Everything returns to the starting point! CITIC Securities Co., Ltd.: "Trade facts, not expectations" should be the first principle in dealing with uncertainty

Since the tariff war, the prices of mainstream global risk assets have basically returned to their original point, indicating that "trading facts, not expectations" should be the first principle in responding to uncertainties under the trade war; looking ahead to May, "signing for the sake of signing" may become the narrative logic overseas. We expect there is still room for risk appetite to rise, and the A-shares will continue to show characteristics of warming risk preference and thematic rotation, focusing on thematic trading opportunities with low institutional holdings; however, from an economic perspective, the real impact has quietly occurred, and we expect that the China-U.S. economy may face new variables at the end of the second quarter. In terms of allocation, besides the short-term thematic rotation, we still recommend focusing on three unchanging major trends: first, the trend of enhancing China's independent technological capabilities will not waver; second, the trend of Europe rebuilding its independent defense and enhancing energy, infrastructure, and resource reserves will not waver; third, China must promote "dual circulation," accelerating the improvement of social security and stimulating domestic demand potential is a necessary policy option.

Since the tariff war, the prices of mainstream risk assets have basically returned to their original point

Since Trump announced "reciprocal tariffs," major global stock indices have experienced a significant pullback of -20% to -5%, but currently, the Indian NIFTY50, Nikkei 225, Korea Composite Index, Nasdaq Index, and S&P 500 have all fully recovered and recorded positive returns. The European STOXX600 has also basically recovered (-0.1%), and the stock indices of ASEAN countries (except Vietnam) have all turned positive. Global investors seem to be very optimistic in pricing that a wide-ranging tariff war will not have a lasting impact. In the commodity market, aside from precious metals and agricultural products achieving positive returns, commodities reflecting industrial demand such as aluminum, nickel, and copper have only seen cumulative declines of -2.9%, -3.0%, and -3.5% from April 2 to May 2, basically recovering from their maximum drawdowns during this period (-8.3%, -11.8%, and -11.2%), while varieties reflecting global trade and consumption demand, such as crude oil and container shipping, have basically not rebounded, recording declines of -18.6% and -38.3% respectively during this period. This is a very rare pricing combination, indicating that global investors believe the tariff war will have a significant impact on trade and consumption, but the stock market will be largely unaffected due to various policy responses. In other words, the baseline scenario priced by investors may be that the tariff war will end in the short term. If we only look at Chinese assets, in the fields of chips, edge AI, and new consumption in Hong Kong stocks, many leading companies have achieved positive returns for the entire month, and the domestic consumption sector has seen relatively small pullbacks, with only sectors directly impacted, such as consumer electronics and optical modules, experiencing larger declines that have yet to recover. From the perspective of the rise and fall of industries in Chinese equity assets, the market is pricing the independent innovation and domestic substitution in the high-end manufacturing industry chain from a medium to long-term perspective, while the tariff war itself is temporary and will not cause lasting effects.

Trading facts, not expectations, should be the first principle under the trade war

Trading based on expectations and Trump's movements has a high probability of encountering real losses amid volatility. From our tracking of active private equity positions, the decline in early April was the most obvious phase of position reduction. According to the channel survey data from CITIC Securities, during the period from April 4 to April 11, the private equity active sentiment index fell from 80.7% to 76.5% Considering that around mid-March, about 50% of the positions were allocated to Hong Kong stocks, and the decline in Hong Kong stocks was even greater on April 7, we estimate that a large number of investors passively reduced their positions to control risks at the beginning of April. However, by the end of the month, the innovative drugs, intelligent driving, and new consumption targets in Hong Kong stocks had all recovered from the decline in early April and some even reached new highs. As of April 25, the latest positions of active private equity remained at 77.5%, slightly above the historical median level. The situation in the U.S. stock market is similar; the core operating indicators of leading U.S. companies in Q1 2025 did not weaken, and some companies even significantly exceeded expectations. We calculated the acceleration ratio of the main operating indicators of core U.S. companies in our sample (for specific indicator definitions, please refer to the "A-Share Strategy Special - U.S. Recession Trading Tracking Guide" (2025/4/10)), and the acceleration ratio of the core operating indicators of 20 leading U.S. companies that have disclosed their financial reports for Q1 2025 is 43%, exceeding the consensus expectation of 35% before the financial reports. Under the tariff war, our basic approach still adheres to two starting points: first, focus on Trump's potential constraints (tax reduction plans, inflation, hardline voter polls) rather than Trump's actions; second, stick to trading facts and avoid excessive trading expectations.

"Signing for the sake of signing" may become the overseas narrative logic in May, and we expect there is still room for risk appetite to rise.

