After more than four years, the Federal Reserve has once again lowered interest rates, initiating a monetary easing cycle. The Fed announced a 50 basis point cut in the federal funds rate to a range of 4.75% to 5%, exceeding market expectations. On September 19th, major indices of A-shares and Hong Kong stocks closed in the green, with a total transaction volume of 627 billion yuan in Shanghai and Shenzhen markets, significantly higher than the previous trading day.
After the market closed, Fund Jun quickly interviewed several well-known private equity institutions to interpret the impact of the Fed's rate cut on the market. Private equity believes that the Fed's rate cut this time slightly exceeded expectations, with the global liquidity outlook marginally improving, which may enhance the global market's risk appetite and provide some support for the performance of risk asset prices. At the same time, overseas rate cuts have opened up space for domestic easing policies, and the future rebound in A-shares and Hong Kong stocks is expected. Regarding the subsequent rate-cutting process, private equity said it will closely monitor U.S. inflation and employment data. It is understood that some private equity firms have laid out some major asset classes in advance to earn returns, and after the rate cut, they are more optimistic about the investment opportunities in high-quality domestic companies.
The Fed's rate cut exceeded market expectations, and private equity is optimistic about further opening up domestic policy space.
In the early morning of September 19th Beijing time, the Fed announced a 50 basis point cut in the target range of the federal funds rate, bringing it down to a level between 4.75% and 5.00%. This is the first rate cut by the Fed since March 2020.
"The Fed's rate cut this time is a preventive and compensatory rate cut," said Kou Zhiwei, a partner at Chongyang Investment, mainly aimed at the recent cooling of the U.S. job market, and by lowering interest rates to clearly convey the market's stance on supporting the job market. At the same time, according to the dot plot released after the meeting, the median expectations of FOMC members for the federal funds rate at the end of 2024 and 2025 are 4.4% and 3.4%, respectively, which have already converged significantly with market expectations. This means that as long as the U.S. economy does not fall into a recession, the market's pricing for this round of rate cuts has been relatively sufficient.
Fang Lei, Deputy General Manager of Xing Shi Investment, analyzed that from the meeting statement, the Fed's confidence in cooling inflation has increased, and its attention to the risk of weakening employment has increased. Moreover, at this meeting, the Fed lowered its expectations for economic growth and inflation, and raised its expectations for unemployment rates, which may indicate that the downward momentum of the economy is an important factor in the Fed's 50BP rate cut. However, since the time between this interest rate meeting and the November interest rate meeting is quite long, the data already released shows that the U.S. economic fundamentals still have resilience. This 50BP rate cut is more like a preventive measure to prevent the economy from accelerating weakness between the two meetings. It is expected that the Fed's rate cuts will still follow a preventive rate cut path.
Fang Lei believes that the Fed's rate cut slightly exceeded expectations, the global liquidity outlook has improved marginally, and the first rate cut is relatively large, which helps to stabilize the market's "soft landing" expectations. The global market's risk appetite may increase, and there is some support for the performance of risk asset prices.
Zheng Xiaoqiu, General Manager of Mingshi Partners Fund, said that this rate cut basically conforms to the market expectation of "50BP + hawkish statement", and in combination with the current U.S. fundamentals, it can still be understood as a "preventive" rate cut rather than a "recession" rate cut. "For the global market, it helps to reduce the market's recession expectations and stabilize risk appetite. Considering that U.S. interest rates are the anchor for the global asset pricing denominator, it has a positive boost for global risk assets. However, before this rate cut, various assets have already priced in and included a large amount of rate cut expectations in advance, so the short-term impact is not significant, and it is necessary to look at the subsequent pace of rate cuts."
Kangmand Capital stated that this rate cut is a preventive rate cut by the Fed to cope with the downward pressure on the economy and the possible prospect of a recession, and the first rate cut exceeded expectations. This rate cut will alleviate the capital market's concerns about the economic recession and "hard landing" in developed countries such as the United States, reduce the pressure on the domestic liquidity environment, increase the room for domestic policy maneuver, and enhance the effectiveness of domestic counter-cyclical policies.
Yuanxing Fund also said that the rate cut exceeded market expectations this time, and the Fed chairman indicated that part of it was a "compensation" for the rate cut that should have been in July. "No matter what, the start of this rate cut cycle is extraordinary, which is a favorable boost for global risk assets, and the prices of precious metals and base metals will also rise. The benefits for domestic equity assets are more obvious, and the boost in domestic market risk appetite may suppress bond asset prices, and there is a possibility that the yield on long-term interest rate bonds will rise."In the view of private equity institutions, the interest rate cut cycle has begun, with liquidity easing and valuations at a relatively low level, the equity market, especially the emerging markets, is expected to perform well.
