CITIC Securities: The risk of the Fed's interest rate hike is not limited to Chinese bonds, commodities, and undervalued equity worth paying attention to

The Zhitong Finance App learned that CITIC Securities released a research report saying that “substantial improvement” in inflation and the nonproliferation of inflationary pressure may be two major prerequisites for the Fed to stop raising interest rates. This means that the Fed's interest rate hike process will not come to an abrupt end, and the implementation of the September rate hike should not be viewed as a negative end. As the Federal Reserve faces the risk of continuing interest rate hikes, safe and certain assets such as Chinese bonds, commodities, and undervalued equity are more worthy of attention. First, Chinese bonds mainly follow China's monetary policy rather than the Federal Reserve's monetary policy, which means that in an environment where the Chinese currency remains moderately loose, Chinese bonds will be a typical example of safe assets; second, before the US-Iran conflict eases, the relationship between supply and demand for commodities represented by energy and non-ferrous metals is tight, and the current macroeconomic environment of global contraction and spread of inflation also points to commodity allocation opportunities worth paying attention to; third, the shift in global liquidity indicates that valuations between different industries are expected to balance.

CITIC Securities's main views are as follows:

The Fed's interest rate hike in September made it clear that inflation is the core contradiction of the Federal Reserve's current monetary policy.

Under inflationary pressure, the bank does not expect the Federal Reserve's interest rate hike process to abruptly come to an end. Since the beginning of this year, new US indicators such as non-farm workers and unemployment rates have shown an overall narrow fluctuation pattern, and indicators such as job vacancy rates and wage growth rates are still hovering at low levels. Although the US job market has not deteriorated further, it is hard to say that it has clearly rebounded steadily. In an environment where there are still concerns about employment, the Federal Reserve chose to start the interest rate hike cycle in September, proving that controlling inflation is undoubtedly the core goal of the Federal Reserve's current monetary policy. At the September interest rate meeting, Walsh emphasized that what he made was not a specific monetary policy decision but a monetary policy discipline, and that it was not the monthly data but the trend of data changes that affected his decisions. As a result, the bank does not expect the Federal Reserve's interest rate hike process to abruptly come to an end when the situation between the US and Iran is far from easing, and the US inflation readings are under pressure to remain high and there is a risk of further spread.

Prior to the September rate hike, investors had anticipated the risk of potential interest rate hikes, but under the benchmark situation, this rate hike may not be the preventative interest rate hike or “dovish rate hike” expected by some investors, and the depth and length of the risk of interest rate hikes may not be sufficient for major assets.

Although before the September interest rate meeting, tools such as FedWatch showed that investors had anticipated interest rate hikes in September, major asset classes may not have sufficiently priced the risk of interest rate hikes. On the one hand, during the September interest rate meeting, Walsh repeatedly emphasized the importance of “substantial improvement” in inflation and the fact that price changes between industries will not spread. This may also be a key condition for the Fed to stop raising interest rates in the future, and the US-Iran conflict may be difficult to end quickly. This indicates that the core of this rate hike is to control the inflation trend and strive to achieve the Fed's inflation target, rather than simply following market expectations or appeasing investors. The September rate hike is only the starting point of a cycle of preventative interest rate hikes or “dovish rate hikes” as expected by some investors. The implementation of interest rate hikes cannot be viewed as an exhaustion; on the other hand, unlike when the interest rate hike cycles in history began, the current valuation of major asset classes represented by global equity assets is clearly higher. Under high valuations, various types of assets may also be more sensitive to the potential risk of the Federal Reserve continuing to raise interest rates. However, since the interest rate meeting in July, with the exception of US bonds, there have been no obvious changes in the price and valuation of most assets, which also shows that there may still be a gap between asset pricing risk and investors' forecasts.

The risk of the Federal Reserve's continued interest rate hike will be an important main line of mid-term pricing in the market, and assets with safety and certainty during the interest rate hike cycle deserve more attention.

The combination of generally high valuations of various types of assets and the risk of continued interest rate hikes by the Federal Reserve determines that asset allocation faces an impossible triangle of space, fluctuation, and odds, and assets with safety and certainty deserve more attention. Investors are advised to pay attention to three major opportunities. First, Chinese bonds mainly follow China's monetary policy rather than the Federal Reserve's monetary policy, which means that in an environment where the Chinese currency remains moderately relaxed, Chinese bonds will be typical of safe assets; second, before the US-Iran conflict eases, the relationship between supply and demand for commodities represented by energy and non-ferrous metals is tight. The current macroeconomic environment of global contraction and spread of inflation also indicates that commodity allocation opportunities are worth paying attention to; third, the shift in global liquidity indicates that valuations between different industries are expected to balance.

Risk factors:

The duration and intensity of the US-Iran conflict exceeded expectations; the Federal Reserve's interest rate hike exceeded expectations; the performance of the US job market exceeded expectations; the spread of US inflation exceeded expectations, etc.