Although U.S. Treasury Secretary Janet Yellen stated in an interview with Fox News on April 30 that the U.S. is advancing bilateral negotiations with 17 major trading partners, from the current statements of various government officials and mainstream media reports, it seems that the only country making smooth progress is India. However, from the "Mineral Cooperation Agreement" signed between the U.S. and Ukraine on April 30, the content of the agreement is quite different from the goals initially portrayed by Trump, resembling more of a symbolic diplomatic achievement. We expect that in May, there will be more bilateral trade agreements or negotiation frameworks similar to the U.S.-Ukraine mineral agreement that are "signed for the sake of signing." Trump will frequently use "key moment agreements" to ease domestic disputes and stabilize the market. The risk to watch in May is that Trump may use some already signed agreements to create negotiation pressure on other countries (especially China), forcing everyone to collectively make concessions, but the current progress does not seem smooth. As long as the market gradually figures out this set of "talking + framework agreements + trying to maintain the economy" game rules, the pricing of uncertainty will tend to be rational, and the risk premium will further narrow, which will instead benefit the repair and enhancement of asset valuations. However, beneath the surface of the tariff war, there is a hidden line; the U.S. previously granted tariff exemptions for high-end electronic manufacturing and components, but may later reintroduce industry-wide tariffs on related categories. The U.S. may not genuinely attempt to produce ordinary low-value goods domestically, but there is a real demand for independence and security in the supply chain of high-end electronic manufacturing and components.

A-shares are expected to still show characteristics of warming risk appetite and thematic rotation, mainly focusing on themes with low institutional holdings.

In summary, regarding market rhythm, we continue to maintain the following view: May may present a trading opportunity after a clearing of chips, during which institutional holdings are not crowded, and themes that are less sensitive to short-term performance situations such as domestic and external demand may become more dominant After the synchronization of the economic and policy cycles between China and the United States in the second half of the year, the best time window for allocation based on fundamental logic will be before the 2026 U.S. midterm elections. Key new technologies and industry themes to focus on in May include: multimodal AI (domestic computing power, edge applications, etc.), AI/AR glasses (SoC, optical waveguides, MicroLED, silicon carbide, etc.), MCP+AI Agent (leading internet companies in Hong Kong, software developers), innovative drugs, and controlled nuclear fusion.

The real impact has quietly occurred, and we expect China and the U.S. economies may face new variables at the end of the second quarter.

In April, China's PMI data began to weaken, with the manufacturing Purchasing Managers' Index (PMI) at 49.0%, down 1.5 percentage points from the previous month. The new export orders index was 44.7%, 4.8 percentage points lower than the average of the past five years, mainly due to weakened exports to the U.S. From April 21 to April 27, the volume of containers shipped from China to the U.S. decreased by 28.3% month-on-month. In the U.S., due to shipping delays, goods arriving at U.S. ports are not yet subject to the 145% super high tariffs, but in 1-2 months, we may see many U.S. manufacturers unable to pay the high tariffs abandon their pickups, or pay certain fees to remain in port warehouses. At that time, small and medium-sized manufacturing enterprises and the retail sector in the U.S. will begin to feel significant impacts. According to Wind data, the ratio of U.S. monthly import value to annualized consumer spending rose from 17% to 20% in 1Q25, while the ratio of channel inventory to annualized consumer spending fell from 86% to 84%. The high increase in imports before the tariff implementation but a decrease in dealer inventory reflects that U.S. residents had preemptively overdrawn some consumption demand to stock up before the tariffs. We estimate that the excess consumption equivalent to 15% of annual consumer spending accumulated by U.S. residents will be consumed within 1-2 months, and the end of May to mid-June may be a critical point for the impact of tariffs on U.S. inflation/retail.

Focusing on three truly unchanging major trends

The trade war remains at a stalemate, and relying on Trump's tariff policy to unilaterally "ease" makes it difficult to make clear bullish or bearish judgments on the market. In the short term, domestic policies are mainly experimental and preventive. In this context, from a medium to long-term perspective, there are three high-certainty trends worth continuous tracking: 1) The trend of enhancing China's independent technological capabilities will not waver (focus on domestic computing power, edge AI, innovative drugs, etc.); 2) The trend of Europe rebuilding independent defense and enhancing energy, infrastructure, and resource reserves will not waver (focus on basic industrial products like copper and aluminum, military materials, energy infrastructure, and communication infrastructure, etc.); 3) China must promote "dual circulation," accelerate the improvement of social security, and stimulate domestic demand potential is a policy imperative (focus on hotels, scenic spots, OTA in the cultural tourism direction, ophthalmology, dentistry, traditional Chinese medicine in the medical service direction, and leading insurance companies) Author: Qiu Xiang, Liu Chuntong, Yang Jiajin, Gao Yusen, Lian Yixi, Yao Yuan, Source: CITIC Securities Research, Original Title: "Trade Facts, Not Expectations"

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