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there is little doubt that the federal reserve will cut interest rates in september. how much will a-shares benefit from it?

many securities analysts said that although the fed's interest rate cuts have led to loose liquidity and the logic that foreign capital is expected to return is still valid, it is expected that the style of the a-share market will still be dominated by domestic fundamentals before and after the interest rate cut. statistics on foreign capital tracking show that although the proportion of foreign capital holdings in chinese stocks in the second quarter is still at a historical low, the trend of overseas funds outflowing from a-shares and overseas chinese stocks is slowing down.

fundamentals remain the core pricing factor

liu chenming, chief strategy analyst at gf securities, believes that from the perspective of liquidity and fundamentals, the u.s. treasury bond interest rate can be "icing on the cake" for a-share assets, but it is difficult to "provide timely assistance". the impact of the fed's interest rate cut is mainly transmitted to a-shares through two channels. among them, liquidity is mainly the logic of valuation repair. in its transmission path, there are uncertainties in both "the interest rate gap between china and the united states affects the central bank's monetary easing space" and "liquidity easing prompts funds to flow into a-shares".

"the decisive factor of asset prices is still fundamentals." he said that for a-shares, during the fed's interest rate cut cycle, the core impact of fundamentals depends on the elasticity of external demand recovery, including the recovery of china's new export orders and the upward earnings of resource products. however, another key pricing factor for a-shares comes from domestic demand, and the expansion of local fiscal revenue may limit the strength of the recovery of domestic fundamentals.

dong zhongyun, chief economist of avic securities, also believes that the a-share market style is dominated by domestic fundamentals before and after the fed's rate cut. looking forward, the fed is gradually approaching a rate cut, opening up space for domestic easing policies. expectations for policy increases are rising, the central bank is releasing positive signals, and continued incremental policies are expected to improve economic fundamentals and reverse market sentiment. a-shares are expected to bottom out and rebound.

he analyzed that the reason behind the fed's rate cut is the decline of the us economy. if the domestic economy is stable and liquidity is not yet loose, the large-cap style will be dominant; if the domestic economy is stable and domestic liquidity is loose, and market confidence is strong, the small-cap style and growth style will be dominant. however, if the economy is greatly affected by external factors and the style tends to be value, the large and small caps will be relatively balanced.

"based on the experience since 1995, there will be at least three interest rate cuts in the future, which means that loose trading will still prevail before the end of the year." hu guopeng, chief analyst of guohai securities strategy group, said that the biggest revelation of loose trading in a-shares in 2019 is that if the domestic policy of stabilizing growth is strengthened and continuous reserve requirement ratio and interest rate cuts are implemented first, the market is expected to usher in a 5%-10% rebound.

foreign capital is still under-allocated and active outflow is narrowing

taking the top 20 overseas active management institutions as observation samples, huatai securities' strategy research team analyzed the us 13f report and found that the proportion of overseas top funds holding chinese stocks began to decline in the first quarter of 2023, and fell to 1.27% in the second quarter of this year, the lowest level since 2018; the over (under) allocation ratio fell to the historical low of 20% since 2018.

in terms of chinese stocks, the allocation ratio of overseas top funds to a-shares decreased in the second quarter, while the allocation ratio to hong kong stocks and adrs increased. among them, the hong kong stock position rose to 45%, the highest value in the past year, which may be due to the phased counterattack of hong kong stocks driven by short-selling funds covering and global fund rebalancing since the end of april.

specifically, the main directions of a-share position increase are household and personal products, food and beverage, and insurance, while position reduction is concentrated in retail, consumer services, and pharmaceuticals; hong kong stocks mainly increase their holdings in a dumbbell shape in high dividend (transportation, insurance) and growth stocks (consumer services, media), and reduce their holdings in automobiles and auto parts/retail industries.

however, the outflow trend of foreign capital seems to be changing. "the epfr fund data we track shows that the outflow of overseas funds from a-shares and overseas chinese stocks has slowed down." cicc's strategy research team found that as of september 4, the active outflow of foreign capital from a-shares was us$110 million, a decrease of us$60 million from the previous week; at the same time, the overall outflow of overseas funds from hong kong stocks and adrs was us$37.12 million, a decrease of us$32.89 million from the previous week, of which the active outflow of funds was us$210 million, a decrease of us$30 million from the previous week.

liu gang, chief analyst of overseas strategy at cicc research department, believes that after a continuous rebound since early august, the hong kong stock market has experienced a correction. there may be opportunities under short-term interest rate cut transactions and policy expectations, but the medium- and long-term trend of hong kong stocks still depends on whether domestic policies can make greater progress. however, with the support of factors such as low valuations and low positions, hong kong stocks can show greater flexibility than a-shares.

wang yi, chief strategy analyst at huatai securities, also suggested that as the federal reserve is expected to start a cycle of interest rate cuts, foreign capital may flow back, and four high-probability clues can be grasped: the convergence of the ah premium, the "equal replacement" of the dividend of a50, the sustained prosperity of consumer electronics and shipping, and the pharmaceutical and hong kong-listed internet that will benefit greatly from the interest rate cuts.