biggest negative factor of overseas recession in advance, and overseas easing is also opening up policy space for us. The successful convening of the Third Plenary Session of the 20th CPC Central Committee has pointed out the direction for the development of China's economy. Combined with the current risk-free rate of return, we believe that the current valuation level of A-shares is very cost-effective and has very high investment value.

Zhang Xiaonan:At present, the external market sentiment has warmed up, and the previous violent fluctuations have come to an end. Although the market volatility is still large, the negative factors have been basically priced in, and the market has begun to pay attention to new growth points.

The attractiveness of Chinese assets is becoming increasingly prominent

China Fund News: Some people believe that as the probability of the Federal Reserve cutting interest rates in September has greatly increased, global funds may switch from assets with higher valuations to assets with lower valuations, and Chinese assets may become a better choice for global funds. What do you think of the attractiveness of Chinese asset allocation amid the global capital market shock?

Zhang Xiaonan:The world is currently in the "recession trade" stage, and the attractiveness of Chinese assets may become apparent after this stage. When the Federal Reserve confirms the interest rate cut, coupled with the Bank of Japan's slowdown in the pace of interest rate hikes, global liquidity will be effectively improved. Currently, Chinese assets are in a valuation trough, and A-shares and Hong Kong stocks have shown very good investment cost-effectiveness after the correction. my country is steadily promoting high-quality economic development, and the improvement in the performance of listed companies will further enhance the attractiveness of Chinese assets.

He Siyao:China's bond assets have been receiving foreign capital inflows this year. The high returns and low volatility after currency hedging are relatively high-quality assets for overseas funds. The Fed's interest rate cuts help reduce risk-free rates, which is generally beneficial to non-US markets. At present, the valuations of some assets in the A-share market, including the Hong Kong stock market, are outstanding in terms of cost-effectiveness worldwide. In addition, since the Chinese market has a low correlation with other overseas markets, funds may also be allocated to a certain extent from a diversified perspective.

Guo Beibei:First, whether from the perspective of price-earnings ratio or equity risk premium, the valuation of Chinese equity assets is relatively low compared to other major developed countries. When the global economic growth rate is lower than expected, the risk of recession increases, and the overvaluation of developed markets is difficult to sustain, the relative security of Chinese assets will be highlighted. Secondly, the exchange rate pressure of the RMB will be reduced, and the space for domestic monetary policy will gradually open up. Then, the certainty of China's macroeconomic improvement in the future will increase the fundamental value of Chinese assets, which may not be fully priced by the market at present.

Zhao Xiancheng:Against the backdrop of a global capital market turmoil, the attractiveness of China's asset allocation is becoming increasingly prominent. The global market has experienced dramatic fluctuations recently, but the A-share and Hong Kong stock markets have shown relative independence and stability, with a small decline, showing strong risk resistance. With the start of the global interest rate cut cycle, China's relative economic resilience, stable growth policies, and relative valuation advantages are expected to attract global capital to flow back.

Aiming for long-term return on investment

Avoid chasing highs and selling lows

China Fund News: In recent years, ordinary investors have invested heavily in stock markets such as the United States and Japan with the help of public QDII products. During the current period of sharp fluctuations in overseas stock markets, how should ordinary investors respond?

He Siyao:Avoid chasing ups and downs when investing overseas. In the equity markets of the United States and Japan, investors from all over the world are participating, and the investor structure is mainly institutional. Ordinary investors entering such markets should still take long-term investment as their goal and avoid excessive speculation, especially at present, some QDII and ETFs have already shown high premium rates, and attention should be paid to the additional risks brought by such premium rates. When the market undergoes drastic changes, you can learn more about the analysis of market professionals, understand the reasons behind the fluctuations, and make reasonable decisions based on your own risk tolerance and the investment period of funds.

Zhao Xiancheng:For ordinary investors, in the current stage of rising volatility in overseas markets, it is particularly important to diversify asset allocation and grasp the market rhythm to avoid blindly following the trend of buying or selling. Although the stock market has fluctuated sharply in the short term due to liquidity and sentiment shocks, the long-term trend is usually determined by fundamentals. Ordinary investors holding QDII products are advised to focus on the long-term fundamentals of markets such as the United States and Japan, rather than short-term fluctuations. In addition, the use of a fixed investment strategy can help investors overcome market fluctuations, reduce timing risks, and increase long-term returns.

