Hong Hao: There are still highs in the Hong Kong stock market in the second half of the year, the gold market is far from over, and a continued weakening of the US dollar is highly likely

On May 29th, Hong Hao, CEO and Chief Global Asset Allocation Officer of Huafu International, shared his outlook on the next phase of the economy and market during a public roadshow.

Hong Hao made some important judgments:

First, the global financial market is entering a period of model transformation, and the market is telling us this through historic price fluctuations. If you still can't feel it, you may not be sensitive enough.

Second, the continued weakening of the US dollar is a high-probability event, and this trend of dollar weakness will gain more and more recognition.

Third, investors should start considering reallocating the profits accumulated in US stocks over the past few years to other markets and assets, such as European bonds, euros, gold, and Hong Kong stocks, all of which are very good allocation targets.

Fourth, although the fundamentals are slowing down this year (2025), due to liquidity flowing back to the Hong Kong stock market and the northbound capital inflow, the Hong Kong stock market should still see a peak in the second half of the year.

The following is a transcript of the speech, presented in the first person, with some content omitted.

The Global Market is Entering a New Round of Model Transformation

As we all know, the yield on the 10-year US Treasury bond is the "anchor" for the world's risk-free yield. However, recently we have seen ongoing concerns about the US Treasury market emerging.

If the US Treasury also experiences severe fluctuations in the future, or even defaults, the risk rating of the global capital market will be adjusted downward accordingly. This is because even once-safe assets are undergoing such changes.

Looking back over the past 60 years, we have experienced three market model transformations.

In the early 1980s, the oil crisis led to a sustained surge in inflation in the United States, and the US economy fell into stagflation. (At that time, then-Federal Reserve Chairman Paul Volcker raised the federal funds rate to over 22% to curb inflation).

From that time until now, the short-term and long-term interest rates in the US Treasury market have been on a long-term downward trend, continuing until 2020 (see the chart below).

Now, we see that the global risk-free interest rate is far higher than the levels at the beginning of 2000, basically returning to the highest levels in over 20 years. This will inevitably lead to a repricing of global assets.

Every Crisis is a Market Restructuring

Observing the chart above, we find that in the long-term downward trend of interest rates over the past 30 years, we often see sudden spikes in interest rates (as seen in the chart).

Generally, every time the global financial market encounters a crisis, we see a significant surge in US Treasury yields.

This is usually accompanied by a tightening of US dollar liquidity and a strengthening of the dollar.

When a global financial crisis erupts, liquidity in the capital market suddenly tightens, and the prices in the entire market will fluctuate violently. This is when the consensus in the entire market begins to be reshaped.

At this time, not much financial knowledge is needed to see that the pricing model of the entire market has changed In the past 40 years, the continuous decline of risk-free interest rates has led to several spectacular bull markets in growth stocks. Except for a few limited years, growth stocks have significantly and far outperformed value stocks.

This is also why there has only been one Warren Buffett over the years. Buffett has consistently chosen to be a value investor even during many years of growth market conditions.

The Gold Market is Far from Over

The current market is entering another mode of transition.

We can look at this issue from another perspective. Around February 2022, the trend of gold began to diverge from the ten-year U.S. Treasury yield.

Under normal circumstances, when U.S. Treasury yields decline, gold prices rise. But now, when the ten-year U.S. Treasury yield rises, gold prices continue to increase, which was unimaginable before. (See the chart below).

It was also that year when Europe and the United States froze nearly $200 billion of Russia's foreign exchange reserves. This led to a sudden realization after 2022 that the U.S. dollar also seemed unreliable.

Whether as a safe-haven asset or as an inflationary asset, gold's role has contributed to its strong performance over the past three years.

I believe that the gold market is far from over. Since 2022, the disruption of the correlation between gold and ten-year Treasury bonds tells us that the entire market has entered a risk-averse mode.

Historically, when global risks surge, the U.S. dollar tends to strengthen. In other words, liquidity tightens, and the supply of dollars decreases, especially the supply of offshore dollars.

