CICC Liu Gang: "East rises and west falls" has converged, completely reversing attention to the April time point, maintaining the judgment of Hong Kong stocks at 23,000-24,000 points, and the next movement may resemble the fluctuations in October

After the Spring Festival, the global capital market landscape has quietly changed: the Chinese stock market continues to strengthen, with the Hong Kong stock market performing particularly well; in contrast, the U.S. stock market has entered an adjustment period. As the halo of "American exceptionalism" fades, the new narrative of "the East rises while the West falls" continues to ferment. How will the trend of the East rising and the West falling unfold in the future? Has the market landscape of the past few years been completely reversed? On Monday, March 17, Liu Gang from CICC provided an analysis and interpretation in his weekly column. The investment workbook representative summarized the key points as follows: The so-called "East rises and West falls" has already shown some convergence in asset performance. To completely reverse the market performance and capital flows of the past two to three years, some conditions and verification points may still be needed. The main time point may focus around the not-so-distant month of April. (The U.S. AI bubble) is currently at a level somewhat akin to 1997 and 1998. If we compare it to the bubble of 2000, it does not necessarily have to reach the level of 2000, but it is far from that level. What people are worried about is not (the U.S. recession) itself, but the reflexivity of interest rates, which means doing the opposite. The main logic is that once interest rates are cut, it can immediately solve some problems, rather than simply amplifying growth pressure indefinitely. **So what is the market worried about? The market is concerned about the various policy swings we are currently seeing (U.S. tariff fluctuations) and the situation of making enemies on all sides, which may cause the Federal Reserve to, like in 2022, watch helplessly as growth slows down in the face of supply-side inflation pressures brought on by the pandemic,even facing the risk and pressure of interest rate hikes. This is what everyone is most worried about and is currently the most unavoidable risk at this position. (The narrative of the East rising and the West falling) indeed carries risks, but the main risk is actually the concern about the arbitrariness of U.S. policies, rather than the natural slowdown of the U.S. economy and the risks associated with AI that I just mentioned. The risks of AI cannot be completely disproven or reversed so quickly. Southbound capital may be at least one of the main forces in this round of funding; so far, overseas capital has mainly been passive and trading-oriented. Long-term capital is not absent from returning, but it is more localized, and overall overseas capital remains underweight, which only indicates that European and American investors will act a bit slower. The trading proportion of southbound capital has reached 30%, with a holding ratio in the range of about 10% to 15%. Overall, southbound capital still has a space of about 600 billion to 800 billion, with a relatively certain increment of around 300 billion. In terms of final views, we still maintain our previous judgment on Hong Kong stocks. The range of 23,000 to 24,000 is currently still considered reliable, with the market oscillating back and forth within this range Next, the Hong Kong stock market may experience fluctuations at a certain level similar to the wave in October last year, rather than a significant pullback, but rather waiting for new catalysts. These catalysts include the upcoming earnings season, especially for leading internet companies; the tariffs on April 2; and more predictions about other macroeconomic policies and consumer policy prospects provided by the Politburo meeting in the first quarter. The timing, the intensity of policy implementation, and the realization of profits are all crucial. Liu Gang from CICC believes that "the rise of the East and the fall of the West" is not an either-or story. To determine whether the Hong Kong stock market can maintain its strength and whether the U.S. stock market will continue to adjust, it is essential to focus on the key time window in April and observe whether the trend of the U.S. AI industry has completely reversed, and whether fiscal aspects, such as whether Bessenet can completely refrain from any fiscal stimulus. He also pointed out that the recent rapid fluctuations in the market can be simply attributed to emotional drives, which is a shift in market narratives. Whether it is the AI narrative, fiscal narrative, or geopolitical narrative, these core narratives have undergone significant changes in the past month or two, thereby influencing the trends of the Hong Kong stock market, European stock markets, and U.S. stocks. Here are the highlights compiled by the investment homework representative (WeChat ID: touzizuoyeben) to share with everyone: "The rise of the East and the fall of the West" has already converged The so-called "the rise of the East and the fall of the West" refers to the noticeable pullback in the U.S. stock market this year, especially in the past two weeks, while the Hong Kong stock market has surged significantly, influenced by various narratives. At this point, the so-called "the rise of the East and the fall of the West" has already converged in asset performance. However, what everyone is interested in is whether this narrative can further evolve at this position, whether it can drive the entire market sectors, and even completely reverse the capital chain. If this can be achieved, the potential for growth will be even greater. In simple terms, it is whether the Hong Kong stock market has further room for significant gains and whether the U.S. stock market has risks of substantial declines. There are actually many factors involved. At this point in time, everyone is essentially extrapolating some narratives, and this extrapolation contains many large assumptions. If these assumptions hold true, then perhaps the conclusions will also hold. But the problem is that these assumptions