GF Securities released a research report stating that in September 2024, the Federal Reserve initiated a new round of "preventive" rate cuts, but the cutting cycle was temporarily halted due to re-inflation concerns triggered by tariffs. However, recent July non-farm employment data showed unexpected weakness, while the month-over-month price growth of core goods with high import dependence (such as clothing, entertainment goods, furniture) in July's core CPI inflation slowed down. Although July PPI data significantly exceeded expectations, the portion directly included in the PCE indicator is limited, and the transmission chain from PPI components to CPI and PCE is relatively long, making tariff-induced inflation pressure controllable in the short term. The window for the Federal Reserve to readjust monetary policy may have arrived.
Based on the two criteria of "core competitive industries + marginal improvement in prosperity," the report recommends focusing on: (1) Hard technology sectors with high export growth, such as overseas computing power industry chains and some new energy subdivision leaders that have stabilized at the bottom; (2) Track sectors with clear prosperity trends, such as innovative drugs; (3) Chinese core assets with global competitive advantages, such as Hong Kong internet leaders.
**I. Different Fed Rate Cutting Models Show Vastly Different Global Asset Performance (Only Preventive Rate Cuts Are Most Beneficial to Equity Assets)**
Referring to historical scenarios, during the Fed's four previous preventive rate cutting cycles (1984-1986, 1995-1996, 2019-2020, 2024-2025), US stock markets performed well, with market pricing reflecting fundamental recovery. US Treasury yields declined alongside benchmark rates, while simultaneously driving USD weakness through interest rate parity effects.
**II. How to Judge the Flow Direction of Spillover Funds from US Dollar Assets? (Where There Are Marginal Changes, There Will Be Attraction for Spillover Funds from US Dollar Assets)**
The logic of this round of global capital rebalancing is that against the backdrop of weakening US fundamentals, the dollar, and US Treasury credit, the Federal Reserve is forced to restart rate cuts, with funds flowing to non-US assets with stronger short-term prosperity than the US. Under this logic, the following assets may continue to be favored by global capital: (1) Gold, crypto, and other safe-haven assets with direct substitutability to the USD. (2) Assets from other developed countries with fiscal or monetary policy shifts and fundamental recovery expectations (such as the euro, European stocks, yen, etc.). (3) Other emerging market assets with important marginal changes in fundamentals or policy and combining both probability and payoff potential (such as South Korea, Vietnam, Brazil, etc.).
A-shares, as an important emerging market asset, have significant potential to attract foreign investment under the capital flow logic of non-US assets being stronger than US dollar assets: (1) A-shares have shown prominent money-making effects since July. (2) After Fed rate cuts, narrowing China-US interest rate spreads will promote capital return to China and provide China with further monetary policy space to stimulate domestic demand. (3) Expected marginal changes in domestic fundamentals and policies in the second half of the year will enhance confidence in foreign capital inflows.
**III. What Types of Assets and Industries Do Foreign Investors Prefer in a Region? (Foreign Investors Still Prefer Local Assets with the Greatest Competitive Advantages of That Era)**
What characteristics do foreign investors have in industry allocation and stock selection styles? Referring to historical situations in Taiwan stocks and A-shares, foreign investors' holdings by industry are basically consistent with industrial structure, favoring core competitive industries. At the same time, they have higher tolerance for valuations, pay more attention to performance stability and sustainability, and chase industries or individual stocks with higher current prosperity.
Based on the above analysis, at the industry selection and allocation level, China's industries with current era characteristics and global competitiveness, such as innovative drugs, Hong Kong internet leaders, NVIDIA industry chains, and new energy vehicles, are worth attention.