Daniel Zhang: The Denial and Affirmation of Current Investment Methods

Hello, investment friends. In this issue, we focus on the current investment framework—first denying a common framework, then explaining our recommended analytical logic.

1. What is wrong? Predicting exports to guide investment has significant fragility

First, the idea we want to deny is: predicting export data → deriving macro data → predicting corporate profits → investment decisions. We believe that the foundation of this framework is very unstable. The main reason is that predicting export data is extremely difficult, which will significantly affect the judgment of corporate profits and GDP. Based on historical relationships, a 10 percentage point misjudgment in exports could lead to a misjudgment of PPI/industrial growth by about 2 percentage points. A 2 percentage point misjudgment in PPI could affect corporate profits by 3-4 percentage points through the profit margin channel; a 2 percentage point misjudgment in industrial growth could lead to a GDP misjudgment of 0.4-0.5 percentage points. Taking April's export data as an example, the market consensus expectation was 0-2%. We anticipated around 6%, but the actual growth rate reached 8.1%, indicating a market misjudgment of nearly 8 percentage points. This shows that the investment framework based on export data predictions is very fragile.

2. What is appropriate? Focus on the status of the U.S. discretionary consumption industry

We believe that the core of judging exports lies in predicting the diversion rate. Historically, from 2018 to 2019, China's diversion rate for exports to the U.S. reached 60%, which led to a significant impact on prices and profits due to tariffs, but the impact on export volume was less than expected.

How to judge the diversion rate? It highly depends on the stability of global demand; the more stable the global demand, the higher the diversion rate (conversely, if global demand declines significantly, the demand for diversion will naturally decrease).

How to judge the stability of global demand? It is highly correlated with the growth rate of U.S. imports. Over the past 30 years, a 1 percentage point change in U.S. import growth roughly corresponds to a 1 percentage point change in global trade growth, mainly due to the significant impact of the U.S. on global total demand, for example, the U.S. accounts for about 15%-16% of global total imports, about one-third of global final consumer goods, and about 60% of global trade deficits.

How to judge U.S. imports? The key is to assess the impact of tariffs, namely the U.S. tariff import elasticity coefficient (how many percentage points of imports drop for a 1 percentage point increase in tariffs). Unfortunately, current academic research is based on decades of low tariff periods, and current tariff changes often reach double digits, so previous elasticity coefficients may not be applicable now.

Since the U.S. tariff import elasticity cannot be precisely measured, let's change our approach to assess the impact of tariffs on U.S. imports. Essentially, it is about determining whether U.S. residents' purchasing power can absorb the tariffs. If it can, it means that the purchasing power of the household sector can be converted into corporate revenue, and the U.S. economic cycle remains smooth, showing a "four highs" state of high growth, high profits, high interest rates, and high inflation. If not, there is a significant risk of stagflation.

How to measure whether residents' purchasing power can absorb tariffs? There are many factors to consider, as it is not simply a matter of comparison. We believe that observing the performance of the U.S. discretionary consumption industry is essential The main point is that this year, the proportion of junk bonds in the maturity of U.S. corporate debt is significantly higher than in the past four years, and the consumer discretionary sector is the largest industry in the maturity structure of U.S. corporate debt, making it potentially the most sensitive to tariffs. Therefore, in the financial market, we first see signals of changes in the equation, or whether the risk premium will increase when U.S. consumer discretionary companies issue bonds (especially junk bonds). Of course, we also need to simultaneously track U.S. inflation data and the status of household excess wealth.

III. One Background and Three Insights for Current Investment

The biggest background currently is "certainty." The April Politburo meeting emphasized "responding to uncertainty with certainty," which we understand to be the most philosophically significant statement in the press release. It indicates that the Chinese government (such as the national team) stands on the same side as financial stability, providing a government backing behind the market. In contrast, the U.S. is entirely different; the various uncertain policies enacted by the Trump administration are, in fact, the source of volatility in the financial market. In other words, Trump stands in opposition to the stability of the U.S. financial market. In this context, we can derive three insights:

Insight 1: The volatility of the Chinese financial market is likely to be lower than that of the U.S. This is mainly due to the differences in the relationship between the government and the market in China and the U.S. The Chinese government maintains financial market stability, resulting in overall lower volatility, and there is a national team to support the market. The probability distribution of upward and downward movements in the stock market is clearly asymmetric. In contrast, the U.S. government is the source of volatility in the financial market.

Insight 2: Future asset price volatility may be less than the volatility of domestic economic data. On one hand, even if domestic economic data comes under pressure in the future, hedging policies may be quickly introduced, and the market may trade based on the logic of policy hedging; on the other hand, the national team may actively participate in the stock market to hedge against some downward risks.

Insight 3: Can we say that mid-term risks have disappeared? It may be too early to conclude that. The recent Sino-U.S. Geneva meeting was a "talk" rather than a "negotiation." This meeting only confirmed the leaders of both sides and the future consultation mechanism, but the tariff negotiations between China and the U.S. may still require some time for observation, and risks have not fully materialized. Therefore, although we believe that future capital market volatility may be less than that of economic data, the fact that tariff risks have not been completely resolved may limit some of the imagination in the capital market.

Of course, we also need to consider factors at the institutional behavior level in the near term, such as in the context of the high-quality development of public funds, investors not only need to consider relative rankings but also the issue of relative benchmark alignment.

Based on the above analysis, our current judgment on the "posture" of investment is "high position, low volatility": First, for relative investors, a high position is important; excessive pessimism is meaningless in the current environment because if the national team can hedge against some downward risks, then excessive pessimism cannot be fully expressed in trading. Second, the market may maintain a relatively low volatility state, which is reflected in both the low volatility relative to economic data and the low volatility relative to overseas markets.

Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances Invest based on this, and you bear the responsibility