CICC: Expect the liquidity environment between China and the U.S. to continue resonating in September and October, continue to overweight A-shares, Hong Kong stocks, and gold

According to the Zhitong Finance APP, China International Capital Corporation (CICC) released a research report stating that it expects the liquidity environment between China and the United States to continue to resonate from September to October, with the US dollar in a downward cycle, benefiting various assets (stocks, bonds, gold, commodities). Similar to the market trend in September, October may still be a relatively favorable macro period, suggesting maintaining a relatively high risk appetite and overweighting Chinese stocks. Currently, the dynamic price-to-earnings ratio of the CSI 300 Index is close to the historical average, and there is still room for valuation expansion compared to the previous bull market peak.

In terms of risk and return, the cost-performance ratio of A-shares and Hong Kong stocks relative to US stocks is higher. Due to the macro liquidity tending to loosen and the independence of the Federal Reserve and the credibility of the US dollar being damaged, it is recommended to maintain an overweight position in gold. Gold has risen rapidly since the beginning of the year, exceeding levels that match the fundamentals, and has recently surged again, increasing the risk of a short-term pullback. It is advised to downplay the trading value of gold and focus on long-term allocation value, increasing allocation on dips.

CICC's main views are as follows:

The pace of Federal Reserve interest rate cuts may switch between "fast-slow-fast"

The Federal Reserve restarted interest rate cuts in September, entering a new phase of the US dollar easing cycle, which may have profound impacts on the operation of the Chinese and foreign economies and asset performance. The baseline expectation is that the Federal Reserve's interest rate cut cycle may be divided into three phases: "fast-slow-fast."

The first phase is Q4 2025, with a relatively fast pace of rate cuts: As inflation confirmed an upward turning point in August, the absolute level is not high, and the Federal Reserve can downplay inflation pressure with "temporary" phenomena, while the risk of employment decline is more urgent than the risk of inflation rise, so the priority of "stabilizing growth" is higher than "controlling inflation."

Chart 1: US inflation has confirmed an upward turning point, and may continue to rise in the next three quarters

Source: Haver, CICC Research Department

In addition, with significant political pressure from Trump, it is expected that the Federal Reserve may cut rates relatively quickly, possibly cutting rates 3-4 times in succession.

The second phase is H1 2026, with a slower pace of rate cuts. As inflation continues to rise, the Federal Reserve may need to rebalance the risks of economic decline and inflation rise, and cannot sustain rapid rate cuts, possibly using a halt to "balance sheet reduction" to soothe financial markets.

The third phase is H2 2026, with the pace of rate cuts accelerating again. As Powell's term ends in May 2026, it is expected that the Trump administration will likely nominate a more dovish Federal Reserve chairman, and the inflationary effects of tariffs may also come to an end, allowing the Federal Reserve to accelerate the pace of rate cuts again. In summary, the trend of easing by the Federal Reserve is a major trend in the coming year, with easing trades being the main line of the global market, potentially driving the depreciation of the US dollar, overall benefiting various assets such as Chinese and foreign stocks, bonds, and commodities.

Chart 2: During the US dollar downtrend, gold, commodities, and stocks tend to rise, with non-US stocks outperforming US stocks

Source: Haver, China International Capital Corporation Research Department

However, during the switching points of the Federal Reserve's easing pace, such as the end of this year or mid-2026, there may be shocks to global asset trends. Currently, the Federal Reserve's policy-making does not rely solely on economic data but is also influenced by the Trump administration, which has impacted the Fed's independence. The predictability of U.S. monetary policy has weakened, and there is a possibility that the actual policy path may deviate from the aforementioned baseline forecast in the future. However, based on the current economic and market situation, a "fast-slow-fast" easing pace may be the policy path with the highest probability of realization and the least resistance.

Economic Path After Federal Reserve Rate Cuts: A Comprehensive Tracking Framework for Economic Indicator Turning Points

The U.S. economy is currently heading towards stagflation (declining growth + rising inflation) or recession (declining growth + declining inflation), with stagflation being more likely than recession. However, considering that the Federal Reserve has restarted the easing cycle and that the fiscal deficit may return to expansion in 2026, U.S. growth will eventually turn upward at some point in the future under policy support.

Chart 3: The U.S. deficit rate may decrease in 2025 but return to expansion in 2026 (the more negative the value, the higher the deficit rate)

Source: CBO, Haver, China International Capital Corporation Research Department

During the period of rising inflation, if growth turns upward, it will create a new market scenario—overheating (rising growth + rising inflation).

Chart 4: Three scenarios for the U.S. economy: excessive policy expansion leads to stagflation or overheating, while insufficient policy support leads to recession

Source: China International Capital Corporation Research Department

If policies provide substantial support to the economy, growth and inflation will rise in tandem; if support is insufficient, growth will decline. Therefore, the probability of recovery ("soft landing" or "Goldilocks," rising growth + declining inflation) is low and will not be discussed in this article.

