Zhang Jiqiang: Any significant adjustment in the current stock market is a buying opportunity; half of the gold should be sold, and investment in the bond market yields diminishing returns

In the industry, Zhang Jiqiang, the director of the Huatai Securities Research Institute, head of macro research, and chief analyst of fixed income, is a well-known analyst who spans macro, strategy, fixed income, and policy.

He is particularly adept at grasping and analyzing the trend changes of major asset classes, and his recent speech on a relevant platform showcased his unique big-picture perspective and logical framework.

In Zhang Jiqiang's view, from the perspective of major asset allocation, this year should gradually shift towards equities. As long as the stock market does not experience high-slope growth and primarily oscillates or has a slow bull trend, it is still considered healthy.

He specifically suggests that one should try to ignore judgments on stock market indices and focus more on structural opportunities, as the latter is the biggest decisive factor.

At this time, the bond market indeed does not have particularly good strategies; it is not a bear market, and there are absolute returns, but the absolute returns are relatively low, making it a market where efforts yield little.

Key Quotes:

1. The stock market should abandon bear market thinking after "926" in 2024; any significant adjustment is an opportunity. The overall operational difficulty in the bond market has greatly increased.

2. This year, there are three major themes worth paying attention to. One is stabilizing the market, another is countering involution, and the third is promoting consumption. Overall, countering involution is undoubtedly recognized as the most core main line.

3. This year, 30% of the insurance premium growth will be invested in the stock market, and previous under-allocations to the stock market will also be replenished. At the same time, personal investments will also see some increases. Therefore, the liquidity in the stock market this year is still quite good.

4. We feel that there is no clear direction for gold; strategically, keeping half of the position would be good, which is different from the past three years.

5. This year, A-shares and Hong Kong stocks have experienced four bottoms. Last year's "926" was the policy bottom, April 6 this year was the emotional bottom, May 7 was the capital bottom, and recently it has been the price bottom or performance bottom.

6. Recently, the stock market has primarily been characterized by a slow bull trend, which is still considered healthy overall. Therefore, one can slightly ignore judgments on indices and focus more on structural opportunities, which is the biggest decisive factor.

7. This year is a year of event-driven, diversified investment, and left-side trading. So far, the characteristics of event-driven trading are still particularly evident. In event-driven trading, information advantage, grasping odds, and flexibility are quite important, so this year, smaller, more flexible funds are relatively benefiting.

8. The bond market indeed does not have particularly good strategies at this time; it is not a bear market, and there are absolute returns, but the absolute returns are relatively low, making it a market of low returns and high volatility.

9. Convertible bonds were originally a particularly good variety at this time, and it has been judged that convertible bonds are better than pure bonds this year. However, there is a gap between convertible bonds and stocks. The main gaps are that they are expensive, and there are fewer selectable varieties.

(The following text adopts the first-person perspective, with some content omitted.)

Gradually Shift to Equities

The basic judgment this year is that the current situation is still acceptable. For example, at the beginning of the year, we judged that one certain thing this year is that the funding environment will be relatively loose, and the most important thing is to focus on doing well ourselves. In our last communication, we judged that the stock market should abandon the bear market mentality after September 2024, and any significant adjustment should be seen as an opportunity.

The bond market this year is neither a bear market nor a bull market. Overall, the operational difficulty has greatly increased. At that time, we judged that a likely scenario was that after a quarter of coupon payments, a three-day interest rate increase could be completely offset.

We also had a particularly simple judgment from the perspective of major asset classes, which might provide a clearer view of the market. From the perspective of stocks, their returns are expected to improve over the next two years. An increase of 5-10 percentage points in the index should be a reasonable estimate, considering valuation and earnings-driven perspectives.

From the perspective of volatility, it is declining, with asymmetric ups and downs. However, the volatility in the bond market is rising; although there are absolute returns, the returns are decreasing. From the perspective of major asset classes, it is certainly time to gradually shift towards equities starting this year.

I believe these judgments have not posed significant issues at least up to now.

Restructuring of the Global Order

What will happen next? Let's take a moment to briefly outline it.