are largely based on expectations; people merely expect that it may evolve in this direction. Therefore, we need to analyze how much of these assumptions have already been reflected in the market and how much actually requires some observation points for verification, rather than simply extrapolating indefinitely. So what is the conclusion? I tend to believe that "the rise of the East and the fall of the West" has already converged, and we have seen this in market performance. However, to completely reverse the market performance and capital flows of the past two to three years, it may still require some conditions and verification points to realize. This is what we need to focus on next. The main time point may focus around the upcoming April, which I will discuss in detail later. Therefore, I think it may still be too early to talk about a complete reversal. Of course, if there are confirmations at certain time points, such as the U.S. stock market not being devoid of trading opportunities or rebound opportunities, how should we view that? US Stock Leaders vs Hong Kong Stock Leaders: Market Performance and Valuation Convergence First, let's take a look at some data. The so-called "East rises, West falls" has changed since 2024, as we see the performance of US stocks and Chinese bonds has shifted to US stocks declining, while leading tech stocks in Hong Kong are significantly rising. This rise, especially evident among leading companies, has converged very clearly. Coupled with the rapid decline of US stocks over the past week or two, this has further reinforced this so-called trend. We can observe this situation from both market performance and valuation perspectives. However, when it comes to valuation, our view is that if we do not consider earnings growth prospects and profitability, looking solely at absolute valuation is not very meaningful. For example, the leading US tech stocks, known as the "Seven Sisters," currently have valuations of about 25 to 27 times. In contrast, the average valuation of the top ten companies in China, after weighted averaging, is around 17 to 18 times, indicating a significant gap. However, it is essential to consider profitability and earnings prospects comprehensively, so we cannot simply look at absolute valuations when making comparisons. Capital Performance: East Rises, West Has Not Fallen So, is there an "East rises, West falls" in terms of capital? This is also a concern for many. From the data, I will explain the EPFR data criteria when discussing southbound capital later. But from simple data, we can conclude that there is indeed an "increase" in the East, but there is no obvious "fall" in the West. Where can we see this "increase"? It is represented by the red line, which indicates all funds combined under the EPFR criteria, both active and passive. You can see that the magnitude of this capital inflow is not that large, even less than the overall capital inflow speed and scale on September 24. In fact, that wave of capital inflow was very significant, which may reflect our expectations more. We even believe that southbound capital, including a portion of overseas funds with a Chinese background, may be the main force behind this round of capital inflow; this is a hypothesis. Therefore, overseas capital is not as large in scale compared to that wave on September 24. As for whether the West has "fallen," the blue line shows that there has been no significant outflow of funds from the US. Moreover, one point we need to clarify is that even if it has fallen, it is not a binary story. Even if it has fallen, for example, Buffett holding $300 billion in cash does not necessarily mean he must hold stocks; he can also hold cash or government bonds, and it does not have to be a direct switch to other markets. "Sentiment" is Changing: AI Narratives, Fiscal Narratives, and Geopolitical Narratives Driving Hong Kong, European, and US Stocks So this is not a binary story. Therefore, when we look at capital, we need to pay attention to these two points. If there are no significant changes in capital temporarily, while market performance changes rapidly, what is driving this? In simple terms, it's about emotions, about everyone's expectations, or to use a trendier word, it's about "narrative." Whether it's the narrative of AI, the narrative of finance, or the narrative of geopolitics, these have all undergone significant changes in the past month or two, driving the Hong Kong stock market, European stock markets, and U.S. stocks. You can see that the risk premium has shown a clear reverse change—our risk premium is declining, which means emotions are improving; the U.S. risk premium is rising, indicating that people need more risk premium to cope with various policies and uncertainties. So this is reflected in emotions. These three charts reverse the "American exceptionalism" Then the question arises, will the narrative that everyone sees necessarily come true? Or how much of it is what people expect to happen at this position? What is the core reason behind the so-called "American exceptionalism" and "the East rises while the West falls"? In fact, we have been analyzing this issue in several thematic reports over the past period. For example, looking at the so-called "East rises while the West falls" relationship from the two accounts of China and the U.S.