
US Stocks Fall, Hong Kong Markets Feast: How Far Can the Structural Revaluation Go?

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In last week's strategy report, Dolphin Research mentioned that at the current price level, the U.S. stock market is likely to oscillate between a lackluster market and downside risks until the end of the third quarter. Indeed, last week the U.S. stock market mainly declined. Under the narrative of a weak dollar:
1) Has the U.S. stock market entered a downward range?
2) Why is there a recent surge in the structural market of Hong Kong stocks? Is it sustainable?
This strategy report by Dolphin Research will focus on exploring these questions.
I. Tariff Revenue Pocketed, Price Repercussions Yet to Come
May is considered a month where Trump's tariffs have had a full impact, but the performance of May's data, from several core results, looks quite good:
a. Tariff Revenue Pocketed, Deficit Not Exaggerated
In May, U.S. federal fiscal revenue saw monthly tariff income further soar from April's doubling to $16 billion, reaching $22 billion. The external tariff revenue has already started to be pocketed into fiscal income.
However, due to the subsequent continuous tariff suspension policy, the $22 billion in May is likely a peak. Before Trump's Tariff 2.0, U.S. federal fiscal tariff monthly income hovered between $5-8 billion.
With the combined increase in personal income tax, corporate income tax, and tariff revenue, U.S. federal fiscal revenue increased by $48 billion compared to last year. Expenditures, apart from a monthly increase of $10 billion in social security spending (mainly due to the Social Security Fairness Act signed by Biden on January 5, 2025, which removed previous restrictions on about 3 million retired public sector workers and their families receiving social security benefits, significantly expanding the coverage of social security), saw some reductions in areas like education and training. The overall deficit in May decreased by $31 billion compared to the same period last year (considering differences in payment nodes, the actual deficit decreased by $38 billion year-on-year).
b. May CPI Steady as a Rock
Corresponding to the U.S. tariff revenue, May's CPI performance can be described as steady as a rock.
The overall CPI and core CPI in May grew month-on-month, one at 0.08% (due to continued decline in oil prices), and the other at 0.13%, with an annualized year-on-year increase of only 1.6%. The current federal rate level is significantly above the CPI growth rate, indicating that the interest rate is undoubtedly at a restrictive level, theoretically allowing for a rate cut.
However, the market expects a very low probability of a rate cut on June 18th or even in July. The issue here is clear: the Federal Reserve needs to look not only at the current numbers but also at the certainty of two major future judgments:
a. What impact will the deportation of immigrants have on the future job market and wages?
From the perspective of immigration impact: In 2024, the additional labor force is around 1.5 million, of which 1.2 million are immigrants. Industries such as transportation, healthcare, and construction heavily rely on immigrants. The U.S. labor market is in a supply-demand balance, with job vacancies roughly matching the number of people seeking employment.
However, illegal entry has basically ceased, and the Trump administration plans to advance the deportation of immigrants and cancel the status of about 800,000 legal workers. The changes in labor supply and demand due to these shifts are still hard to predict.
Currently, the rebound in job vacancies in April and the month-on-month increase in private non-farm wages in May, which rose again to above 0.42%, with employment averaging around 135,000 over the past three months.
From the perspective of the Federal Reserve's dual mandate of maximum employment and price stability, the current favorable job market gives Powell enough room to "plan before acting," allowing for no rush to cut rates.
b. Tariff Revenue Inflow, Prices Not Reflecting, Is It a Delayed Reaction or Truly No Impact? What Will the Final Tariff Negotiations Be Like, and What Impact Might They Ultimately Have on Prices?
From the perspective of May's prices, import tariffs mainly affected digital appliances, which are heavily dependent on imports from China, with a higher month-on-month price increase. However, core prices remained stable or declined month-on-month in areas like transportation, entertainment, and education, showing an overall stable downward trend.
Before the tariffs were implemented in April, U.S. importers significantly increased imports in January and March, with wholesalers' inventories at relatively high levels. The goods sold in May might still be those purchased during the normal tariff period, so the impact is not yet apparent.
Looking forward, based on the current negotiation stance, the optimistic scenario for trade partners is an average overall tariff increase of 10%, similar to the U.S. imposing a global governance fee on various countries. In this case, referring to the previous round of tariff confrontations with China, the new round of tariffs is expected to improve the certainty of U.S. price expectations.
If we consider (a-b) together, a likely path is:
Due to the stable job market, there will be no rate cut in June and July to further confirm the trend of price prospects. By the September 17th FOMC meeting, when the impact of tariffs or immigration deportation on employment and prices gradually manifests in the economy, the Fed will then determine whether to cut rates in the fourth quarter. Moreover, if the issues are not significant, based on the current CPI data moving forward, there is a certain probability of a rate cut by the Fed.