For the domestic market, Fang Lei believes that the impact of the Federal Reserve's interest rate cut is positive: First, the overseas rate cut opens up space for domestic easing policies, and policy expectations and their game-playing may become an important factor affecting the market in the near term, with the introduction of domestic incremental policies expected to drive a marginal improvement in market sentiment; Second, the preemptive rate cut of 50BP helps to maintain the resilience of overseas demand, and China's export growth is expected to be maintained, with the expectation of an overseas "soft landing" also supporting a marginal improvement in domestic economic expectations; Third, from historical experience, the start of the Federal Reserve's rate cuts often leads to a global reallocation of funds, and a phased inflow of foreign capital may help Chinese assets perform.
Kou Zhiwei said that on September 20th, China will usher in the first benchmark interest rate adjustment window after the Federal Reserve's rate cut, and the rate cut will further open up space for domestic policy easing. With the warming expectations of the Federal Reserve's rate cut, the bank's foreign exchange settlement and sale for clients in August achieved a surplus for the first time since July 2023, indicating that enterprises and residents have a more stable expectation of the exchange rate, which lays the foundation for a larger easing of domestic monetary policy.
Zheng Xiaoqiu said that for the domestic market, it mainly reduces external policy constraints and alleviates exchange rate pressure, which is conducive to increasing the space for internal policy operations, but the rhythm and actual strength of the policy still depend on us and need further observation; In addition, attention can be paid to the reflow of overseas institutional funds to emerging markets after the rate cut, whether it will benefit the domestic capital market.
A top private equity fund said that this rate cut was carried out against the background of some easing of inflationary pressure in the United States and signs of weakness in the job market. The Federal Reserve announced a 50 basis point cut in the federal funds rate, sending a clear signal to the market that it wants to protect the economy from falling into a recession, and the focus of U.S. monetary policy has shifted from fighting inflation to protecting employment. "For the domestic market, the Federal Reserve's rate cut may provide greater room for maneuver for our central bank's monetary policy, and the renminbi exchange rate may be boosted. It is expected that our central bank will also consider monetary policy comprehensively based on the domestic economic situation and inflation level."
Subsequent attention still needs to be paid to U.S. inflation and employment data, and private equity believes that the rate cut is beneficial to global risk assets.
Regarding the future path of rate cuts, Powell said that 50BP should not be regarded as the new standard for the pace of rate cuts. Many private equity practitioners believe that after the rate cut, the interest rate is still high at 4.75%~5%, so there is still room for rate cuts in the future, but the path of rate cuts still needs to be observed.
Fang Lei said that at present, the Federal Reserve is still following a preemptive path for rate cuts, and the dot plot shows that there is still room for a 50BP rate cut within the year. It is a high probability that the next two meetings will continue to cut rates, and the specific extent of the rate cut depends on the performance of U.S. economic data. However, compared with the dot plot, the market's expectations for rate cuts will be more "dove", and CME data shows that the probability of the federal funds rate falling to the 4%~4.25% range by the end of this year is about 50%, slightly lower than the 4.4% under the neutral expectation of the Federal Reserve.
"So, the current market has digested the rate cut, and the subsequent market may gradually shift to trading a 'soft landing'. In an environment where global risk preferences rise, equity and other risk assets may be supported; the downward space for U.S. Treasury bonds and the U.S. dollar index is limited, and it may rise with the improvement of overseas economic data in the subsequent period." Fang Lei said.
Zheng Xiaoqiu believes that at present, the U.S. economic fundamentals are strong and have not shown obvious recession. From the dot plot announced at this meeting, there is also a large divergence in the internal rhythm and strength of rate cuts. "After the first 50BP rate cut, we expect one or two rate cuts within the year, with the amplitude possibly mainly at a 25BP pace, and it is not ruled out that intermittent rate cuts will be adopted during the observation of economic and inflation data."Command Capital also states that, at present, the market expectation is that there will be two more rate cuts totaling 50 basis points (BP) before the end of the year. However, some aggressive investors anticipate a 75 BP cut. It is expected that the Federal Reserve will continue to lower interest rates to around 3.5% in 2025, during which the Federal Reserve will decide the timing and magnitude of rate cuts based on inflation and employment levels.
