"Under the nest, there are finished eggs." In 2018, the volatility of global financial markets intensified, risk appetite declined significantly, and highly speculative targets, emerging market currencies, and highly valued assets alternately fell sharply. As the fixed star of global stock markets, US stocks have fallen sharply since October, with only the NASDAQ index still gaining slightly during the year, while the MSCI global stock index also fell more than 6% after surging more than 20% in 2017. In the short term, the intermittent adjustment of the US stock market will continue as a whole, and the downside space is relatively large; in the long run, the rise and fall of the US stock market will affect the whole body, and it is advisable to lay out the asset allocation during the adjustment period in advance.
We believe that there are the following historical experiences about the US stock market that deserve attention: first, the cycle of the US stock market is long and bearish, which dominates but does not completely determine the performance of the global stock market; second, the "West is not bright and the East is bright" during the US stock adjustment period, and the global relative value high point will switch to the market where the real economy has a significant performance or a financial center substitution effect; third, the valuation of the US stock industry is squeezed, and the bull market leads the rising sector under the greatest pressure during the adjustment period; fourth, micro choice and rigid demand are the first, and daily consumption and health care will reflect the bottom position value.
The U.S. stock cycle bull is long and bearish, but no matter the rise or fall, it will move the whole body. For decades, U.S. stocks have been the world's largest stock market by market capitalization. Over the past three decades, although financial deepening has driven the expansion of other stock markets, the total global market capitalization of US stocks has been around 40%, and it has never been less than 30% on an annual basis. In the past five years, as the US economic recovery has led the world, the continuous bullning of US stocks has also returned its market value from a low level to near the historical center. In the two decades leading up to the current bull market in the U.S. stock market (2009 to present), there have been two complete bull-bear cycles in global stock markets (1990-2000, 2000-2002, 2002-2007, and 2007-2009), and the bulls and bears of the U.S. stock market are highly compatible with it.
Compared with the world's ten major stock indexes with more complete data (regardless of the difference in exchange rates, dividends, index structures and other factors), the Mumbai Sensex 30 and NASDAQ indexes have increased by more than 20 times in the past 28 years, equivalent to a compound annual growth rate of more than 11.5%. In addition, the Hang Seng Index, the Dow Jones Industrial Index, the S&P 500, and the German DAX have more than or nearly 10 times the performance (equivalent to a compound annual growth rate of just under 9%), but the first breakthrough of the Hang Seng Index occurred at the end of the previous bull market, and only briefly exceeded the historical high in early 2018, while the highs of other indexes were established at the end of 2017 and are a symptom of the current bull market.
At the end of the past two bull cycles, the bursting of the technology bubble and the subprime mortgage crisis were key detonators, but the impact of U.S. stocks on global stock markets can also be seen. Despite the short bulls and bears, the bear market has fallen not to be underestimated, and in the past two rounds of US stock bear markets, MSCI advanced economies and emerging markets have both pulled back by 50% or more. In the short term, the current trend of the global financial market has shown the characteristics of "event dependence", and the changes in the US stock market may occur at any time, and will trigger a large-scale adjustment of the market in different ways. In the long run, the new wave of protectionism that began in March 2018 changed the true recovery that began in 2017. With the increasing prominence of post-cyclical characteristics and the gradual emergence of the cost of trade frictions, the strength of the US economy may have peaked, regardless of non-local corporate factors, the trend of US stocks is also facing a trend suppression of fundamentals.
