East Money Asset Management: Early signs of stock market rotation have emerged, opportunities may exist in underperforming small-cap stocks

According to the information obtained from Zhitong Finance APP, Dongfang Huili Asset Management stated in a publication that economic activities are better than expected, artificial intelligence development is thriving, coupled with substantial corporate profits, leading the performance of large-cap stocks in the United States significantly ahead of other US markets in the first half of the year. Looking ahead, the upward trend is expected to expand, but it will not develop in a linear manner, rather it will rise in multiple stages. After the release of the July Consumer Price Index, the chance of a rate hike by the Federal Reserve in September has increased, leading to early signs of market rotation, creating opportunities for underperforming categories and sectors (small-cap stocks, Europe, and Japan).

The profit trend and the following themes are now key:

It is expected that the US economy will slightly slow down in the second half of the year. Economic data and surveys also reflect this trend. The main features of economic slowdown include labor market readjustment, deteriorating consumption, and a significant gap between affluent and low-income consumers.

There is little room for error in monetary policy. Premature rate hikes may lead to a resurgence of inflation, while delaying rate hikes may result in a significant increase in future rate hikes. Therefore, central banks such as the Federal Reserve, the European Central Bank, and the Bank of England are currently exercising patience and making decisions based on economic data, with Dongfang Huili Asset Management believing that the current situation supports a trend of slowing inflation.

Excessive use of public funds and massive government debt will affect interest rates. As the United States approaches a major election, discussions on the long-term impact of deficit spending on borrowing costs are expected to intensify. In order to promote self-sufficient economies and domestic economic growth, Europe may need to increase investment within the region.

Dongfang Huili Asset Management believes that returning to basics, paying attention to valuations, and maintaining investment discipline are crucial. Some categories in major markets have shown overheating, and when triggering factors (such as slowing growth, liquidity crises, and earnings below expectations) emerge, market trends may sharply reverse. Therefore, investors should differentiate between categories with high valuations and those expected to continue growing.

Here is a summary of Dongfang Huili Asset Management's four major investment viewpoints:

Cross-asset: Risks from the US election and additional fiscal spending may impact medium/long-term bond yields. Therefore, while remaining optimistic about the survival period of US and European fixed income, Dongfang Huili Asset Management slightly adjusts its position. After the inauguration of the new president of Mexico, Dongfang Huili Asset Management downgraded its view on Mexican bonds, but still slightly favors emerging market bonds overall. With increasing divergence in the stock market, Dongfang Huili Asset Management is now positive on Japan. They still slightly favor US, European small-cap stocks, and the UK, but have adjusted their views slightly, and are positive on the improving UK domestic economy. Lastly, due to geopolitical tensions and sustained gold demand, they are also positive on gold.

US and European inflation data support rate hikes, so Dongfang Huili Asset Management continues to favor US Treasury bonds and UK government bonds. They slightly favor core European markets and maintain an active management position. In Japan, they closely monitor the statements of the Bank of Japan, with their current position being close to neutral. US Treasury inflation-protected securities also have long-term investment value. Quality remains the focus of credit, with Dongfang Huili Asset Management believing that investment-grade bonds in the US and Europe are preferable to high-yield bonds. Although they slightly favor European investment-grade bonds, they have slightly lowered their view to reflect strategic market changes Valuations in certain categories of the US stock market are high, but valuations need driving factors to show. Therefore, Orient Wealth Management maintains caution towards categories with high valuations, preferring equally weighted US markets, value stocks, and high-quality stocks. In Europe, Orient Wealth Management continues to focus on a barbell strategy of defensive stocks, as well as high-quality cyclical stocks driven by major trends such as energy transition and electrification.

Strong domestic demand and the Federal Reserve's change in stance support the outlook for emerging markets. Orient Wealth Management is particularly bullish on hard currencies and local bonds, as well as countries with attractive real yields, such as India and Brazil. In terms of stocks, they are optimistic about the stock markets in South Korea, India, Brazil, and South Africa