CSC Zhou Junzhi: Both US stocks and gold will experience fluctuations, and there are new opportunities in Chinese stocks

On June 17, CSC held a mid-term strategy meeting for 2025. Zhou Junzhi, the chief macro analyst at CSC, provided an outlook on global asset allocation during the strategy meeting, and her insights garnered significant attention.

Zhou Junzhi observed that U.S. stocks may experience fluctuations in the near term, but with the easing of trade tensions and the technology trend not being disproven, the risk of a significant downturn is limited.

She also pointed out that the market is currently generally bearish on the U.S. dollar, which has indeed been relatively weak in the first half of the year. Looking at the long term, the dollar may ultimately head towards a period of weakness, but in terms of the second half of the year, the pace of dollar weakening will be more moderate compared to the first half. Correspondingly, the pace of gold appreciation may not be as smooth as in the first half.

Regarding the allocation of Chinese stocks, she advised investors to focus on liquidity-driven structural opportunities and to remain somewhat cautious about the pro-cyclical sectors related to domestic demand. This is mainly related to the direction of China's fiscal transformation.

In her speech, she reminded investors that the fiscal policies of the U.S., Japan, and Europe have undergone significant changes in both total volume and structure, deeply affecting global capital flows. In the first half of this year, overseas trading has shown a "reverse dollar" trend, reflecting this impact. Although the global reverse dollar trading may moderate in the second half compared to the first half, looking at the longer term, we must pay attention to the reallocation of global capital.

We have summarized Zhou Junzhi's speech content as follows (in the first-person perspective) for the readers.

Three Main Lines of Global Asset Allocation

The core factors influencing asset performance in the first half of the year can be summarized into three main lines: technology, fiscal policy, and trade war.

From a technological perspective, U.S. stocks are closely related to the country's position in the technological revolution. In the first quarter, market skepticism about technology trends, such as concerns about the progress of the technological revolution triggered by DeepSeek, led to a decline in U.S. stocks; although there was some recovery in the second quarter, the trade war on April 2 impacted the globalization dividends, causing the market to drop significantly at one point. Although there was some subsequent recovery, the overall index change was limited, and the technology sector still dominated. The pricing of the Chinese stock market has a weak correlation with the macro pro-cyclical sectors.

In terms of fiscal policy, the fiscal policies of the U.S., Japan, and Europe have undergone significant changes in both total volume and structure, which have had a profound impact on global capital flows and policy direction.

Taking the U.S. as an example, its fiscal deficit rate significantly expanded after 2020, but starting in 2023, the deficit rate has narrowed significantly compared to the early pandemic period, and the structure of fiscal easing has shifted from spending to tax cuts. This change has different effects on U.S. inflation and economic stimulation compared to before.

Japan has long implemented a loose fiscal policy, but after 2023, fiscal pressures have emerged, and the central bank has begun to reduce bond purchases. The logic of Japan exporting cheap funds to the world for the past 20 years has begun to change quietly.

China's fiscal policy is also transforming, shifting from an investment-oriented approach to one focused on people's livelihoods and social security. The changes in total volume and structure make it difficult for the market to apply past logic, expecting significant counter-cyclical easing in investments, which would bring pro-cyclical investment opportunities in domestic demand or rapid increases in upstream commodity prices.

Europe has shifted from fiscal restraint at the beginning of the pandemic to easing, and the relaxation of constraints on defense and fiscal deficit rates over the next decade will enhance economic expectations. This is a very important reason for the recent strengthening of European stocks and the euro The impact of the trade war is another main theme. The effects of the trade war on the global economy are mainly reflected in three aspects:

First, total economic data. The increase in tariffs by the United States may push up inflation. The only disagreement now is whether the impact of the trade war on U.S. inflation is one-time or persistent. We tend to believe it is one-time, so there will be a round of Federal Reserve easing in the second half of the year, and the scenario for U.S. Treasury bonds will be better in the second half than in the first half;

Second, supply chain restructuring. After the implementation of tariff rules, the competitiveness of China's industrial transfer will be re-priced, and we believe the market will price this segment in the future;

Third, on the financial level, the trade war hinders the flow of the U.S. dollar and challenges its credit. This aspect has been priced in relatively fully in the first half of the year, and will ease marginally in the second half. After all, financial pricing tends to be more forward-looking.

These three impacts have jointly led to cracks in U.S. credit assets in the first half of the year, and global funds have begun to capture signals of weakening U.S. dollar credit.

Shift in European and Japanese Monetary Policy

European fiscal policy remained relatively restrained in the early stages of the pandemic, with its fiscal deficit rate significantly lower than that of China, the United States, and Japan. However, this year, European fiscal policy has seen a significant shift: over the next decade, Europe will further relax constraints on defense and fiscal deficit rates, and this policy adjustment has directly enhanced market expectations for the European economy. The strengthening of expectations for fiscal easing has led to strong performance of European assets (such as European stocks and the euro) in the second quarter, becoming an important direction for global capital allocation.