First, let's look at the external environment. Every year we provide a main theme, and for the past 3 to 4 years, our main theme has been the transition of China's economy from old to new driving forces, which is the fundamental background dominating the market. (This theme) has not yet completely ended, but the transformation has achieved increasingly more results.

In the past three years, AI has also been the most important external theme, which is crucial for understanding (the market), especially the structural trends in stocks.

This year, an additional factor has emerged, which is the restructuring of the global order. This is influenced by factors such as the AI revolution, and this restructuring at least includes three levels.

The first level is the geopolitical level, where NATO's spending will gradually increase to 5%, corresponding to military industry and trade, including some minor metal chains, which is a point of concern for everyone.

The second level is the financial level, including the issue of the weakening dollar this year. Some topics related to digital currencies and overseas financial easing have emerged, but this has not caused significant turmoil and differs somewhat from expectations at the beginning of the year.

The third level is the economic and trade level. The U.S. economy has met expectations in recent times, having gone through several ups and downs. Initially, there were concerns that the U.S. economy might be heading for a recession, although we did not fully agree with that view; later, some voices referred to the U.S. as having a "Goldilocks economy," which we also do not completely agree with, as it is not that rosy. Up to now, a new consensus is slowly forming. The U.S. has entered a period of mild stagflation or stagflation-like environment.

Globally, recent data on Japanese corporate profits has been quite good, and both Europe and Japan have increased some fiscal spending, especially in military industries, with Europe making significant efforts, so related sectors need attention.

Anti-involution is the most core main theme

Back to the domestic situation. We often say that there is still a certain so-called imbalance in supply and demand.

There are many reasons behind this, such as local governments' efforts to attract investment and the emphasis on manufacturing. Whenever we encounter economic downturns, we generally solve short-term problems through investment or supply, which increases long-term supply. Because investment is demand in the short term and supply in the long term. The demand side has coincided with the downturn cycle of real estate in recent years, so domestic demand is indeed a bit weak.

This explains why there has been a divergence between macro and micro perspectives in recent years, with the bond market performing better, as it is less sensitive to actual GDP, and the stock market lacking profit-driven momentum, among other situations. The macro reflection on the micro level is what we call "involution." This is our simple understanding and explanation.

This year, there are three major themes worth paying attention to. One is stabilizing the market, especially in the stock market, which has been effective. The second is anti-involution. The third is promoting consumption. Overall, there are still differences in opinions regarding the strength of consumption promotion, but anti-involution is undoubtedly recognized as the most core main line by everyone.

However, behind anti-involution, there are at least five departments involved, including the central government, local governments, finance, industry associations, and enterprises. The central government is currently clearly increasing the mechanisms for exit, as well as establishing regulations against unfair competition and pricing, which will improve the ecological supply-demand relationship of the entire industry from an institutional perspective.

But the real core is the local governments, which have indeed played a strong role in promoting the increase of overall production capacity through investment attraction and other behavioral models in recent years. Whether their KPIs can change and be constrained, I believe is already making progress, mainly in the context of unifying the market environment.

There is no need to mention the industry associations. The finance sector has also been undergoing some new changes recently. I believe that enterprises are also making efforts in terms of taxes, labor protection, and accounts receivable.

Therefore, anti-involution remains the most core main line for us to view the economy and the market going forward, and it is worth continued attention.

From an economic perspective, the current performance characteristics this year are still strong production and slightly weaker domestic demand. This time, the hope is that anti-involution will have some impact on this pattern.

Liquidity is quite good

Second, the 5% target is becoming increasingly likely to be achieved this year, as the actual GDP in the first half of the year has already reached 5.3. In the second half of the year, due to the effect of a high base, there will be a decline in year-on-year comparisons in the fourth quarter, which is normal, mainly due to the high base. Everyone should be mentally prepared for this.

Third, regarding inflation, July and August happen to be at a low base effect point, so we should see some turning points in PPI and CPI for those months. However, do not form the illusion that anti-involution will start to improve immediately upon implementation. In fact, the PPI in July was still slightly weaker than expected, mainly because futures prices lead spot prices, so the prices have not fully reflected this. By the end of the year, we believe that the PPI may recover to around negative 1.5. There are also some voices suggesting that the target by the end of the year might be 0%, but we think the probability of achieving that is relatively low. The CPI may slightly rise to around 0.5 by the end of the year The ongoing low price situation is expected to see a noticeable correction in the coming months. If demand aligns better, the re-inflation effect may improve, but for now, continued observation is necessary.

