The decline of Trump trading: opportunity or pitfall?

Recently, under the disturbance of Trump's election, various assets have experienced significant fluctuations, and after the peak of Trump trading last week, it has begun to decline. Before discussing trading, it is worthwhile to first look at the current fundamentals. The United States mainly released the price data and social retail data for October.

1. October Prices - Stabilizing and Declining, or Soft Landing

The core CPI in the U.S. for October increased by 0.28% month-on-month, a slight decline from the previous month's 0.31%. However, this is influenced by the rise in housing costs; if we exclude housing costs and look at core services, we can see a clearer declining trend.

The main contributors to this decline are the significant drop in medical services and transportation services, which had seen larger increases last month, including:

a. Medical services saw a slight decrease in specialist service costs.

b. More importantly, the price decline (from a month-on-month increase of 1.4% to 0.4%) is mainly due to the significant drop in motor vehicle insurance costs, which account for a large proportion of transportation services, directly falling from a month-on-month increase of 0.9% to a negative growth of 0.1%.

Since motor vehicle insurance costs are primarily based on premiums, there is a certain lag in the transmission of insurance costs. Insurance companies, after considering their own costs and profits, need to undergo state regulatory review to adjust prices, essentially requiring attention to the profit trends of vehicle insurance companies for early predictions.

Overall, it can be seen that the CPI data for October reflects that although the process of de-inflation in the U.S. is slow, inflation is indeed gradually retreating, and prices are approaching normal levels.

It is estimated that the inflation trend reflected in October will not influence the Federal Reserve's judgment on inflation trends and is unlikely to affect the market's judgment on the pace of interest rate cuts.

2. U.S. Social Retail - Overall Stable, Structural Weakness

In October, the total retail sales in the U.S., seasonally adjusted month-on-month, appeared to weaken (from 0.84% to 0.4%), but the previous month was relatively high. The 0.4% month-on-month increase in October equates to a 5% year-on-year growth in social retail, which is considered a relatively good growth situation.

This month's growth was mainly driven by motor vehicles and building materials and gardening sales, which are strongly cyclical goods. Excluding these categories, the core retail (excluding motor vehicles, gas stations, dining, and building materials) saw a slight negative growth month-on-month, which is not favorable.

So if we make an overall evaluation, although the overall retail sector in American society is relatively stable, there are still some hidden dangers revealed in the structure, namely that core retail is weak, and there are signs of a steady slowdown in consumption trends.

Overall, combining the macro incremental data for October (1-2), the United States is still in a state of economic growth slowdown with a soft landing.

3. The Decline of Trump Trading

The economic fundamentals are good, and Powell's statement implies that the pace of interest rate cuts will be based on fundamentals and cannot directly preset the magnitude of rate cuts. These two factors together present a very interesting situation: the 10-year U.S. Treasury yield is almost pulling back to 4.5%.

Moreover, in this round of pulling from 4% to 4.5%, the main contribution comes from long-term real economic growth expectations, rather than an upward trend in long-term inflation expectations.

With stable economic fundamentals, the market raises long-term economic growth expectations, and coupled with the Federal Reserve emphasizing not to preset the magnitude of rate cuts, the U.S. dollar continues to strengthen.

In other words, the market is betting that the U.S. economy led by Trump will actually exhibit characteristics of a strong dollar, with the dollar index directly pulling close to 107, while the last round of the dollar approaching 110 was during the post-pandemic demand surge and supply shortages in the U.S. in 2022.

The rise of the dollar and the widening of the yield curve inversion between China and the U.S. will clearly attract funds towards dollar assets, which is not good for emerging assets, and for the Hong Kong stock market, which is a dollar investment market, there is obviously a certain liquidity absorption effect.

With the valuation of Hong Kong stocks already relatively low, the only way for them to rise against the wind is through improvements in economic fundamentals. However, for the core consumer assets of Chinese concept stocks covered by Dolphin in the third quarter, this confidence is not very evident. Among leading companies, in the context of macro consumption:

a. In the third quarter, Tencent's payment business revenue representing commercial payment scenarios experienced a year-on-year decline;

b. In September, Alibaba's CMR revenue grew by 2-3% year-on-year;

c. Benefiting from device replacement subsidies, JD Retail's growth in the third quarter was only around 5%.

If the third quarter was bad, it is already evident, and the market has moved on. What remains to be seen is the expectations and effects of policies, but currently, major companies seem to generally avoid discussing the situation for the fourth quarter, with the most mentioned being that after increased subsidies in October, payment and platform transaction data have improved somewhat.

The overall outlook for the fourth quarter from various companies remains restrained and conservative, unwilling to provide an overly optimistic outlook. Clearly, most companies are still relatively cautious and conservative

However, from a macro perspective, signals of macro improvement are gradually emerging: although credit data remains relatively weak, the manufacturing PMI in October has slightly rebounded, standing above the 50 threshold again since April; the forward-looking indicators for corporate hiring and labor costs have begun to recover; the month-on-month decline in PPI has narrowed; and the year-on-year growth of social retail in October has recovered to 4.8% (partly due to major platforms advancing Double Eleven to mid-October).

At this current juncture, both the US dollar and US Treasury yields are at relatively high levels, and more than half of the earnings season for Chinese assets has passed, with most of the expected negative surprises already released. Companies are now unwilling and afraid to provide outlooks and forecasts for the fourth quarter.

What remains crucial is actually the effectiveness of economic policies in the fourth quarter, as well as how the Central Economic Work Conference at the end of the year will set the GDP and deficit targets for next year.

At this point of observing the effectiveness of policy implementation and further releasing more economic policies for 2025, Dolphin believes that there are still certain speculative opportunities for Chinese concept stocks before the end of the year after the pullback.

4. Portfolio Adjustment and Returns

Last week, the Alpha Dolphin portfolio had no adjustments. The portfolio's return fluctuated at -3.2%, lower than the S&P 500 (-2.1%), but stronger than MSCI China (-6.1%), Hang Seng Tech (-7.3%), and CSI 300 (-3.3%).

Since the portfolio began testing (March 25, 2022) until last weekend, the absolute return of the portfolio is 63%, with an excess return of 75.5% compared to MSCI China. From the perspective of net asset value, Dolphin's initial virtual asset of 100 million USD has exceeded 166 million USD as of last weekend.

5. Individual Stock Profit and Loss Contribution

The underperformance against the S&P 500 last week was mainly due to Chinese concept assets during the US dollar appreciation cycle, combined with the fact that most individual companies did not report ideal earnings results, leading to significant stock price corrections.

From the fluctuations of the companies covered by Dolphin last week, apart from the performance-driven SaaS concept stocks, other assets in both China and the US generally corrected, with Chinese concept stocks experiencing larger declines due to the withdrawal of US dollar liquidity. In contrast, the decline in US tech stocks appears more like a normal pullback after previous gains.

Dolphin's analysis of the rise and fall of leading companies is as follows:

6. Asset Allocation Distribution

The Alpha Dolphin virtual portfolio holds a total of 16 stocks and equity ETFs, with a standard allocation of 6 stocks and 10 equity assets being under-allocated. The remainder is distributed among gold, U.S. Treasury bonds, and U.S. dollar cash. As of last weekend, the asset allocation and equity asset holding weights of Alpha Dolphin are as follows:

7. Key Events This Week

This week marks the peak of the U.S. earnings season, with the onslaught of Chinese concept stocks earnings season, including Tencent, Alibaba, JD.com, NetEase, Bilibili, Sea, etc. The key companies and core focus points for the earnings reports that Dolphin will cover are as follows: