CITIC Securities: Waiting for the Federal Reserve's September rate hike to be implemented. The configuration suggests maintaining the AI+ energy structure

The Zhitong Finance App learned that CITIC Securities released a research report saying that investors began to seriously consider the possibility that the Fed will raise interest rates in September this week. High oil prices and the stalemate situation in the Middle East have once again caused investors to worry about high inflation and market adjustments. CME FedWatch showed that the probability of raising interest rates by 25 basis points in September rose from about 58% at the beginning of the month to about 85% after the inflation data was released. The research report believes that the breadth of North America's economic growth was far weaker from 2004 to 2006 and 2021, and there are no conditions for trending interest rate hikes; currently, various quantitative and price sentiment indicators in the market have returned to a slump, and the release of interest rate hikes risk should be viewed as a buying point rather than a selling point. The implementation of the September rate hike is a sign that layout space has opened up, and it is recommended to maintain an AI+ energy structure in terms of configuration.

CITIC Securities's main views are as follows:

Investors are starting to seriously consider the possibility that the Fed will raise interest rates in September this week

1) High oil prices and the stalemate situation in the Middle East have once again fueled investors' concerns about high inflation and market adjustments. Recently, the situation in the Middle East has once again escalated, and the disturbances faced by the crude oil market have further extended from the risk of navigation through the Strait of Hormuz to Saudi energy facilities and alternative export channels in the Red Sea. As of September 11, the cracking price differences between ICE diesel and NYMEX heating oil had risen to 92.73 US dollars/barrel and 111.90 US dollars/barrel respectively, up 70.99 US dollars/barrel and 79.18 US dollars/barrel at the end of last year. Both hit new highs during the year. The rapid rise in refined oil prices made the impact of this round of price increases for energy and chemical products even stronger than the first round of closure of the Strait of Hormuz. In the midst of this round of supply shocks, China is no longer acting as a buffer for demand. Crude oil imports clearly rebounded in August, and the space for balancing global crude oil supply and demand by pressuring demand is narrowing. Investors are worried that high inflation expectations will once again induce drastic market adjustments similar to those in March of this year. However, judging from the pricing of TIPS, the market still sees the crude oil shock as a driving factor for short-term inflation, and long-term inflation expectations are relatively stable. On the day the US PPI was announced this week, the 5-year, 10-year, and 30-year TIPS break-even inflation rates rose by 5, 3, and 2 basis points, respectively, to 2.46%, 2.40%, and 2.32%, respectively. After the CPI was announced, they fell back to 2.40%, 2.36%, and 2.28% respectively. Compared with the end of August, the three still increased by 9, 5, and 2 basis points, respectively.

2) The market requires pricing to be implemented once to raise interest rates to free up operating space in the fourth quarter. Since September, the commodity market's pricing of the Fed's interest rate hike has clearly heated up. CME FedWatch shows that the probability of raising interest rates by 25 basis points in September rose from about 58% at the beginning of the month to about 85% after the inflation data was released. However, the A-share market has always been hesitant about pricing interest rate hikes. After the Jackson Hole meeting, the precious metals sector was clearly superior to that of US stocks. It wasn't until Brent and WTI oil prices surpassed $100 this week that there was no obvious adjustment. To a certain extent, this shows that the market still sees the Fed's interest rate hike as preventive and symbolic. The bank's previous judgment and positioning on the market was a volatile market where there were valuation suppressing factors but the fundamentals were still resilient. The emergence of phased opportunities depended on the release of local risks and pricing to create space. Even with preventative interest rate hikes, the market needed to have room to operate after pricing. Therefore, the bank is more inclined to believe that this week's accelerated adjustment is still the expected pricing for the implementation of interest rate hikes, and after pricing, there is more room for operation in the fourth quarter.