Fourth, regarding financing demand, overall it is generally average this year. The financing demand across various sectors varies significantly. So far, the credit numbers from surveys indicate that it is indeed average, as June is a big month, and July is generally overdrawn, making it a small month. Therefore, inferring from the bill data, the credit data for July is indeed not good, but the social financing data is decent, and the financing costs in the bond market are relatively low, which has diverted some funds. As banks are also reducing internal competition, it is worth noting whether the demand is suppressed if credit rates do not adjust significantly at this time.

There is a variable here, as this year's important meetings mentioned policy finance, which may still have several hundred billion in funds. When these funds are injected becomes quite important, as they may play a certain leverage role worth paying attention to.

The export data is still very good. The better the export data, the less pressure there will be on internal support, including real estate. Therefore, the recent prices in real estate have indeed weakened a bit, but the probability of a policy reversal is not particularly high. Beijing has also introduced some new policies, which are more viewed as a local industry dilemma or difficulty.

We specifically mention monetary policy, as it is a very important turning point after the reserve requirement ratio and interest rate cuts on May 7. This is a turning point from quantitative change to qualitative change. The one-year fixed deposit interest rate has finally broken through 1%, greatly enhancing the liquidity of funds. This is a liquidity benefit for the capital market, both for stocks and bonds. Therefore, the liquidity for both stocks and bonds is currently good, and the monetary policy is still in a comfortable zone.

From the perspective of the central bank's four major goals, growth exceeded expectations in the first half of the year, and achieving 5% for the whole year should not be a problem. Inflation was previously under pressure, but after the reversal of internal competition combined with technical effects, it is gradually improving, and this pressure is slowly easing. More and more people realize that both supply and demand sides need to exert effort. Previously, everyone thought that monetary policy or the demand side could take action, but the supply side also has many possibilities, so the pressure on the central bank has decreased significantly. The third includes asset prices, and the fourth includes the balance of international payments, which are currently stable, so the central bank is overall still in a comfortable zone.

However, if the central bank wants to cut interest rates, it generally judges through several major indicators. Among the six indicators I have listed (GDP, social financing, prices, housing prices, exchange rates, bank interest spreads), housing prices should be under slight pressure, while the others point to neutrality, making it difficult to cut rates.

Therefore, I believe that discussions about interest rate cuts in August and September are not mainstream, and important meetings have not mentioned reserve requirement ratio or interest rate cuts, so this will take some time. Generally speaking, there is no need to inquire whether there will be interest rate cuts; just follow the indicators.

Currently, we see that the liquidity in both the stock and bond markets is indeed very good. There has been a lot of discussion in the capital market this year, debating where the money comes from. In our view, part of it is from quantitative funds, as quantitative products have performed very well this year, and mixed products with fixed income + have recently become particularly popular, with insurance premiums growing by 30% this year, including previous under-allocations that need to be replenished Of course, personal investment also accounts for a part. So looking at the sources of this year's stock market trading volume, liquidity is still quite good.

The Hong Kong stock market is a bit more complex. Two months ago, it was the best time for liquidity in the Hong Kong stock market, when some overseas funds were gradually allocating, and overseas interest rates were very low, leading to some inflow of funds. Recently, this inflow seems to have slightly slowed down, and both stock and bond liquidity are good, with even A-share liquidity being slightly better than that of the Hong Kong stock market, which is worth noting.

Significant Event-Driven Characteristics

Following this line of thought, we can take a simple look at the future judgment of major asset classes.

As we mentioned last time, this year is a year of event-driven, diversified investment, and left-side trading.

So far, the event-driven characteristics are still particularly obvious. In event-driven scenarios, information advantage, grasping odds, and flexibility are quite important, so this year, smaller and more flexible funds have relatively benefited.