Guo Beibei:Global assets have entered a low-correlation phase since 2021, and it is very important to use country-specific assets for asset allocation. Since the beginning of this year, the correlation of global assets has gradually strengthened. The liquidation of the yen carry trade has caused global assets to fluctuate sharply at the same time, which also reminds investors that the factors that need to be considered in future asset allocation may be different, and the difficulty is also increasing. Especially for markets with greater uncertainty, the importance of identifying and managing risks is higher than the judgment of asset returns. In this case, reasonable allocation of risks of various assets through methods such as risk parity can effectively reduce the overall volatility of the asset portfolio, while also obtaining reasonable expected returns.

Zhang Zili:The current short-term shock is actually an investment opportunity for the market to "reverse and pick up people". At present, with the Federal Reserve about to enter the interest rate cut channel and Japan no longer raising interest rates and maintaining loose liquidity, it is necessary to judge that the medium- and long-term monetary environment is good. There are no key indicators of recession in the US economy, and the Federal Reserve still regards suppressing inflation as its primary policy consideration. Investors can allocate assets of corresponding proportions based on their own risk tolerance and investment time limit, and choose assets with low correlation with their existing assets for allocation.

Still need to pay attention to the Fed's interest rate cut decision and geopolitical risks

China Fund News: After the global market shock, what risks or uncertainties should we pay attention to in the future?

Zhang Xiaonan:At the current point in time, we still need to pay attention to the policy risks and geopolitical risks of other economies in the world. The current market believes that the probability of the Fed starting to cut interest rates in September is high, but if recent data proves to be exceptional data, and the subsequent labor market continues to pick up or even raises inflation again, the uncertainty of the Fed's interest rate cut will rise again. At the same time, the European Central Bank and the Bank of Japan may also introduce unexpected policies due to problems in their own economic development, which will once again increase market uncertainty. In addition, there are geopolitical frictions in Europe, the Middle East and other places. Changes in the local situation may also have an impact on the prices of commodities such as resources, which may indirectly affect the performance of the equity market, and it is also a risk point to pay attention to.

He Siyao:We need to pay attention to the changes in the future growth momentum of the global economy. Is there really a risk of recession in the trend of US economic growth? A considerable part of the yen carry trade may have been closed at present, but the Bank of Japan's policy communication errors have caused a huge shock to the local market, which will still make investors worry about future policy mistakes; and the market is still discussing whether the Federal Reserve has already lagged in policy. In general, risk sentiment has been significantly damaged this time, and it may not be easy to recover quickly in the short term. In addition, the geopolitical risks in the Middle East are still unresolved, and the US election is also fierce, which may disturb the market at any time.

Zhao Xiancheng:The market has high expectations for the Fed's interest rate cut in September. We need to pay close attention to the Fed's statements and decisions on the rate cut, which will have a significant impact on global capital flows and market sentiment. Adjustments in Japan's monetary policy may cause fluctuations in the yen exchange rate, which will have a chain reaction on the global market. In addition, we should also pay attention to the risk of weaker US economic data, the uncertainty of the US election, and geopolitical risks.

Guo Beibei:First, in the short term, we still need to pay attention to the sustainability of the release of liquidity risks. Secondly, the current capital market has basically priced in the Fed's interest rate cut expectations, and the probability of re-inflation risk is low, so we need to pay more attention to the confirmation of the "soft landing" of the US economy. The release of relevant economic data such as US inflation, employment, PMI, etc. in the future is expected to cause continuous disturbances to the market. Finally, the US election will affect the changes in the future global economic competition environment, thereby affecting the trend of the global capital market. It is expected that the impact of this uncertainty will continue until the dust settles on the November election.

Zhang Zili:We need to pay attention to the overall operation of the international economy, whether there are local risks being released, and the disturbances to the capital market caused by changes in political trends and potential international security situations. We also need to pay attention to the breakthroughs in cutting-edge technology and the singularity moments brought about by industrialization to avoid missing investment opportunities.

Editor: Xiaomo

Audit: Wooden Fish

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