The breadth of North America's economic growth is far less than the conditions for trending interest rate hikes in 2004-06 and 2021

1) The breadth of this round of economic growth in North America is insufficient, and K-type differentiation is obvious. The trip roughly compared the current economic data of North America with the real estate boom from 2004 to 06 and the post-pandemic recovery period in 2021. The average value of the US comprehensive economic activity diffusion index during the year was -0.023, the average for 2004 to 2006 was 0.154, and the average for 2021 was 0.335; the average value of new housing construction during the year was 1.36 million units, and the average for the other two periods was 1.94 million units and 1.6 million units respectively; the latest value of the personal savings rate was 3%, and the average for the other two periods was 3.23% and 11.3%, respectively; the average for the other two periods was 2.93% and 13.68%, respectively; the top ten private industries accounted for year-on-year employment expansion The average for the year was 50%, and the average for the other two periods was 75% and 72%, respectively. Overall, the breadth of North America's economic growth was far less extensive from 2004 to 06 and 2021. Almost all of the factors driving economic growth are focused on AI investment. In the first eight months of this year, US corporate bond issuance increased by 29.8% year-on-year, with an average of 11.8% from 2004 to 06, and -11.3% in 2021. Massive private sector credit expansion even squeezed out demand for treasury bonds. Interest rates on 30-year US bonds reached 5.22%, surpassing 5.2% in June 2007. The main industry driving the expansion of private sector debt is the information technology and communication services industry. The profit growth rate of the information technology and communication services industry is expected to reach 62.6% and 50.7% respectively in the third quarter, while optional consumption and mandatory consumption are only 3.1% and 2.6%, respectively.

2) Trendy interest rate hikes may significantly damage non-traditional AI industries and have limited impact on AI-related industries. Continued interest rate hikes to cope with inflation in this economic situation may not hurt AI-related investments. Investment in cloud infrastructure still has extremely rich returns due to lack of computing power, and the non-AI sector may suffer due to high interest rates and continued interest rate hikes. Interest rate hikes cannot curb AI investment, and the rise in prices due to AI investment crowding out resources and some commodity materials (such as memory), nor can it solve the problem that upstream energy conversion costs continue to rise due to the Middle East conflict. However, it may further narrow the breadth of economic growth, putting pressure on non-traditional AI sectors and residential sectors. This makes the Fed lack confidence in its promises and statements to restore inflation targets and the Fed's credibility. This is also the reason why the market has always viewed the interest rate hike during the year as a precautionary and posturing rate hike. The bank believes that the implementation of the Fed's interest rate hike in September should be a sign that the adjustments since July are nearing the end. It is a risk implementation rather than a (downward) revaluation of stocks.

Various quantitative price sentiment indicators in the market have returned to a sluggish state, and the release of the risk of interest rate hikes should be viewed as a buying point rather than a selling point

In terms of volume and price indicators, the investor sentiment index constructed by the bank reached a freezing point range, and the low absorption odds were high after a significant contraction. After the contraction and consolidation in August, crowded transactions in the technology hardware sector in the early stages have improved markedly. The MA5 reading for electronics+communications transactions fell from more than 40% of the June and July highs to 28.2%, the lowest on September 4, and fell back to the level of the end of April. The share of individual stocks traded in the top 5% (MA10) also fell from the previous high of 52% to 44.7% on September 11, falling back to the level of April 16. From the perspective of derivatives indicators, compared with the deep adjustment period in July, the current liquidity pressure on the market has abated markedly. As of September 11, the IVs for the China Securities 1000 and Shanghai and Shenzhen 300 stock index options were 28.3% and 17.9% respectively, all at the central level of the historical market calm period. Since September, even on volatile trading days (such as September 4 and September 11), there has been no significant increase in stock index options. After intense liquidation in July, leveraged capital did not significantly increase risk appetite in August. As of September 10, the share of financing purchases in the Shanghai and Shenzhen markets (MA5) was 8.5% of the total turnover of the two markets, which is in the 9.0% quantile since 2025 and 54.7% since 2021. According to a channel survey of CITIC Securities, the sample active private equity firm continued to drop to a low level for 4 consecutive weeks after substantially recharging its positions in the 1st week of August to 79% on August 7. The most recent position level (September 4) was 70.8%, which is the 22.7% quantile since 2021, the second lowest position level after October 2024 after the week of July 17.

