Minsheng Securities: Suppressive factors are gradually fading, increasing the probability of market rebound

According to the financial news app Zhitong Finance, Minsheng Securities released a research report stating that currently, the suppressive factors are gradually fading away, real estate investment is fluctuating on a lower platform, there are signs of marginal improvement in fiscal expenditure, and more importantly, the continuous strong exports and the imminent overseas interest rate cuts are accumulating the rebounding power of physical assets represented by bulk commodities. Similarly, the probability of a rebound in the market from February to April 2024 is also increasing.

Minsheng Securities recommendations: First, after experiencing a decline in physical assets trading, upstream resource assets will usher in a turning point: energy (oil, coal), non-ferrous metals (copper, gold, aluminum), shipping (oil transportation, shipbuilding, bulk cargo); Second, after the global recession expectations recede, Chinese manufacturing remains a dominant industry, with expectations of stabilizing external demand, and itself is in the process of capacity clearance for household goods, home appliances, intermediate goods driven by emerging market production ( special steel), and capital goods under investment restart ( instruments, general equipment); Third, relatively advantageous assets with declining capital returns, after adjustment, cost-effectiveness is highlighted, recommending banks, railways, gas, and ports.

Key points from Minsheng Securities:

Domestic: From weak demand to recovery.

Last week (2024-09-09 to 2024-09-15, same throughout the text), all economic data for August in China were released, basically meeting the market's previous expectation of "weak demand". However, we need to see the accumulating power of future demand recovery: firstly, China's dependence on "price for quantity" exports has not decreased, but has unexpectedly strengthened, with the resilience of exports exceeding investors' expectations multiple times this year; from financial data, thanks to the accelerated issuance of government bonds, the scale of new social financing in August slightly exceeded expectations, whether in absolute value or proportion, the government bond issuance in August 2024 was the highest since 2017, indicating that the unexpected fiscal contraction in the first half of the year is starting to reverse. With the combined effect of exports and fiscal policy in the future, the temporary trough in total domestic demand may have appeared. Since 2023, due to the impact of de-financialization and excessive capacity saturation in the midstream, PPIRM is more elastic when rising compared to PPI, and more resilient when falling. This means that upstream is still a better tool to express demand recovery.

Overseas: From recession trading to the power accumulation stage of second inflation.

For overseas markets, the resilience of inflation is once again evident, with core CPI slightly exceeding expectations, while long-term inflation expectations and short-term expectations diverge again: in September, the short-term inflation expectations at the University of Michigan in the United States continued to fall to 2.70%, but the 5-year inflation expectations rebounded to 3.10%. Despite the ongoing weakness in employment data, the global bulk commodities that previously traded on recession expectations have begun to show a general stabilization and rebound, which may indicate the end of recession trading. Fundamentally, a "soft landing" for the U.S. economy is a high probability scenario: the U.S. fiscal deficit expanded further in August, significantly higher than the forecast value and the same period in previous years, massive fiscal support ensures the resilience of the U.S. economy; and interest rate cuts themselves are more conducive to the recovery of physical demand Prepare for the next scenario: Deduction after preventive rate cut.

Using the absolute value of the manufacturing PMI as a historical scale, this round of rate cuts is closer to historical preventive rate cuts. It may take about five months (the historical average duration) from the rate cut to the substantial repair of manufacturing data. Although slower than the recovery speed of manufacturing PMI after a rate cut at a low level, looking at the direction alone is incorrect: the absolute degree of real demand is equally important. Our statistics show that during a rate cut with the manufacturing PMI at a relatively high level, even if manufacturing activities have not immediately recovered, the retreat of bulk commodity prices has been very limited: since 1970, the average change in energy, metal, and mineral indices when the PMI is at a high level and a rate cut is implemented are -0.40%/-2.94%, respectively, compared to -12.29%/-12.71% when the PMI is at a low level. Once manufacturing activities rebound, commodity prices will rise to varying degrees, with energy and gold experiencing higher increases compared to other commodities. Overall, considering that the Chinese real estate market has found a new lower platform at present, the recovery of global physical demand is only a matter of time, and the probability of bulk commodities and related stocks transitioning from recession trading to rate cut trading has significantly increased.

A turning point may have already appeared.

In the past two months, both the overall market and physical assets have faced systemic headwinds. During the retreat of physical assets, the market has also experienced a spiral decline, which has indirectly confirmed the market's focus on physical consumption. Currently, the suppressive factors are gradually fading away, with real estate investment oscillating at a lower platform, signs of marginal improvement in fiscal expenditure, and more importantly, the continued strong exports and the approaching overseas rate cuts are accumulating the rebounding strength of physical assets represented by bulk commodities. Similarly, the probability of a rebound in the market from February to April 2024 is increasing. We recommend: First, after physical assets have experienced recession trading, upstream resource assets will usher in a turning point: energy (oil, coal), non-ferrous metals (copper, gold, aluminum), shipping (oil transportation, shipbuilding, dry bulk); Second, after the global recession expectations recede, Chinese manufacturing remains a dominant industry, with expectations of external demand stabilizing marginally, and industries such as household goods, home appliances in the process of capacity clearance, intermediate goods driven by emerging market production (special steel), and capital goods under investment restart (instruments, general equipment); Third, relatively advantageous assets with declining capital returns will show cost-effectiveness after adjustments, recommending banks, railways, gas, and ports.

Risk Warning: Domestic economic recovery falls short of expectations, and overseas economies experience significant downturns