Secondly, we suspect that volatility will rise in the near future. Because U.S. stocks, domestic bonds, and commodities are all at a position that is either particularly low or particularly high, they are particularly susceptible to event-driven factors, and precisely at this time, event-driven occurrences have increased, so volatility is likely to rise. This is worth noting, and it is a good thing for flexible funds.

This year, diversified asset allocation is still quite important, but the direction this year is different from before. In the past, when we mentioned diversified asset allocation, it was about allocating to U.S. stocks. This year, we know that besides U.S. stocks, other markets, except for domestic bonds, have outperformed U.S. stocks, which is very interesting and worth noting.

Keeping Half of the Position in Gold is Already Good

Looking at various major asset classes this year, there are several (characteristics).

First, regarding U.S. stocks, there really isn't a particularly bearish sentiment right now. However, there are some concerns about how much more it can rise. One concern is valuation; U.S. stocks are indeed very expensive, particularly expensive, and historically quite high. Secondly, the macro quadrant is in a state conducive to successful investment. During mild stagflation, it is not particularly good for stocks, but subsequently, the Federal Reserve is expected to cut interest rates. Historically, when the Federal Reserve actually cuts rates, defensive varieties may perform slightly better. However, times may have changed, and we cannot simply refer to history, so we tend to view U.S. stocks conservatively, as many of our funds are domestic. If U.S. stocks rise by 5%, and we also rise by 5%, we will definitely focus on our own market. We are more familiar with the domestic market and are more willing to invest there. Therefore, as long as we do not make the mistake of relying on a significant rise in U.S. stocks, it is fine to be cautious.

Overall, we believe it is a market with weak volatility. AI and defensive varieties, along with interest-sensitive assets, are worth noting, giving a sense of dual allocation.

Secondly, regarding U.S. Treasuries. Our judgment on U.S. Treasuries is consistent with our previous assessment. Previously, we identified 4.5% on the 10-year Treasury bond as a watershed. Above 4.5%, there is no need to be too pessimistic, as the Federal Reserve still has many bullets left to fire, and at that time, there should be opportunities in the general direction; however, below 4.5%, it becomes a bit awkward The two-year yield is down to 3.6, 3.7, and up to 4.0, basically at this level. The two-year yield is easier to judge, mainly based on the pace of interest rate cuts.

However, this year, when pairing with U.S. stocks and U.S. bonds, there is a major issue to consider: the movement of the U.S. dollar. If the dollar performs relatively weakly, it may seem that U.S. bonds have made some money, but when converted to RMB, the attractiveness is not that strong.

Then there is gold. After May, we suggested selling half of it, mainly because gold had indeed been overbought at that time. Second, the situation between China and the U.S., including geopolitical aspects, had somewhat eased, and tariffs had also relaxed, which weakened a significant supporting factor. Later, there were other influences from stablecoins, etc. In the last two weeks, there may still be some positive factors, such as increased tariffs on Switzerland, as Switzerland is a metallurgical powerhouse, and the tariff disturbances added a bit more, but currently, it is more of a false alarm. Yesterday, Trump mentioned again that he would not impose tariffs on gold, so gold has seen some adjustments.

We feel that there is no clear direction for gold; strategically holding half of the position is already good. There are no major issues (nor do we see) significant opportunities, which is quite different from the past three years.

Focus on Structural Opportunities

We are focusing on domestic stocks and bonds.

First, let's look at stocks. This year, A-shares and Hong Kong stocks have experienced four bottoms. Last year, September 26 was the policy bottom, April 6 this year was the sentiment bottom, May 7 was the capital bottom, and recently it has been the price bottom or performance bottom. Of course, the upward elasticity from the performance bottom is insufficient, but we have indeed seen the price bottom.

From these perspectives, the policy is relatively friendly, and capital is very abundant, so there is a logic for long-term revaluation. Therefore, we have been emphasizing this year that the logic for revaluation of Chinese assets mainly comes from here.

So far, we still maintain this judgment. It is more about rhythm and structure.

In terms of rhythm, there have been some minor disturbances overseas recently, and the performance-driven aspect is not particularly obvious, so the overall increase or slope will not be particularly high at this time. If the slope is particularly high, everyone should be cautious, as leveraged funds exceed 2 trillion. If there is a high slope increase, I believe this is not particularly healthy. Recently, it has been mainly characterized by fluctuations or a slow bull market, which I think is generally healthy.