AI is still one of the few sectors that can resist rising interest rates. Continued interest rate expectations may increase K-type differentiation again

Although interest rate hikes will equally drive up the financing costs of the entire economy, the boom gap between industries causes the slope of the price-demand curve to be different, and demand in the less prosperous non-AI industry will be damaged even more. Since this year, the degree of AI/ non-AI stock price differentiation in the Chinese, US, Japan, and South Korea markets is also highly correlated with the market's interest rate predictions for the Federal Reserve. Recently, emerging market currencies have continued to depreciate, and the high oil price environment and tightening global liquidity will limit traditional investment and consumer spending. With technological dividends and capital efficiency advantages, the AI sector is still one of the few industries that can withstand the impact of rising interest rates. Since September, as expectations of the Federal Reserve's interest rate hike have increased, the K-type differentiation margins in major global stock markets, especially US stocks, have strengthened. The bank expects that if interest rate expectations continue to rise, K-type differentiation in the market will once again strengthen, and AI assets are expected to lead the market again since the July hiatus. However, considering that institutional investors in the current position of the A-share market have clearly overtaken the electronics, communications and other industries, and that related sectors still account for a high share of floating and losing chips after undergoing a deep adjustment in July, this may affect the smoothness of the market, and the intensity of K-type differentiation is also expected to be weaker than in the second quarter. Therefore, after the Fed's interest rate hike is implemented and fully priced by the market, the new round of market prices may focus more on non-institutional heavy technology stocks (represented by new optical communication technology and PCBs), and the transaction structure may be driven and dominated by active capital; for conservative capital, some defensive sectors (banks, coal) or dividend-like sectors (energy conversion) may be selected for allocation.

Waiting for interest rate hikes to be implemented, it is recommended to maintain the AI+ energy structure in terms of configuration

The bank maintains a volatile market judgment that there are valuation suppressing factors in the market but the fundamentals are still resilient. The emergence of phased opportunities depends on the release of local risks and pricing to create space. If the Fed's interest rate hike is implemented in September, it should be seen as a sign that adjustments have come to an end since July and that layout space has opened up, rather than a new round of downward adjustments. Market sentiment indicators, which are already quite sluggish, and indicators of active capital positions, which are rapidly declining, also support this judgment to a certain extent. Structurally, considering that long-term interest rates on US bonds may continue to rise due to strong private sector financing crowding out effects, it is expected that K-type differentiation between the Chinese, US, Japan, and South Korea markets may reoccur; however, due to high positions, a weaker narrative than in the second quarter, and deteriorating chip structures, the intensity of differentiation is expected to be weaker than in the second quarter. In terms of allocation, after interest rate hike risk pricing, it is expected that opportunities in the technology sector will focus more on the direction of benefiting from increased manufacturing complexity (such as new optical communication technology, PCBs, advanced packaging, etc.) and the direction of quantitative incremental logic (such as wafer manufacturing and gas turbines). Individual stocks with heavy institutional positions may be more flexible. Considering that the effects of RSI are reflected in the speed of model advancement, the new cutting-edge model represented by Astra has broken through in physical AI fields such as spatial intelligence, as well as preventing the heat of distillation from heating up, the North American chain may be more dominant for some time to come. In the non-technology sector, it is recommended to continue to focus on energy and leading brokerage firms with the potential to go overseas. A steady configuration could focus on banks, coal, etc.

risk factors

Frictions in the fields of technology, trade, and finance between China and the US have intensified; domestic policy strength, implementation effects, or economic recovery have fallen short of expectations; macro-liquidity at home and abroad has tightened beyond expectations; conflicts in regions such as Russia, Ukraine, and the Middle East have further escalated; and China's real estate inventories have fallen short of expectations.