Now let's look at the marginal changes in Japan's fiscal and monetary policy.

Since the 1990s, Japan has long implemented ultra-loose fiscal policies, maintaining a high fiscal deficit rate while using monetary policy tools such as Quantitative Easing (QE), Qualitative and Quantitative Easing (QQE), and Yield Curve Control (YCC).

However, after 2023, Japan's fiscal policy has shown marginal changes: fiscal pressures have emerged, and the Ministry of Finance has begun to reduce the scale of bond purchases, marking a shift from "large fiscal easing" to "fiscal convergence." This change has led to a reversal in the flow of global funds—the trend of Japan exporting cheap funds to the world over the past two decades is weakening, pushing up the global interest rate center, especially significantly impacting yen arbitrage trading and cross-border capital flows.

As European fiscal easing supports the performance of Eurozone assets, while Japanese fiscal convergence weakens the arbitrage properties of the yen, the volatility of U.S. dollar credit assets (such as U.S. Treasury bonds and U.S. stocks) has intensified. This change explains why European stocks and the euro performed well in the first half of the year, while U.S. Treasury bonds and the dollar weakened simultaneously.

Capital Expenditure of Tech Giants

One of the core reasons for the weakness of U.S. stocks in the first quarter, aside from Deepseek's challenge to U.S. tech monopolies, is the market's doubts about the sustainability of capital expenditures by U.S. tech giants (commonly referred to as the "Seven Giants" or "Seven Sisters").

The market is concerned that the innovation cycle in the tech industry has peaked, leading to pressure on the valuations of the tech sector, which in turn dragged down the overall performance of U.S. stocks. Entering the second quarter, as some tech giants disclosed their capital expenditure plans and industry research feedback, market expectations for the sustainability of capital expenditures by the "Seven Giants" have somewhat recovered.

Although differences still exist, the marginal improvement in capital expenditure expectations has alleviated the market's pessimistic sentiment towards the tech sector, driving a corrective rebound in U.S. stocks in the second quarter The technological trend remains the core variable determining the medium to long-term trajectory of the US stock market. If the capital expenditure of the "seven giants" can continue to support technological innovation (such as in AI, semiconductors, etc.), then the US stock market still has medium to long-term upward support; conversely, if capital expenditure falls short of expectations, coupled with the impact of the trade war on the global supply chain, the volatility of the US stock market may further intensify. We view technology as a very important factor in the US stock market. After all, a significant portion of the profits in the US stock market comes from technology, which is very different from other countries' stock markets.

The US Stock Market Will Show Volatility

Looking ahead to the second half of the year, the interpretation of the aforementioned three main lines may marginally ease, but will still have an impact on asset pricing in the short term.

Regarding the trade war, the market generally expects negotiations to continue, but it is also widely recognized that the most intense phase may have passed. Although there is still uncertainty regarding Trump's policies, the tariff shock from 0 to 1 in the first half of the year has gradually been digested, and the marginal impact of the trade war on global expectations has weakened.

We have the following outlook for the market in the second half of the year.

For the US stock market and US bonds, we expect the US stock market to show a volatile trend. Compared to the bearish trend in the first half of the year, there are certain opportunities in US bonds in the second half, but the downside space is limited, and the US dollar may fluctuate steadily.

In terms of Chinese assets, it is not advisable to excessively price cyclical sectors in the stock market; attention should be paid to structural opportunities, still focusing on narratives driven by risk appetite and liquidity; the bond market is relatively optimistic, and the potential for interest rate declines is worth looking forward to.

In the commodity sector, gold performed well in the first half of the year due to its strong monetary attributes, but the marginal easing of the trade war in the second half may weaken its upward momentum, making the pace of increase less smooth than in the first half. Black commodities were previously fully priced due to weakened demand, and whether they will continue to decline needs further observation.

The Core Logic of Chinese Assets

Specifically regarding Chinese assets, the market pricing in the first half of the year reflected more liquidity and risk appetite.

Although the real estate data from January to April was impressive, the data has weakened again since the end of April, coupled with the pressure of potentially declining exports, and the marginal decline in residents' income expectations, the narrative surrounding this key asset may shift.

Therefore, the bond market may benefit more from fundamental pricing in the second half of the year, and the potential for interest rate declines is worth paying attention to. On the policy front, China's fiscal policy is transforming to "invest in people" (such as in fertility, elderly care, etc.), rather than traditional investments in physical assets, which reduces expectations for overall stimulus policies, making structural opportunities the main line.

In addition, the RMB exchange rate may maintain range fluctuations under the central bank's regulation. This has also been the requirement of Chinese policy in recent years, aiming for stability.

After all, in the context of global volatility, there are many things that need to be advanced in China's domestic demand. The RMB exchange rate is neither suitable for a significant appreciation nor for a significant depreciation. Coupled with the increasing experience the central bank has accumulated in exchange rate regulation over the past two years, the trend of exchange rate fluctuations has become increasingly evident