Fed's Unexpected Rate Cut: How Much Do A-Shares and HK Stocks Benefit?
The Federal Reserve's rate cut has opened up policy space domestically, but its impact on A-shares and Hong Kong stocks is not the same.
Hong Kong stock valuations are considered more sensitive to the Fed's rate cuts and may rise more significantly.
The long-awaited dollar rate cut by the global economy has finally come to fruition.
In the early morning of September 19, 2024, Beijing time, the latest Federal Reserve interest rate decision was released, lowering the target range of the federal funds rate by 50 basis points to 4.75%-5.00%, and the Fed subsequently hinted that there would be another 50 basis point cut this year.
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A few hours after the Fed announced the rate cut, the Hong Kong Monetary Authority announced that the benchmark interest rate would be lowered by 50 basis points to 5.25%, effective immediately.
After the decision, global major markets saw unusual movements, with U.S. stocks rising and then falling back, major stock indices turning negative during the session, the S&P 500 ending a seven-day winning streak, closing down by 0.29%; the Dow Jones closed down by 103.08 points, a decline of 0.25%, at 41,503.10 points; the Nasdaq Composite Index closed down by 54.76 points, a decline of 0.31%; U.S. Treasury yields collectively closed up, while the U.S. dollar index turned up again after falling.
In terms of Chinese assets, after the market opened on September 19, the three major A-share indices fell slightly and then quickly rose, with the Shanghai Composite Index closing up by 0.69%, the Shenzhen Component Index up by 1.19%, and the ChiNext Index up by 0.85%.
Hong Kong stocks rose even more, with the Hang Seng Index closing up by 2%, achieving a five-day rise, and the Hang Seng Technology Index up by 3.25%.
In other Asian markets, the Nikkei 225 rose by 2.13%, and the South Korean Composite Index rose by 0.21%.
Xue Junsheng, Head of Economic Research Department and Chief Economist of Hang Seng Bank, said that the Fed's decision shows that the U.S. has officially started a rate-cutting cycle.
Although there is still uncertainty about U.S. interest rates, the direction is becoming clearer.
From the forecasts of the authorities' committee members, it can be seen that the Fed still has confidence in the U.S. economy.
Even though it has started to cut rates, the pace of rate cuts in the next two years is not expected to accelerate.
It is estimated that the rate cut in 2025 will be 100 basis points, the same as the previous forecast, and 50 basis points in 2026.
With the era of rate cuts coming, how will capital shift?
For Hong Kong and A-shares, which are at a lower valuation level, can they attract more foreign capital inflows and open up opportunities for a rebound from the bottom?
The market has long been looking forward to the Fed's first rate cut in four years, which was 50 basis points higher than expected.
The last time the Fed cut rates was on March 16, 2020, due to emergency relief measures to deal with the economic shutdown caused by the spread of COVID-19.
Since then, the Fed has been raising interest rates since March 2022, with the last increase in July 2023, during which the Fed raised rates by 75 basis points four times in a row.
China Life Security Fund said that the market has expected this rate cut.
Since October 2023, the market has started to trade the Fed's rate cut expectations, but the inflation data at the beginning of 2024 was higher than expected, and the rate cut expectations have fluctuated.
Looking at the dual pillars 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 unemployed people has narrowed significantly, clearly reflecting the signs of a weakening labor market.
However, before the Fed's September meeting, there was a divergence in the market on whether the Fed would cut rates by 50 or 25 basis points.
Industry insiders generally believe that the recent U.S. economic data is positive, such as the just-released August retail sales data, which is higher than expected, prompting the Fed to start this round of rate cuts with a higher than expected 50 basis point cut, reflecting the Fed's determination to achieve a "soft landing" for the U.S. economy.
In its latest research report, CICC pointed out that it is not common to start a rate-cutting cycle with a 50 basis point cut, and there have only been three times since January 2001, September 2007, and March 2020.
UBS Wealth Management Investment Director's Office said that the Fed's 50 basis point rate cut this time exceeds that of other major central banks.
Fed Chairman Powell said that the Fed is committed to maintaining a strong economy, rather than worrying about the upcoming recession.
The Fed is confident that inflation can be sustainably reduced to the 2% target, enabling it to start a rate-cutting cycle strongly.
The Fed is a latecomer to the global easing cycle.
Previously, the European Central Bank has cut rates twice.
The central banks of Switzerland, Sweden, Canada, New Zealand, and the UK have also cut rates.
However, Powell emphasized that the Fed does not think it is behind the situation.
He said that the U.S. economy remains robust, and the labor market remains strong.
Although the first rate cut is 50 basis points, the committee is currently "not in a hurry" to cut rates.
