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the fed’s rate cut has opened up domestic policy space, but its impact on a-shares and hong kong stocks is different. the valuation of hong kong stocks is considered to be more sensitive to the fed’s rate cut, and the rise may be more obvious.

text｜cheng mengqi

editor｜yang xiuhong

the long-awaited us dollar interest rate cut by global economies has finally come true.

in the early morning of september 19, 2024 beijing time, the latest federal reserve interest rate decision was released, lowering the federal funds rate target range by 50 basis points to 4.75%-5.00%. the federal reserve subsequently hinted that it would drop by another 50 basis points this year.

a few hours after the federal reserve announced a rate cut, the hong kong monetary authority announced that it would cut its benchmark interest rate by 50 basis points to 5.25%, effective immediately.

after the shoe dropped, major global markets saw unusual movements. u.s. stocks rose and then fell, and major stock indexes turned to decline during the session. the s&p 500 ended its seven-day winning streak and closed down 0.29%; the dow jones industrial average closed down 103.08 points, or 0.25%, to 41,503.10 points; the nasdaq composite index closed down 54.76 points, or 0.31%; u.s. treasury yields collectively closed higher, and the u.s. dollar index turned higher again after falling.

as for chinese assets, after the market opened on september 19, the three major a-share indexes fell slightly and then quickly rose. the shanghai composite index closed up 0.69%, the shenzhen component index rose 1.19%, and the chinext index rose 0.85%. hong kong stocks rose even more, with the hong kong hang seng index closing up 2%, achieving five consecutive increases, and the hang seng technology index rose 3.25%.

in other asia-pacific markets, the nikkei 225 index rose 2.13% and the south korean composite index rose 0.21%.

xue junsheng, head of economic research and chief economist of hang seng bank, said that the fed's decision shows that the united states has officially started a cycle of interest rate cuts. although uncertainty about us interest rates still exists, the direction is becoming clearer. from the forecasts of the authorities' members, it can be seen that the fed is still confident in the us economy. even if it starts to cut interest rates, the pace of interest rate cuts in the next two years has not accelerated. it is expected that the interest rate cut will be 100 basis points in 2025, the same as the previous forecast, and 50 basis points in 2026.

with the advent of the interest rate cut era, how will funds shift? for hong kong stocks and a shares, which are at a relatively low valuation level, can they attract more foreign capital inflows, and can the opportunity for a bottoming out and rebound begin?

the 50 basis point rate cut exceeded expectations

the market has long been looking forward to the federal reserve's first interest rate cut in four years.

the last time the fed cut interest rates was on march 16, 2020, as an emergency relief measure to deal with the economic shutdown caused by the spread of the new coronavirus. since then, the fed has started raising interest rates since march 2022, with the last rate hike in july 2023, during which time the fed raised interest rates four times by 75 basis points.

china life security fund said that the market has already expected this rate cut. since october 2023, the market has begun to trade the fed's rate cut expectations, but the inflation data in early 2024 was higher than expected, and the rate cut expectations have fluctuated. from the perspective of the dual-pillar framework of employment and inflation in the united states, the number of employed people in the united states has been systematically reduced recently, the unemployment rate has continued to rise, and the gap between job vacancies and the number of unemployed people has narrowed significantly, which clearly reflects the signs of a weakening labor market.

however, before the fed's september meeting, the market was divided on whether the fed would cut interest rates by 50 basis points or 25 basis points.

industry insiders generally believe that the recently released us economic data is positive. for example, the just-released august retail sales data was higher than expected, which prompted the federal reserve to start this round of interest rate cuts with a 50 basis point rate cut that was higher than market expectations, reflecting the federal reserve's determination to promote a "soft landing" for the us economy.

cicc pointed out in its latest research report thata rate cut cycle that starts with 50 basis points is not common, with only three such occurrences since the 1990s: in january 2001, september 2007 and march 2020.

the office of the chief investment officer of ubs wealth management said that the fed's 50 basis point rate cut exceeded that of other major central banks. fed chairman powell said that the fed is committed to maintaining a strong economy rather than worrying about an impending recession. the fed is confident that inflation can sustainably fall back to the 2% target, allowing it to strongly start a rate cut cycle.

the fed is a latecomer to the global easing cycle. the european central bank has already cut rates twice. central banks in switzerland, sweden, canada, new zealand and the united kingdom have also cut rates. but powell stressed that the fed does not think it is behind the curve. he said the u.s. economy remains solid and the labor market remains strong. despite the first rate cut of 50 basis points, the committee is in "no rush" to cut rates at this time.

ubs also mentioned that historically, the u.s. market has performed well when interest rates are cut during non-recessionary periods, and this time is unlikely to be an exception. ubs maintains its forecast that the s&p 500 index is expected to rise to 5,900 points by the end of the year and further rise to 6,200 points by the end of june 2025.

what impact will it have on a-shares and hong kong stocks?