Therefore, it is advisable to slightly ignore the judgment on the index and focus more on structural opportunities, as this is the biggest winning hand.

In terms of structural opportunities, what we mainly promoted in February this year was broad technology, in mid-March we promoted high dividends along with some thematic investments, and after June, we suggested that everyone shift from high dividends to leading companies with global competitiveness. At that time, it was against the trend of involution. These sectors are still worth paying a little attention to. The capital activity is good, the policy is generally friendly, but the performance-driven aspect is not obvious, just in time for the performance period, so these strongly narrative sectors will perform relatively better.

After the end of October, if everyone's sentiment peaks under certain events, after October, economic growth may slow down due to seasonal effects and low high base effects, and there may be a switch between strengths and weaknesses at that time However, I believe that in the next year or two, the overall long-term logic of the revaluation of Chinese assets should not change significantly. Of course, the current situation is that the overall market's undervaluation is gradually decreasing, which is a relatively obvious reality.

High Dividends in Hong Kong Stocks as a Good Alternative to Bond Funds

In terms of Hong Kong stocks, the activity level may have weakened slightly.

At the beginning of the year, we thought that Hong Kong stocks had the highest odds, but now various sectors of Hong Kong stocks are somewhat awkward. For example, some new consumption stocks are a bit expensive, and there are even some funds observing whether there are shorting opportunities. After the food delivery battle, there are various concerns about the competitive landscape of the entire internet industry, so while stability is sufficient, the elasticity is lacking, or whether it can regain momentum is still under observation.

Recently, hard technology companies have reported some earnings, which are generally good, so there has been some unjustified sell-off. However, it is worth noting whether the reactions behind the earnings are higher than everyone's expectations.

Innovative drugs have performed the best this year, but the research threshold for innovative drugs is indeed quite high. Many people, including myself, may not be professionals, so the willingness to chase the rise is not particularly strong, although it is likely not fully completed.

The high dividends of Hong Kong stocks are relatively stable and serve as a good alternative to domestic bond funds.

Bond Market: Efforts Yielding Little Return

Regarding the bond market, first of all, from the perspective of fundamentals this year, it is even somewhat favorable for the bond market in certain aspects. However, the downside is that from the perspective of sentiment, valuation, and levels, the cost-performance ratio is indeed average, and the duration of public funds is relatively long. From the perspective of stock-bond and risk preferences, the cost-performance ratio is slightly at a disadvantage, which is not particularly friendly to the bond market.

In 2019, we published a major report suggesting that interest rates had entered a long-term downward cycle. However, in February of this year, we released a report making some adjustments to this view. We believe that in the next three to five years or two to three years, we will enter a fluctuating pattern, with limited downward space. For example, 1.6 may be the lower limit; in the short term, 1.8, and in the long term, 1.9 or 2.0 seems to be a strong upward resistance level, entering such a range.

The difference in the bond market now compared to before is that previously, in a fluctuating market, it was also a good market to earn coupon payments. But now, the interest rate levels or absolute levels are indeed too low, making it difficult to have overly optimistic coupon payments. During a fluctuating period, merely earning coupon payments is not enough; even a slight fluctuation may negate the coupon payments earned earlier.

Therefore, this market is entering a year of efforts yielding little return, including next year. You may exert a lot of effort, but the returns may not be as good as stocks, or even worse than commodities, overseas investments, or Hong Kong stocks, which is very likely to occur, entering an environment of efforts yielding little return.

Recently, we have entered a phase of looking at stocks to make bond decisions. Everyone is making bond decisions based on the performance of stocks. This also reflects that the confidence of bond market investors is not as strong as before, which is a very interesting phenomenon worth noting. Therefore, this is a judgment on the operational characteristics We believe that in terms of space, in the short term, it could be 1.6, 1.8, and possibly 1.5, 1.6 by next year, with an upward potential of 1.9, 2.0. Basically, these are the upper and lower limits. The volatility space is not large, but the fluctuations are frequent, possibly much more frequent than before.

