The five major consensus and five major expectation differences in the current market

Market Consensus and Potential Expectation Gaps

Recently, the macro mainline affecting assets has shifted, with the market's sensitivity to tariffs decreasing and attention to economic data and geopolitical situations increasing, while the previously formed market consensus has begun to show divergence and expectation gaps. We have attempted to outline five groups of market consensus and potential expectation gaps for investors' reference and suggest seizing trading opportunities after consensus reversals.

Consensus 1: The impact of tariffs on the market is diminishing and gradually devolving into a disruptive factor. The China-U.S. London economic and trade talks have concluded, with both parties reaching a framework agreement, and the probability of short-term trade friction further escalating is low, with the market also incorporating a relatively optimistic expectation of the negotiation results.

Expectation Gap: After the downgrade of U.S. tariffs, soft data representing expectations is warming up, but hard data representing the actual fundamentals is beginning to show signs of cooling. The emotional impact is fading, but the economic effects are just beginning. The impact of tariffs on fundamentals may be lagging but will not be absent: first, there was a significant import rush in the U.S. in the first quarter, with excessive imports potentially maintaining for 2-3 months, and companies may not have significantly raised product prices in the short term; second, high interest rates, high tariffs, and significant fluctuations in the capital market have led to a decline in consumer confidence, slowing terminal demand, and a cooling trend in service inflation; third, while tax cuts and tariffs were implemented simultaneously in 2018, this round involves tightening tariffs first and then expanding tax cuts, with the timing mismatch of policies leading to a significant reduction in the transmission coefficient of tariff inflation. If subsequent tax cut policies are implemented, inflation will still face upward pressure. Domestically, considering the export rush effect in the first quarter, the impact of tariffs on fundamentals may also have a lagging effect. With the new 30% tariffs gradually coming into effect, there will still be considerable disturbances to external demand in the third and fourth quarters, and attention should be paid to subsequent corporate profit data.

Consensus 2: The U.S. debt problem is worsening, U.S. Treasury yields are difficult to lower, and the dollar may weaken in the long term. The U.S. government's debt problem has long troubled the dollar and U.S. Treasuries. Multiple factors have resonated this year, impacting dollar credit and shaking the notion of American exceptionalism, accelerating the process of global de-dollarization. In the short term, fiscal deficits are easier to loosen than to tighten, sovereign credit ratings are being downgraded, and increased policy uncertainty is pushing up the term premium of U.S. Treasuries, weakening their safe-haven attributes.

Expectation Gap: Long-term issues may have been relatively fully priced in the short term, with a cooling U.S. economy leading to potential Fed rate cuts, and U.S. Treasury yields may have opportunities for phased declines in the second half of the year. The term premium of U.S. Treasuries and sovereign CDS spreads have recently marginally retreated, indicating that long-term debt issues may have been relatively fully priced in the short term. Meanwhile, the cooling U.S. economy, combined with the U.S. Treasury's record buyback of $10 billion in government bonds, has led to a slight warming in demand for U.S. Treasuries, which may still have downward space in the short term. However, the conflict in the Middle East has pushed up oil prices, increasing the risk of economic stagflation, leading to a marginal rise in U.S. Treasury yields The US dollar has fallen to its lowest level in three years. If the US stabilizes in the second half of the year and the tech sector in the US stock market reshapes its attractiveness to global capital, while external geopolitical risks intensify, the short-term process of de-dollarization may slow down or even reverse temporarily. The safe-haven attributes of the dollar and US Treasuries have declined more due to uncertainties in the domestic market, but external uncertainties such as intensified geopolitical conflicts still provide strong support for the dollar. Historically, there has been a strong correlation between the dollar index and the global geopolitical risk index, and the recent escalation of the Israel-Palestine conflict may boost the demand for the dollar as a safe haven. In addition, the recent strong performance of US stocks, along with a cooling US economy that maintains some resilience and the advantage of US Treasury yield spreads, suggests that the short-term downside potential for the dollar may be limited.

Consensus Three: Domestic interest rates are low and fluctuate narrowly, making it difficult to achieve excess returns, while the development of bond index funds is timely. As the domestic market enters a low-interest-rate era, the odds have significantly decreased, and the expected returns of the bond market and the Sharpe ratio have deteriorated. With the decline in bond market yields, it has become increasingly difficult for actively managed funds to achieve alpha returns, prompting institutions to shift towards passive and diversified investments, leading to rapid expansion of bond ETFs and other index fund products.