Yuanxing Fund indicates that the subsequent path of Federal Reserve rate cuts is currently expected according to the dot plot of a 50 BP cut for the remaining time this year and a 100 BP cut for next year. In this process, they will closely monitor U.S. inflation and employment data. Based on the current data situation in the United States, there is no rule out that expectations for inflation may experience significant fluctuations at some point in the future, causing market volatility, but this may happen next year. The U.S. rate cut is basically beneficial for global equity assets, commodity prices, and bond assets.
A leading private equity fund said, "According to past practices, Federal Reserve officials will influence market expectations through external statements and decide the specific magnitude and pace of rate cuts based on the performance of economic data. However, the main tone is expected to be methodical, aiming to minimize unnecessary market panic."
From the perspective of various assets, private equity believes that the Federal Reserve's rate cuts are beneficial to the performance of risk assets. Command Capital stated that during the rate-cutting process, emerging markets and growth stocks will benefit from improved liquidity and increased risk appetite, and assets such as gold and U.S. Treasury bonds will also perform well.
Zheng Xiaoqiu believes that, from the current point of view, considering the magnitude of rate cuts already priced into previous assets, U.S. stocks and gold still have some room for upward movement; U.S. Treasury bonds, due to more充分的 pricing, may be mainly volatile in the short term, and if rate cuts continue in the medium term, U.S. Treasury bonds still have good configuration value; among commodities, pay attention to the potential repair of copper, etc.; the performance of Chinese equity assets depends on the domestic policy response, and currently, the space for H-shares is more optimistic. "Of course, the trend of major asset classes still needs to continue to track the changes in the economic fundamentals and the corresponding reasons for rate cuts, not just the pace of rate cuts."
Kou Zhiwei said that for major asset classes, rate cuts have already been fully priced in, and the most important thing going forward is the performance of the U.S. economy. If the U.S. economy does not experience a recession, U.S. stocks are expected to achieve a style shift from large technology stocks leading the rise to an economic recovery-driven increase, and the downward space for U.S. dollar long-term bond rates and exchange rates is not large.
Private equity lays out major asset classes in advance to earn profits and is more optimistic about the valuation repair of high-quality growth stocks in the future.
According to the reporter's understanding, some private equity institutions have laid out some major asset classes such as gold and commodities in advance to earn profits, and are more optimistic about the investment opportunities of high-quality growth stocks after the rate cut.
"We have made certain operational layouts in advance before this rate cut, especially in macro strategy products, where we have continuous investment layouts for major asset classes such as gold, commodities, and overseas equity; after the rate cut, the main change is in the direction of China-related equity assets, observing whether domestic policies respond in a timely manner to boost domestic demand and drive market risk appetite." Zheng Xiaoqiu said that from the perspective of capital flow, he is more optimistic about the overall investment opportunities of Hong Kong stocks and Chinese concept stocks, including Hong Kong Internet, going abroad direction, real estate and other cyclical industries, and pharmaceuticals, all of which have certain trading opportunities, but should be adjusted in a timely manner in combination with domestic policy responses.
Fang Lei said that the current valuation of A-shares is at a low level, which may mean that the market pricing has included more pessimistic expectations, and some sectors and high-quality companies may have over-adjusted. With the Federal Reserve's rate cut, the domestic monetary policy space has opened up, and the macro environment faced by the domestic capital market will gradually improve, which is conducive to the valuation repair of high-quality growth stocks that have undergone significant price adjustments and whose valuations have significantly deviated from the fundamentals. He is optimistic about two types of targets: one is value growth stocks with mass consumption as the main demand, which are expected to benefit from domestic policy efforts and are also expected to benefit from the expected easing of liquidity; the other is technology growth stocks driven by technological breakthroughs, which currently have not high valuations, but have a large long-term development space, and are also expected to undergo value reassessment following the easing of liquidity.Command Capital stated that it will formulate investment strategies based on the Federal Reserve's interest rate cut pace and magnitude, the U.S. election, and domestic counter-cyclical policies in real estate and fiscal areas. The key focus will be on the direction of going overseas, domestic demand sectors benefiting from domestic counter-cyclical policies, and dividend-type sectors in a low-interest-rate environment.
Yuanxing Fund said that mainly considering the possibility of a risk preference recovery process in the domestic capital market, the Federal Reserve's current operation may be more beneficial to A-shares and Hong Kong stocks. "At the current position, we are more optimistic about equity assets and have reduced the position and duration of interest rate bond assets."