Reviewing the 11 rounds of Federal Reserve rate-cutting cycles since the 1970s, it was found that, on average, it takes 12 months from the initiation of rate cuts to the turning point of growth. The current Federal Reserve rate-cutting cycle began in September 2024, and it has just been 12 months, so the turning point of growth seems to be near. Therefore, asset allocation needs to consider the possibility of the economy turning towards overheating in the future.

Chart 5: In the Federal Reserve's rate-cutting cycle, the sequence of turning points for core economic variables is roughly "real estate -> surveys -> employment -> consumption -> investment -> inventory -> credit"

*Note: The numbers in the chart represent the number of months between the turning points of various indicators driven by interest rate cuts and the upward turning point of GDP year-on-year. Negative numbers indicate that the indicator turning point occurs before the GDP year-on-year turning point, while positive numbers indicate that the indicator turning point occurs after the GDP year-on-year turning point; the indicators are arranged from top to bottom in the order of relative GDP turning point "leading-lagging." Source: Wind, Bloomberg, CICC Research Department.

Further research shows that the time interval from the interest rate cut to the growth turning point actually has a large variance; in some cases, they occur simultaneously, while in others, they can differ by up to 30 months. Therefore, simply applying the historical average interval makes it difficult to accurately predict the timing of growth turning points. It is recommended to track the order of turning points of key economic indicators and predict the general rhythm of economic turning based on the relatively stable leading-lagging relationships between different economic variables.

Specifically, a database of indicator turning points was constructed using 16 core economic data points, tracking the turning point patterns in the past 11 rounds of interest rate cut cycles. It was found that the upward turning point of growth often follows the sequence of "real estate -> surveys -> employment -> consumption -> investment -> inventory -> credit." Consumption and employment data are the most noteworthy, as once their turning points are confirmed, the overall economy generally quickly confirms the upward turning point of growth. Among employment data, the unemployment rate is actually a lagging variable, with its turning point occurring after the growth turning point. Therefore, if the Federal Reserve overly relies on the unemployment rate turning point for decision-making, it may mislead policy direction. Bank credit is theoretically sensitive to interest rates, but its turning point is also quite lagging and may not provide timely forward-looking signals. Real estate data is a clear leading indicator, but the interval variance between the real estate turning point and the economic turning point is large; for example, during the interest rate cut cycles of 1984 and 2000, the growth turning point appeared 1-2 years after the real estate turning point.

Chart 6: Turning Points of U.S. Interest Rate Cut Cycles and Economic Trends

Source: Wind, Bloomberg, CICC Research Department.

Therefore, although there have been signs of a rebound in U.S. new home sales recently, without corroborating data from other sources, one cannot conclude that the economic growth turning point is approaching.

Chart 7: Significant Rebound in U.S. Single-Family Home Sales in August

Source: Haver, CICC Research Department.

Based on the above indicator system, it is recommended to adopt the following strategies: engage in easing trades or stagflation trades before the consumption and employment data confirm the upward turning point; after the consumption and employment turning points, consider switching to overheating trades How does the Federal Reserve's interest rate cut affect the market? October remains a window period for liquidity resonance between China and the U.S., with easing trades likely being the main theme of the market.

In August, it was indicated that due to the loosening liquidity trends in the U.S. and China, and with time still remaining before the next round of negotiations deadline in November, September to October could be a window period for liquidity easing trades, providing a relatively favorable macro environment for major asset classes such as Chinese and foreign stocks, gold, and U.S. Treasuries. It is expected that Chinese and foreign stocks will not continue to oscillate sideways but will continue to rise. In September, the Hang Seng Index rose by 5%, the Shanghai and Shenzhen markets rose by 3%, the ChiNext rose by 9%, the Hang Seng Technology Index rose by 10%, and gold rose by 10%, validating the judgment.

Chart 8: Global major asset classes experienced a broad rise in September

Source: Wind, Bloomberg, CICC Research Department

Looking ahead, October may still be a window period for liquidity resonance, with easing trades being the main theme of the market. However, it is also necessary to pay more attention to the sustainability of the market and the risk of volatility: if there are no incremental policies, the issuance pace of government bonds in our country may begin to slow down, leading to a downward turning point in M2 and social financing growth rates.

Chart 9: This year's fiscal policy has been proactive, with a rapid pace of government bond issuance in China

Source: Wind, CICC Research Department

If macro liquidity turns tight over time, it may affect market liquidity and risk appetite. In a liquidity-driven market, risk assets such as stocks have already experienced a significant rise, and asset volatility may also increase, presenting both risks and opportunities. Looking at overseas markets, leading indicators show upward pressure on U.S. inflation. If the pace of inflation rises faster than expected, leading to an earlier transition of the Federal Reserve's interest rate cut cycle from the first phase to the second phase, it would be unfavorable for the easing environment and could also lead to market volatility.