Combining this with Dolphin Research's previous strategy report "Can Trump Still Push U.S. Stocks to New Heights?", in August-September, depending on the actual passage time of the U.S. budget bill, there might still be a wave of U.S. debt issuance, pushing up long-term U.S. bond yields. When U.S. bond yields rise above 4.5%, it can easily suppress asset valuations.
The investment rhythm for the rest of this year becomes, in July, U.S. stocks will focus on earnings fundamentals, and if U.S. stocks hit new highs again, the arrival of the debt issuance wave in August-September, will instead be the time to lock in profits. After the debt issuance triggers an asset pullback, the fourth quarter, combined with Fed rate cuts or rate cut expectations, will present the next opportunity for U.S. stocks.
II. Hong Kong Stocks: How Long Can the Asset Frenzy Last Amidst Liquidity Overflow?
Excluding the policy bottom on September 24 last year, Hong Kong stocks have had two major opportunities from this year to now:
a. The revaluation of Chinese assets brought by DeepSeek;
b. The revaluation of liquidity due to the overflow of Hong Kong dollars. The second wave of Hong Kong stocks emerged under this background, focusing on new consumption/innovative drugs and A/H share premiums.
As a currency pegged to the U.S. dollar, the Hong Kong dollar's exchange rate should fluctuate within a narrow range of 7.75-7.85. On April 3 (Liberation Day), the exchange rate was still trading near the midpoint of the official range at 7.78, but it quickly appreciated to near the strong-side guarantee of 7.75 by early May.
Subsequently, the Hong Kong Monetary Authority began to massively release Hong Kong dollar liquidity, causing the Hong Kong Interbank Offered Rate (HIBOR) to plummet from around 4% to near 0%, significantly deviating from the U.S. benchmark rate.
The deluge of Hong Kong dollar liquidity almost immediately pushed the Hong Kong dollar exchange rate to the edge of the weak-side guarantee. At this time, it corresponds to the overflowing Hong Kong dollar liquidity and almost negligible Hong Kong dollar borrowing rates.
However, the current state of Hong Kong stocks still faces an overall weak individual stock fundamentals, ultra-low costs, and overflowing liquidity. Combined with weak fundamentals, the ultimate choice for individual stocks is:
a. Stability-seeking: Blue-chip dividend stocks, and currently, many A-share blue-chip type assets listed in Hong Kong have few circulating shares; some dividend-type assets, when bought by southbound institutions, can save 20% dividend tax; in addition, A-shares listed in Hong Kong generally have a slight discount in pricing compared to A-shares.
In the future, apart from Haitian Flavouring & Food, other A-share blue-chip stocks like Sanhua Intelligent Controls will be listed one after another; as long as HIBOR remains low, it is not ruled out that these companies will perform a "show" where the H-share valuation of CATL is higher than that of A-shares during their debut in Hong Kong.
b. Growth-seeking: Growth assets, pulling growth assets upward, corresponding to the upward pull of new consumption and innovative drugs.
If the borrowing cost of the Hong Kong dollar remains at such a low level in the future, under the overflow of liquidity, it can be imagined that funds will continue to drive the revaluation of Hong Kong dollar-quoted assets.
However, it should be noted that Dolphin Research currently finds it difficult to find reasons to believe that the same asset will have a so-called structural revaluation premium in Hong Kong stocks compared to A-shares. Therefore, in such a frenzy of funds, everyone should keep an eye on the liquidity of the Hong Kong dollar in the future, and the best way to reflect supply and demand is through fund pricing—namely, observing liquidity changes through HIBOR to determine the short-term participation level.
III. Portfolio Returns
Last week, the virtual portfolio Alpha Dolphin of Dolphin Research did not adjust its positions, achieving a weekly return of 1.3%, significantly outperforming the observed market—outperforming the CSI 300 (-0.3%), MSCI China (+0.3%), Hang Seng Tech (-0.9%), and S&P 500 (-0.4%).
Since the portfolio began testing (March 25, 2022) until last weekend, the portfolio's absolute return is 91%, with an excess return of 89% compared to MSCI China. From the perspective of asset net value, Dolphin Research's initial virtual asset of $100 million has exceeded $194 million as of last weekend.
IV. Individual Stock Profit and Loss Contribution
Last week, the Alpha Dolphin portfolio's performance comprehensively outperformed market indices, mainly due to the recovery in gold prices, contributing 0.8 percentage points to the 1.3% weekly increase, with equity assets contributing about 0.5 percentage points.
Among the equity portion, it mainly benefited from the holdings of Pop Mart. Dolphin Research explains the specific stocks with significant price changes as follows:
V. Asset Portfolio Distribution
The Alpha Dolphin virtual portfolio holds a total of 18 stocks and equity ETFs, with 7 standard allocations and the rest underweight. Assets outside of equities are mainly distributed in gold, U.S. bonds, and U.S. dollar cash, with the current ratio between equity assets and defensive assets like gold/U.S. bonds/cash being approximately 52:48.
As of last weekend, the Alpha Dolphin asset allocation distribution and equity asset holding weights are as follows:
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