However, this time, especially since the beginning of this year, as trade friction risks have increased, the U.S. dollar has weakened, which is something we have not seen before.

Therefore, as the dollar weakens, gold will certainly strengthen, and I believe this does not need further elaboration.

The Weakening of the Dollar Has Just Begun

Additionally, at the end of last year, industry peers predicted that the dollar would continue to strengthen this year (2025). Because the interest on U.S. dollar (debt) is very high, but until now, the dollar index has already fallen to around 98 (it was around 110 at the beginning of this year, editor's note).

The dollar is now at a five-year low, and if it falls below 98, the depreciation trend will intensify. More and more people will recognize this point. Looking back at the end of last year when we were forecasting this year, I believe the vast majority of people would not have thought this way, but now we have seen a clear trend of dollar weakness.

I believe the weakening of the dollar has just begun. The main issue now is that the dollar is no longer a safe-haven asset; it has become a risk asset. Tariffs bring uncertainty, and this risk comes from the United States. Naturally, the dollar has turned into a risk currency rather than a safe-haven currency Naturally, capital has begun to reassess its layout in the United States. Not only has the S&P risen nearly tenfold from 2009 to now.

International capital is starting to reevaluate its positioning in the U.S., whether because U.S. stocks have risen significantly or because the U.S. has now become an important source of risk, with the dollar no longer being a safe-haven currency. Even if you can obtain high interest, the depreciation of the dollar will offset the income from high interest.

I believe this is where this cycle differs from others. The dollar has become a risk asset, and the Federal Reserve's high interest rates no longer attract global capital inflows.

China Still Has Many "Cards"

Next, let's take a look at the situation in China.

The three drivers of GDP are investment, consumption, and exports.

On the investment side, in the past two years, we have invested a lot of money into high-end manufacturing. On one hand, this has consolidated our position as a global production center, and on the other hand, it has increased capacity.

In the future, we will continue to use investment to stabilize our economy to achieve economic growth goals. However, it will no longer be the main component of economic growth as it was during the real estate boom.

On the consumption side, there has been some improvement in the first quarter due to policy stimulus, but it may not become the main tool for growth this year.

The remaining factor is exports, which have been very strong in the first four months. China's current account has reached a peak. At the same time, the U.S. forward inflation expectations are closely related to China's current account.

In this trade friction, there are many cards to play.

Hong Kong Stocks Will Benefit

In the next few years, the weakening cycle of the dollar is likely to become increasingly evident and gain more consensus.

After cyclical adjustments, the performance of the U.S. relative to other markets has entered a clear downward trend. Therefore, when making asset allocations this year, we cannot blindly buy dollar assets as we did before; at the very least, we need to reallocate the profits accumulated over the past few years into assets from other countries.

From an allocation perspective, you need to start thinking about redistributing the profits you've made and the fruits of victory accumulated over the past few years into other markets and varieties.

Using the same algorithm to calculate the operation of China's cycle, it has roughly returned to the long-term average level, and we have seen corresponding performances in stock indices and real estate sales, all showing varying degrees of rebound.

The Hong Kong stock market is one of the best-performing major markets this year. The recovery has already begun in 2024, and there was also a second wave of very good market performance from January to March this year.

The economic cycle in Hong Kong has also begun to slow from a high point. If we have corresponding policies, the Hong Kong stock market will also benefit, as it has better elasticity and more abundant liquidity, making it likely to benefit even more If global finance de-dollarizes, the performance of the U.S. market relative to other emerging markets and developed countries will converge. The money that remains overseas invested in dollar assets will definitely flow back into our Chinese market, and some may go to Europe.

The Hong Kong stock market has experienced a phenomenon of very abundant liquidity this year. The balance of the Hong Kong Monetary Authority's base currency has soared dramatically.

I believe that the Hong Kong stock market should reach a new high in the second half of this year, and we should also see that IPOs in the Hong Kong market will continue to be booming.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. 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. Investing based on this is at your own risk