Asset allocation advice: Continue to overweight A-shares, Hong Kong stocks, and gold in October, favoring ChiNext and the Hang Seng Technology Index, while maintaining a standard allocation in Chinese and U.S. bonds and U.S. stocks, adjusting positions flexibly based on policy and liquidity changes.

It is expected that the liquidity environment between China and the U.S. will continue to resonate from September to October, with the U.S. dollar in a downward cycle, benefiting various assets (stocks, bonds, gold, commodities). Similar to the market trend in September, October may still be a relatively favorable macro period, and it is recommended to maintain a relatively high risk appetite and overweight Chinese stocks. Currently, the dynamic price-to-earnings ratio of the CSI 300 Index is close to its historical average, and there is still room for expansion compared to previous bull market peaks.

Chart 10: The price-to-earnings ratio of the CSI 300 is below previous bull market peaks

Source: Wind, CICC Research Department

From the perspective of capital flow, residents are moving their deposits, individual investors are still entering the market, and proactive foreign capital is still under-allocated in Chinese stocks. The profit-making effect may continue to create a positive cycle with capital inflows, supporting the performance of Chinese stocks. Given that the stock market has already risen significantly and the economic fundamentals are yet to improve, stock volatility may increase. We are more optimistic about the ChiNext and Hang Seng TECH Index, which have relatively low valuation percentiles and relatively high technological content. During the rapid interest rate cut phase of the Federal Reserve, we maintain an overweight position in U.S. stocks. Historically, during periods of U.S. dollar decline, U.S. stocks often underperform non-U.S. markets after accounting for U.S. dollar exchange rate losses. This year, U.S. stocks have underperformed Chinese stocks, which aligns with historical patterns during U.S. dollar decline periods. From a valuation perspective, U.S. stocks remain relatively expensive compared to U.S. bonds and non-U.S. stock markets, with the equity risk premium of the S&P 500 index close to 0%, reflecting that investors may be overly optimistic about the prospects of the U.S. economy and technological revolution.

Chart 11: U.S. stocks remain relatively expensive compared to U.S. bonds and non-U.S. stock markets

Source: Bloomberg, CICC Research Department

At the same time, the low volatility of U.S. stocks is mismatched with the interest rate environment, which may pose potential risks.

Chart 12: U.S. stock VIX is severely undervalued relative to term spreads

Source: Bloomberg, CICC Research Department

Therefore, considering the overall risk-return profile, the cost-effectiveness of allocating A-shares and Hong Kong stocks relative to U.S. stocks is higher. Due to the macro liquidity trend towards easing and the damage to the independence of the Federal Reserve and the credibility of the U.S. dollar, we maintain an overweight position in gold. Gold has risen rapidly since the beginning of the year, exceeding levels that match the fundamentals, and has recently surged again, increasing the risk of a short-term pullback. We recommend downplaying the trading value of gold and focusing on its long-term allocation value, increasing allocation on dips.

Chart 13: Compared to the rise and duration of historical gold bull markets, the current gold market may still be underperforming, and we may still be in the early stages of a gold bull market.

Source: Wind, CICC Research Department

Chinese interest rates have declined too quickly relative to economic fundamentals over the past two years, and valuations remain relatively high. When risk appetite increases, the "stock-bond seesaw" effect is evident, and interest rates may face upward pressure in the short term, converging towards economic fundamentals. However, in the second half of the credit cycle, with the growth and inflation central tendency shifting downwards, the central tendency of interest rates may also struggle to rise significantly. Considering both bullish and bearish factors, we recommend maintaining a standard allocation to Chinese bonds Chart 14: The speed of bond rate decline over the past two years has been relatively fast compared to economic fundamentals

Source: Haver, Budget Lab, China International Capital Corporation Research Department

Chart 15: The decline in growth and monetary easing has led to a continuous drop in interest rates, with the median decline in the five years following the credit cycle inflection point reaching 255bp

*The horizontal axis represents the X year before and after the credit cycle inflection point. Source: Wind, China International Capital Corporation Research Department

Although the supply pressure of U.S. Treasury bonds is relatively small this year, there is a possibility that the yield on the 10-year U.S. Treasury bond may drop below 4%. However, inflation risks and the pressure of U.S. Treasury issuance may gradually rise after 1-2 quarters, increasing market uncertainty and maintaining a standard allocation to U.S. Treasury bonds. The benchmark assumption for the above allocation recommendation is that liquidity remains loose, but as analyzed earlier, the sustainability of the liquidity window depends on the policy path. It is also recommended that investors closely monitor changes in U.S.-China policies during October-November and manage their positions accordingly. If the liquidity window changes, timely adjustments to asset allocation should be made