Expectation Gap: External geopolitical conflicts affect risk appetite, and external demand may slow under tariff disruptions, while internal consumption and real estate still need to stabilize. If fundamental data slows down beyond expectations, there are still opportunities worth seizing in a wave-like or even small trend manner. Globally, the negative impact of tariffs is gradually becoming apparent, with the manufacturing PMI of major economies in May remaining in the contraction zone, and uncertainties related to US policies and geopolitical risks still significant, leading to insufficient corporate investment confidence. Domestically, the PPI in May showed an expanded decline, indicating weak domestic demand; the month-on-month decline in second-hand housing prices in various cities has widened, and since June, the heat in both new and second-hand housing markets has declined; the suspension of national subsidies in some regions and the slowdown in dining consumption growth are also noteworthy. Overall, the fundamentals in the third quarter still lean towards a bullish direction for the bond market.

Consensus Four: Short-term hotspots in the industry are in innovative drugs + new consumption + stablecoins, with Hong Kong stocks outperforming A-shares. Benefiting from low valuations + loose offshore dollar liquidity + a higher proportion of new economy sectors, Hong Kong stocks have performed remarkably well among global equity assets this year, showing significantly better elasticity than A-shares. Structurally, innovative drugs and new consumption have become favored directions for capital, while the undervalued financial sector in Hong Kong stocks has also seen continuous increases in allocation funds Expectation Gap: Recently, hot sectors such as innovative drugs have accumulated significant gains, and the risk of a phase adjustment has increased. Attention should be paid to whether the industrial main lines like AI + robotics will return, while the AH premium may stabilize in the short term after falling to a low since 2021. In the long term, as the activity level of Hong Kong stocks gradually increases, the premium of A-shares relative to Hong Kong stocks is expected to systematically narrow. However, in the short term, the AH premium has already dropped to a nearly 5-year low, and further downside may be relatively limited. Additionally, Hong Kong stocks are more sensitive to geopolitical situations, which may trigger a rebound in the AH premium in the short term. Structurally, sectors such as innovative drugs and new consumption have a high degree of capital congestion, while the trading proportion of TMT and other sectors has fallen from high levels. Coupled with the generally better-than-expected performance of companies like Microsoft and NVIDIA, attention should be paid to whether the logic of the AI industry will return.

Consensus Five: Commodity demand is unlikely to improve, and supply constraints are leading to price differentiation. There is a general optimism about gold, while copper may outperform crude oil in the long term. The impact of tariffs is gradually becoming apparent, with the manufacturing PMI of major economies falling into contraction territory in May, and the U.S. job market also showing signs of cooling. Although countries tend to favor fiscal expansion, it is more about hedging against the negative effects of tariffs, making it difficult to see a significant improvement in commodity demand. In contrast, the resource scarcity brought about by supply constraints provides a higher safety margin and price support. In the medium to long term, attention should be paid to the strategic allocation value of scarce resources under the trend of de-globalization, with gold > copper > black series > crude oil from a supply perspective.

Expectation Gap: The geopolitical situation continues to heat up, and crude oil has rebounded significantly from low levels, showing strong performance. In an uncertain environment, asset allocation needs to emphasize odds thinking. Since June, the escalation of the Russia-Ukraine conflict and the comprehensive expansion of conflicts involving Iran have rapidly pushed up oil prices, with a rebound of over 20% from the monthly low. In the short term, the uncertainty of oil prices is at a high level: from a supply-demand perspective, Iran's crude oil production is about 3 million barrels per day, of which about half is for export, while OPEC's idle capacity exceeds 4 million barrels per day, which can basically cover potential supply gaps. The greater tail risk lies in whether Iran will block the Strait of Hormuz in retaliation, as this strait accounts for nearly 20% of global oil trade volume. However, historically, oil price increases caused by geopolitical conflicts do not last long, and as the situation clarifies, prices may return to fundamental pricing. In the medium to long term, with the intensification of geopolitical conflicts and trade frictions, strategically scarce resource products still possess high allocation value.

Note: This article has been abridged.

Authors of this article: Zhang Jiqiang, Tao Ye, Wang Jianggang, Source: Huatai Securities Fixed Income Research, Original Title: "[Huatai Asset Allocation] Market Consensus and Potential Expectation Differences"

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