UBS also mentioned that historically, the performance of the U.S. market during rate cuts in non-recession periods has been good, 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 rate cut has opened up policy space domestically, but when it comes to the impact of the rate cut on A-shares and Hong Kong stocks, most interviewees said that it is necessary to pay attention to the domestic stable growth policy statements, implementation, and changes in fundamental data, but all agree that Hong Kong stocks are more sensitive to external liquidity, coupled with the linked exchange rate arrangement under which Hong Kong follows the rate cut, or it will be reflected earlier than A-shares.
In fact, before the Fed announced the rate cut, the Hang Seng Index had risen for four consecutive days, and on September 19, it continued to rise by 2%, successfully achieving a five-day rise, with a total increase of 835.8 points from September 12 to September 19.
CICC's research report mentioned that considering the transmission of overseas easing, Hong Kong stocks are more flexible than A-shares.
In addition, Hong Kong stocks have relatively better earnings, and valuations and positions are more thoroughly cleared, which also supports the relative performance of Hong Kong stocks.
Similarly, at the industry level, growth stocks sensitive to interest rates (biotech, tech hardware, etc.
), sectors with a high proportion of overseas dollar financing, Hong Kong local dividends, and even real estate, as well as export chains benefiting from the U.S. rate cut driving real estate demand, may also benefit marginally.
However, it is not advisable to simply compare the average rules of historical experience.
On average, Hong Kong stocks often rebound sharply and outperform A-shares at the beginning of the rate cut, and the probability of rising is also higher.
Xingye International believes that rate cuts can be mainly divided into two categories: "preventive rate cuts" and "relief rate cuts."
The main difference between the two types of rate cuts is whether the U.S. economy has fallen into a recession when the rate cut is made.
If the U.S. economy has not yet fallen into a recession, and the rate cut is mainly to prepare for unfavorable factors, it is a preventive rate cut, generally with a smaller cut and a shorter duration.
The rate cut in September 2024 is more in line with the standard of "preventive rate cuts."
Because from the 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, all show that the U.S. economy is moving towards a soft landing and has not fully fallen into a recession.
Regarding the performance of the Chinese market in the "preventive rate cut" cycle, Xingye International mentioned that since 1990, A-shares and Hong Kong stocks have experienced six Fed rate cuts, including three "preventive rate cuts" (1995-1996, 1998, 2019) and three "relief rate cuts" (2001-2003, 2007-2008, 2020).
In the three "preventive rate cuts," the trends of A-shares and Hong Kong stocks are not the same, and the overall trend of the Hong Kong stock market index is upward, with the Hang Seng Index rising by more than 20% in the two rate cuts of 1995-1996 and 1998.
However, in the three "preventive rate cut" cycles of the Fed, A-shares did not show a consistent trend of rising or falling.
Why do Hong Kong stocks and A-shares take different steps when the rate is cut?
The main reasons are two-fold.
First, the Fed's "preventive rate cut" eases global liquidity, and foreign capital will actively seek overseas assets with higher investment returns, so Hong Kong stocks are likely to see an inflow of foreign capital; second, due to Hong Kong's offshore market and the linked exchange rate system in Hong Kong, the Hong Kong dollar is directly linked to the U.S. dollar, so the valuation of Hong Kong stocks is more affected by Fed policy and U.S. dollar liquidity, and is more sensitive to Fed rate cuts, with more significant increases.
The decline in interest rates promotes Hong Kong's economic growth.
In addition to the different trends of A-shares and Hong Kong stocks brought about by the rate cut, Hong Kong's interest rates are expected to follow the Fed's decline, which will help maintain Hong Kong's economic growth.
Hong Kong's Financial Secretary Chan Mo-po said that the start of the rate cut cycle is expected to have a prudent positive impact on Hong Kong's economy.
First, under the linked exchange rate, Hong Kong's interest rate trend will generally follow the trend of U.S. interest rates.
The originally tight capital situation is expected to gradually become more relaxed, which will help to reduce the pressure on business operations and support fixed asset investment.
Second, with the U.S. rate cut, the Hong Kong dollar exchange rate will also slightly weaken, which will help to attract tourists and benefit local consumption and retail catering businesses.
However, influenced by the flow of funds and market sentiment, the actual rate cut in Hong Kong may not be completely consistent with the U.S.
Although the rate cut cycle has started, the future speed and magnitude of U.S. rate cuts will be affected by local economic and employment conditions, the presidential election, and other factors; coupled with the continued uncertainty of geopolitical situations and other external factors, it is necessary to remain cautious.
Hong Kong Monetary Authority Deputy President Li Dazhi said at a press conference that the U.S. rate cut cycle has just begun, and it is expected that interest rates will remain at a relatively high level for a period of time.
There are still many variables in the future pace of U.S. rate cuts, depending on inflation data, etc., and investors need to pay attention to global market risks.
In terms of 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 U.S. enters the rate cut cycle, it will not affect the financial and monetary stability of China's Hong Kong, but the current monetary policies of various major economies are not synchronized, and market fluctuations cannot be ruled out.当然可以，请提供您需要翻译的内容。