If restrictions is still the way to curb infection rates now, then the risk of fully opening up again is still great, and the sustainability of economic and employment recovery is questionable. The data from Israel and the UAE show that it will take quite a long time for countries to reach herd immunity even with very high vaccination rate. Therefore, we believe that the market's current expectation on major developed countries in curbing the infection by vaccine for a recovery on their economy, in our view is likely to be too optimistic.
Based on the above analyses, the market may overestimate the short-term supply pressure of US Treasury bonds, and at the same time expect an early pandemic control and economic recovery. Therefore, we are not worried about the further sharp rise of US Treasury bond yields. For the Fed and US Treasury Department, 10-year Treasury bond yield between 1.5% and 2% is acceptable, and there is no need to make intervention too early (such as increasing QE or yield curve control). However, as the market, especially the equity market, hangs over a high valuation now, it will take some time for the market to digest a 10-year yield slightly higher than 1.5%. Therefore, we believe that overseas stock markets are still under pressure, and the US stock index is more likely to fluctuate at the current levels. At the same time, the equity market structure will continue to switch, and the market style will continue to favor some sectors that benefit from economic recovery and lower PE valuation, such as finance, energy, raw materials and consumer discretionary. However, there are still some short-term adjustment pressures on technology, consumer staple and healthcare, which outperformed last year and were valued more expensively now.
We think that the long-term opportunity in the US equity market may appear in the middle and late March. With the launch of a new round of fiscal stimulus, most US residents will get a new check of $1400 per person around the end of March. A considerable part of this capital, we believe and also showed in certain survey, will still be invested in the stock market. Therefore, we may see another equity market rally then.
III. Chinese domestic market
Although the rising bond yields and equity selloff in overseas markets have a certain impact on the domestic market, we believe that these effects still mainly are psychological. The real impact on the domestic market will still be mainly on domestic economies and policies. With the gradual stability of overseas markets, the focus of domestic market will gradually return to the fundamentals and credit/liquidity situation.
First of all, during the annual National People's Congress and the Chinese Political Consultative Conference (NPC & CPPCC) held last week, the new government work report set the GDP growth target at 6% this year, which means that the pressure on the government to maintain growth this year will be very low, given last year’s low base effect. GDP grew only 2.3% in 2020. Even with a low end potential growth of 5.5% per year, the growth rate of domestic GDP is expected to growth around 8%, on the basis of a successful domestic control of the pandemic. What's more, overseas demand has begun to recover, which will have a huge pulling effect on China's exports. In this case, if the growth target is only 6%, it means that the Chinese central government has a huge space to adjust its domestic fiscal, monetary and credit policies.
In fact, our understanding is that domestic macro policies, especially fiscal and credit policies, are always "a hedging policy", that is to say, the worse the global economy might be, the more proactive the domestic policies will be. At present, if overseas exports and domestic manufacturing investment continue to accelerate, it means that the domestic accommodative policies may end earlier. This will not only be reflected in the issuance suspension of "pandemic alleviation special purpose treasury bonds" this year, but also in the exit of proactive fiscal policies. We believe this will also be reflected in the gradual tightening of domestic credit, including the conditions on corporate bond offering and incremental resident loans (especially residential mortgages).
On the whole, from the economic point of view, we think that the general situation is that "the external demand continue to improve with the domestic demand falling steadily". In terms of asset allocation, we maintain our domestic views proposed before that "commodities will outperform, bond interest rates may peak and begin to fall late this year, but equity stocks continue to be relatively weak". In terms of commodities, we are positive especially on those highly benefited from the recovery of overseas demand, such as non-ferrous and petrochemical products. Relatively speaking, precious metals will be the weakest in the short term, because the rising yields and the expectation of economic recovery are both unfavorable to precious metals.
In our last review, our view on A-shares "the best performance in the first half is before Spring Festival, and the index target is around 3700.". At the same time, we suggest that "investors should be cautious about A shares after Spring Festival in Q2." At present, the market basically confirms our previous judgment. The market rose rapidly before the Spring Festival to around 3700 and then fell rapidly, especially the previous strong "institutional hoarding" equity names.
For the future trend of A-shares market, we think the most critical indicator is still the amount of equity fund subscription, because we know that the main driving force of this round of A-shares bull market since 2019 is based on the transfer and allocation of residents' funds from the previous Trust and Wealth management products to equity funds. At the same time, due to the fund's high equity positions and centralized shareholding, if the market falls sharply or sector rotates just like what happens now, most large-scale equity funds are difficult to follow the change in the short term, so a NAV decline may happen and even drive a wave of fund redemption. This has not happened, at lease for the time being, but the speed and the scale of fund raising after the Spring Festival have slowed down compared with that before the Spring Festival (Figure 6). Therefore, we believe that the A-shares is likely to continue to fall back under 3500 points (Shanghai Composite Index) and consolidate, it is still difficult to see the bull market returning in the near future.