Source: CICC
Affected by the sudden weakening of the RMB exchange rate and external disturbances, overseas Chinese stock markets experienced another round of volatility this week after an unexpected sharp rebound in the previous week.
From a fundamental perspective, in the absence of further large-scale fiscal stimulus to drive PPI into positive territory, the market lacks fundamental support for inflation trades dominated by pro-cyclical sectors. Therefore, we remind the market that after fully considering positive catalysts, it may once again turn into a period of volatility, which has been confirmed.
The significant inflow of northbound funds and the outperformance of the Hong Kong stock market are also due to investors' avoidance of uncertainties before major central bank decisions overseas, balancing with optimistic expectations for domestic policies.
Both the Bank of Japan and the Federal Reserve have signaled a clear &#34;dovish&#34; stance, dispelling market concerns.
The Fed's March FOMC meeting sent a &#34;dovish&#34; signal, implying the possibility of the first rate cut around mid-year, which is expected to provide a favorable external environment for overseas Chinese stock markets in the short term.
Compared to market concerns about a potential reduction in the number of rate cuts, the Fed's dot plot still maintains the expectation of three rate cuts this year, largely alleviating market concerns. However, we still remind investors that whether the market will benefit from the decline in US bond yields and Fed rate cuts still heavily depends on domestic factors, as the divergence between the performance of the Hong Kong stock market at the end of last year and changes in US bond yields illustrates.
Domestic data shows that the economy remains relatively weak, so the balance between the two is starting to tilt: high-frequency data for March indicates economic weakness. In this environment, further policy support remains crucial. Fiscal expenditure in January-February this year (general public budget + government funds) increased by 116 billion yuan year-on-year, a slowdown compared to the 672 billion yuan increase in December last year. Therefore, we believe that high-frequency data and fiscal expenditure announced in the coming months will be key factors in evaluating the progress of fiscal policy.
Looking ahead, we believe that the market may continue to experience range-bound volatility in the short term. Before the pace of fiscal expenditure accelerates and data improves, we continue to recommend the &#34;dumbbell&#34; strategy focusing on three main themes (high dividends, technological growth, and partial overseas expansion and upstream sectors).

The market, dominated by pro-cyclical sectors, lacks fundamental support for re-inflation trading. Therefore, the market may turn volatile again after fully incorporating positive catalysts! Before the acceleration of fiscal spending and improvement in data, CICC continues to recommend three main themes for the "dumbbell" strategy (high dividends, technology growth, partial overseas expansion and upstream)

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