Review and Outlook (June 13, 2022)

Fortnight in Review

The U.S. CPI reached a 40-year high of 8.6% last Friday, exceeding the market consensus of 8.3%. The financial market responded with a sharp drop of stocks and rise of USD Index, as the hope of a mitigating inflation busted.

In the past two weeks, S&P 500 Index declined to 3900 from 4158 (-6.2%); USD Index rose to 104.7 from 102.2 (+2.5%). Hang Seng Index registered 370 points rise (+1.8%) including the drop of today. RMB declined 1.5% against USD to 6.75RMB/USD.

Hang Seng Index has been more defensive than the U.S. stocks, which accumulates a 10% decline year-to-day, compared to 18.2% loss of S&P 500 Index or 27.5% drop of NASDAQ Composite Index.

Outlook

US Economy: The U.S. faces a dilemma of high inflation and slower economy. The root cause of inflation would be the radical monetary easing from 2020, aiming to address the impact of COVID-19. The direct reasons include tariff against Chinese goods, supply chain chaos, energy and food crisis from Ukraine-Russia conflict, as well as sharp rise of property price. The weapon against inflation is mostly monetary – without much efforts to handle other factors – so the effects might be questionable.

Consumer sector encounters headwind as the COVID subsidy is phasing out. Even more, consumer producers and retailers are now facing higher cost due to tariff and supply chain chaos, thus lower margins. It is questionable that consumer stocks have the highest valuations across industries and the least drawbacks. Likewise, semiconductor sector might face a hard time as it overestimates the demand and hoards excessive inventory. That being said, we believe the U.S. stocks would continue to go south.

China’s Policy Trend: The Chinese authorities have stated “counter-cyclical” policies these years, which, in our view, are policies in reverse to the U.S. economy. When the U.S. economy was booming in 2020-21, China adopted a tight monetary policy, restraining property sector, restricting off-school education and Internet platforms. When the U.S. economy slows down in 2022, China changes to an easing monetary policy and more pro-business policies. We expect this diverting trend to continue for the year, and that the Chinese stocks (US-listed, Hong Kong stocks, A-shares) would be stronger than the US equities.

Hong Kong Stocks: As we mentioned before, the Chinese government is likely to announce a series of supporting policies for Hong Kong on the 25th anniversary of Handover of Hong Kong to China. These supporting policies would be mostly in the financial sector. We expect Hong Kong equities would be more independent from, and stronger than, the U.S. market.