The West is not bright and the East is bright, and the performance of the real economy and the substitution effect of financial centers highlight the value of allocation. Measured by the total market capitalization of listed companies as a percentage of GDP, the average global asset securitization rate since the 1990s is about 85%. Due to the obvious differences in the size and structure of the economy and finance, the asset securitization rates of high-income countries and middle-income countries are quite different, with average values of 94% and 44% respectively. In 2007, emerging market economies outpaced advanced economies, and brics crossed the 10% threshold for total global stock market capitalization. If we take the financial crisis as a starting point, we can find that the ten-year average of the global asset securitization rate is still 85%, but the corresponding indicators for high-income countries and middle-income countries have become 101% and 55% respectively, reflecting the essence of structural changes in the global economy and financial landscape. By the end of 2017, the asset securitization rate in high-income countries climbed sharply to a record peak (138%), and correspondingly, risk assets such as US stocks and high-yield bonds also experienced a long bull market, and valuations were at historically high levels. In 2018, the global economy continued to recover, but the stability declined significantly, coupled with the overall tightening of the global long-term loose monetary environment since the middle of the year, the pressure on financial markets has further emerged.
In this case, focusing on the market with relatively limited downside space in the future is the key to the precautionary measures for asset allocation during the adjustment period: on the one hand, the overall atmosphere of the current global financial market is biased towards excessive pessimism, the current valuation of some oversold markets has overrepresented the actual damage to the real economy, and once the bulls and bears switch, the relative performance of the economy will become the focus of concern; on the other hand, if the policy environment changes positively, the risk appetite tends to stabilize, and the market with undrawn gains/oversold will also highlight the allocation value. From the historical experience, the West is not bright and the East is a significant feature of the US stock adjustment period, if the MSCI Global Index is used as a reference, Asian economies with excellent long-term economic growth performance, such as South Korea, India, and Hong Kong, have exceeded the benchmark in the past two rounds of US stock bear markets. Among developed markets, the UK stock index is the most robust, reflecting a certain degree of substitution effect on the STATUS OF THE UNITED STATES AS a global financial center.
Combined with the relative performance of the past two bear markets, we believe that the NASDAQ index will perform significantly below the benchmark during the US stock adjustment period in the future. It is worth mentioning that in 2000-2002, when the developed markets led the decline, or in 2007-2009, when the overall decline in emerging markets was even greater, the US stock index and the Nikkei 225 index, with the exception of the NASDAQ, performed above or near the benchmark level.
Industry valuations squeeze bubbles, micro choices and rigid demand determine the bottom position allocation. Comparing the relative performance of the sector in the past two rounds of the US stock bear market, taking the S&P 500 industry indexes other than real estate as an example, it can be found that: First, the inter-industry valuation bubble is a significant feature of the adjustment period, especially the sectors that led the rise in the previous bull market have performed the worst in the subsequent bear markets, which are the information technology sector in the period 2000-2002 and the financial sector in the 2007-2009 period. Second, the distribution characteristics of the relative performance of the plate are relatively stable, and the industries characterized by micro-selection and rigid demand highlight the allocation value during the adjustment period. From the past two rounds of adjustment periods, daily consumption and health care are the two best performing industries, and the defensiveness of energy and utilities is also more obvious.
Combined with the above experience, we believe that the financial and information technology sector, as well as the telecommunications services sector, which is closer to the latter's performance during the adjustment period, will perform significantly below the benchmark in the overall decline of the stock market in the future, but the relative performance of the optional consumer sector, which has led the gains so far in this bull market, will not lag behind significantly. From the long-term trend point of view, although the technology stocks fluctuate greatly, for most of the past three decades, they have led the US stock market, rising by about 20 times so far, reflecting the broad growth prospects of "information optimization" and "technological progress". In fact, since the crisis for ten years, the trend of technology stocks has been relatively beyond the ups and downs of the overall market, reflecting that in the era of high connectivity, the new formats, new technologies represented by the Internet and their changes and shaping of society have once again updated investors' cognition.
We believe that in the future, technology stocks will face a double squeeze bubble between industries and within the industry, so investment in the new economy field needs to be carefully screened to seize the opportunity of "transformation" of the new economy under the dual role of market forces and policy supervision. As the market focus gradually shifts to the real economy and pays attention to endogenous growth, scientific and technological innovation that combines supply-side and industrial upgrading, and combines demand-side with consumption upgrading will still create the most growing investment targets.
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