the fed's interest rate cut has opened up domestic policy space, but when it comes to the impact of the rate cut on a-shares and hong kong stocks, most respondents said that they need to pay attention to the statements and implementation of domestic stable growth policies and changes in fundamental data in the future. however, they all agree that hong kong stocks are more sensitive to external liquidity, and if hong kong follows the interest rate cut under the linked exchange rate arrangement, they may reflect the impact earlier than a-shares.

in fact, before the federal reserve announced the interest rate cut, the hang seng index had risen for four consecutive days, and continued to rise by 2% on september 19, successfully achieving five consecutive increases. from september 12 to september 19, it rose by a total of 835.8 points.

cicc research report mentioned thatconsidering how overseas easing is transmitted, hong kong stocks are more flexible than a-shares.in addition, hong kong stocks' relatively better earnings, more thorough valuations and position clearing also support their relative performance.similarly, at the industry level, growth stocks that are sensitive to interest rates (biotechnology, technology hardware, etc.), sectors with a high proportion of overseas dollar financing, local dividends of hong kong stocks and even real estate, as well as export chains that benefit from the us interest rate cut to boost real estate demand, may also benefit marginally. however, simply comparing the average rules of historical experience is not advisable. on average, hong kong stocks tend to rebound sharply and outperform a-shares in the early stages of interest rate cuts, and the probability of rising is also higher.

industrial securities international believes thatinterest rate cuts can be mainly divided into two categories: "preventive interest rate cuts" and "relief interest rate cuts".the main difference between the two types of rate cuts is whether the u.s. economy has already fallen into recession when the rate cut occurs. if the u.s. economy has not yet fallen into recession, the rate cut is mainly to prepare for policy in the face of adverse factors, which is a preventive rate cut. generally speaking, the rate cut is smaller and lasts for a shorter period of time. the rate cut in september 2024 is more in line with the standard of a "preventive rate cut." because from the perspective of economic data, whether it is the sam recession rule index, or the u.s. unemployment rate, manufacturing ppi (producer price index), core pce (personal consumption expenditure deflator) and other indicators, they all show that the u.s. economy is moving towards a soft landing and has not yet fallen into a full recession.

regarding the performance of the chinese market during the "preventive rate cut" cycle, xingzheng international mentioned that since 1990, a-shares and hong kong stocks have experienced a total of six fed rate cuts, including three "preventive rate cuts" (1995-1996, 1998, and 2019) and three "relief rate cuts" (2001-2003, 2007-2008, and 2020). in the three "preventive rate cuts", the trends of a-shares and hong kong stocks were different. the hong kong stock market index showed an overall upward trend. in the two rate cuts from 1995 to 1996 and 1998, the hang seng index rose by more than 20%. however, in the three "preventive rate cut" cycles of the fed, a-shares did not show a consistent upward or downward trend.

why do hong kong stocks and a-shares move at different paces when interest rates are cut? there are two main reasons. first, the fed's "preventive interest rate cut" eases global liquidity. foreign capital will actively seek overseas cost-effective asset allocations to seek assets with higher investment returns. therefore, hong kong stocks are likely to usher in foreign capital inflows. second, because hong kong stocks are in the offshore market and hong kong implements a linked exchange rate system, the hong kong dollar is directly linked to the us dollar. therefore, the valuation of hong kong stock assets is more affected by the fed's policies and us dollar liquidity, and is more sensitive to the fed's interest rate cuts, and the rise is more obvious.

falling interest rates boost hong kong's economic growth

in addition to the different trends of a-shares and hong kong stocks due to the interest rate cut, hong kong's interest rates are expected to fall along with the federal reserve, which will help maintain hong kong's economic growth.

hong kong financial secretary paul chan mo-po said that the start of the interest rate cut cycle is expected to bring prudent positive effects to the hong kong economy. first, under the linked exchange rate, hong kong's interest rate trend will generally follow the trend of us interest rates. the originally tight funding situation is expected to gradually turn to a looser one, which will help alleviate the pressure of business operations and support fixed asset investment. secondly, with the us interest rate cut, the hong kong dollar exchange rate will also soften slightly, which will help attract tourists and benefit local consumption and retail and catering businesses. however, due to the flow of funds and market sentiment, the actual rate cut in hong kong may not be exactly the same as that in the united states. although the interest rate cut cycle has started, the speed and magnitude of the us interest rate cut in the future will be affected by many factors such as the local economy and employment conditions and the presidential election; coupled with the continued geopolitical situation and other external uncertainties, we must continue to remain prudent.

at the press conference, david lee, deputy chief executive of the hong kong monetary authority, said that the us interest rate cut cycle has just begun, and it is expected that interest rates will remain at a relatively high level for a foreseeable period of time. there are still many variables in the pace of us interest rate cuts in the future, depending on inflation data, etc., and investors should pay attention to global market risks. in the hong kong market, market liquidity is stable and the hong kong dollar exchange rate is stable, which has a positive impact on the economy. when the united states enters a cycle of interest rate cuts, it will not affect the financial and monetary stability of hong kong, but the monetary policies of major economies are not synchronized at present, and fluctuations in the financial market cannot be ruled out.