From an operational perspective, equity exposure, swing trading, and coupon income can still be pursued in our view. If leverage can be applied, there is still some room, but it is indeed troublesome to add on, and the selection of varieties is not as good as before. Duration and corporate credit have declined, and at this time, it is actually difficult to gain significant advantages. This year, we have seen that long-term interest rate bonds generally have yielded basically zero returns so far, possibly even worse than some credit bond varieties.

In summary, I mentioned to everyone last time that if your risk appetite is relatively high, the bond market this year may serve more as a liquidity management tool. Banks and insurance companies have no choice; bonds are still a basic allocation. At this time, it is advisable to push for some micro-operation or swing trading to cope with the situation and try to make some small enhancements. Recently, micro-operation strategies have also decreased, and even for some ETF target bonds, is it possible to operate in reverse at this time? Are time deposits a better option? Long-term interest rates have recently fluctuated slightly around 1.7, but in reality, the operational difficulty is quite high. In any case, the bond market at this time indeed does not have particularly good strategies; it is not a bear market, and there are absolute returns, but the absolute returns are indeed quite low, making it a market with low returns and high volatility.

Of course, in terms of rhythm, the past two weeks were not bad, but this week is a bit awkward. Overall, the risk appetite in September and October is not low. After October, supply is in the off-season, and coupled with the fact that sentiment will decline after reaching a peak, along with whether the economic fundamentals can improve under a high base, this is worth everyone's attention. We believe that there might be some opportunities at that time.

Next year, we think the overall volatility and recent operational characteristics will be quite similar. The volatility will definitely be greater than in the first half of the year, and there may very likely be impulse-style adjustment opportunities, mainly not from the fundamentals, but from institutional behavior. Because next year, the smoothing mechanism of wealth management will gradually weaken. In the first half of this year, if you bought wealth management products, you were looking at last year's performance, which was of course very good. Looking at this year's performance next year seems a bit average, especially compared to stocks; whether this will change the mindset at that time is unclear. Therefore, we need to be slightly cautious about this. This may lead to a certain degree of forced selling or impulse-style increases, presenting a stage of advancing two and retreating one, meaning that an increase of 20 basis points could retreat by 10 basis points.

We know that when everyone is panicking, it can be seen as an opportunity. This year has been similar. Every time there is significant panic, like two or three weeks ago, we felt that above 1.7, there could be opportunities to pay attention to, but we did not dare to chase; especially at 1.6, we do not recommend chasing.

You ask if there are any favorable factors in this market, of course, there are. Aside from the fundamentals, the central bank has been relatively supportive of the liquidity situation recently, and the buying and selling of government bonds has not yet restarted, which are all potential opportunities or positives Recently, we communicated with the bank, and its liabilities are also experiencing a reverse trend, so the interest rates on the liability side have really been declining. After the interest rates decline, there is a certain possibility that this will be transmitted to certificates of deposit and bonds, so I believe this will have a significant suppressive effect on the overall upward space.

Practical Difficulties of Convertible Bonds

Finally, let's talk about convertible bonds. Convertible bonds are actually a particularly good variety at this time, and we have been judging that convertible bonds are better than pure bonds this year.

However, conversely, there is a gap between convertible bonds and stocks. The main differences are that they are expensive and there are fewer varieties to choose from. From this perspective, if one can invest in stocks, the significance of convertible bonds is limited. If one cannot invest in stocks, such as in the bank's gold market, wealth management, or insurance accounts, if one wants to invest, it might be better to use ETFs or public fund products to speculate or do beta.

Currently, there are only a few convertible bonds priced below 120 yuan, and the number has greatly shrunk. From this perspective, the operational difficulty in the market is not low.

Recently, although we are quite positive about stocks and believe that convertible bonds will exceed (current levels), we give a neutral judgment on convertible bonds because the cost-performance ratio is poor, and the operational difficulty is quite high, making it difficult to act in practice, which is a troublesome issue.

From this perspective, we try to grasp some beta, and if there are no beta opportunities, or no opportunities in ETFs or public fund accounts, it might be better to simply invest in some underlying stocks or other opportunities.

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 one's own risk