—the financial account and the trade account, as well as a series of reports on the revaluation of Chinese assets, all provide detailed analysis around this issue. Actually, due to time constraints, I won't elaborate too much on these three small charts, which I have reported in previous meetings. But these three charts basically illustrate what "American exceptionalism" is. Conversely, if "the East rises while the West falls" reverses, what is being reversed? The so-called "American exceptionalism" is reflected in the content of these three charts. The chart on the left shows that the overall fiscal situation has supported the fundamental outlook; the second is in the technology sector, where the rise of ChatGPT in 2023 has driven the leading companies in the U.S. stock market, leading to a significant rise in the U.S. stock market. Looking at the middle chart, its characteristic is that if you exclude the performance of a few leading tech stocks, the overall performance of the U.S. stock market over the past two to three years may be less than 20%, which is much weaker. This shows that leading tech stocks have played an important role. This trend has also led to a significant inflow of global funds, which in turn has helped the fiscal financing on the left, masking some of the current account deficit issues. So this has formed a positive feedback loop over the past three years. However, since the beginning of this year, especially in the past month or two, think about whether these three points have encountered some challenges. The so-called narrative change, the first is in fiscal matters. Elon Musk is still calling for fiscal cuts and layoffs within the U.S., creating a marginal change in this narrative. Some tax reduction policies from Besant are still not forthcoming. At the same time, after disputes in the White House, Europe, especially the UK and Germany, has begun to independently increase fiscal infrastructure and even military spending, forming a narrative and actual situation of fiscal expansion on the European side So we see that the euro is rising, euro bond yields are increasing, leading to a weakening of the dollar, and this narrative is being shaken or even loosened. The second narrative is in the technology sector, the impact brought by DeepSeek is obvious and needs no further explanation. The third is the randomness of Trump's policies since the beginning of the year, including this feeling of being at odds with everyone, which has indeed shaken investors' expectations and confidence in him. So these three factors combined have become the main reason for reversing the so-called "American exceptionalism." Let's think about these three reasons; which one has been definitively reversed? For example, has the AI trend in the U.S. completely reversed? In terms of fiscal policy, can Bessent completely refrain from any fiscal stimulus going forward? It may not have reached the point of being completely falsified yet.** It's just that at this point in time, people are seeing some signs and have such concerns, so it is reflected in the sentiment of the asset market. The level of the AI bubble in the U.S. is not as large as everyone imagines As for this viewpoint that has been leaning towards the "East rises and West falls" direction, many have already heard a lot about it, so I will mention a few points that may be slightly different, which might be more valuable and helpful to everyone. If we continue to discuss in this direction, as mentioned earlier, plus the recent analyses that everyone has been hearing, the incremental value may not be that significant. So I will present a few points that might be different or offer a different perspective. First, the AI bubble in the U.S. is not as large as everyone imagines. For example, in the left chart, the top seven companies account for 28%, which is much higher than the 22% during the internet tech bubble. But you should know that in the right chart, their net profit share is 21%, also far higher than the 9% profit share in 2000. This means they still have fundamental support. Although valuations are indeed high, hasn't there also been a process of bubble deflation recently? If we compare it to the Hong Kong stock market, the top ten companies' market capitalization share has exceeded 28%, but their net profit share is lower than this figure. So in comparison, the impact of U.S. stocks is not that exaggerated. The current level is somewhat like 1997 or 1998. If we compare it to the 2000 bubble, it does not necessarily have to reach the level of 2000, but it is far from that level. Of course, in 2026, especially whether the capital expenditures of the leading companies can be realized, may be the main driving force behind whether the leading U.S. companies can further evolve. At least it is not as imagined, with such a large bubble. Additionally, after the recent valuation adjustments, some leading stocks are not considered very expensive anymore The second point is that when comparing absolute valuations, everyone must comprehensively consider their profit prospects. For example, the median valuation of leading companies in the U.S. stock market is around 27-28 times, but their profit margins are also about 30%. In contrast, our leading companies currently have profit margins of less than 15%, and the median valuation is around 16-17 times, which is relatively matched. If our profit margins and ROE can significantly increase in the future, meaning profits can be realized, then valuations can naturally see further improvements. However, profit realization is a very important condition and should not simply be compared based on absolute valuations. I hope everyone pays attention to this perspective. The market is not worried about the U.S. recession itself, but about the reflexivity of interest rates The second point is that there is a so-called recession concern regarding short-term U.S. growth. We want to reiterate our viewpoint that if everyone is simply worried about a natural slowdown in growth, I think it is not a cause for concern. First, this is not unexpected; second, it is not a bad thing. You can recall the period from July to September 2024, when everyone was even more concerned about the risk of a U.S. recession due to the Sam Rule than they are now. But the Federal Reserve could completely resolve this issue by cutting interest rates by 100 basis points in a quarter. So what everyone is worried about is not this matter itself, but the reflexivity of interest rates, meaning to do the opposite. The main logic is that once interest rates are cut, it can immediately resolve some issues, rather than simply amplifying growth pressure indefinitely. So what is the market worried about? The market is concerned that the various policy swings and the situation of making enemies on all sides we see now may cause the Federal Reserve to, like in 2022, face supply-side inflation pressures brought on by the pandemic, watching growth slow down helplessly, and even facing the risk and pressure of raising interest rates. This is what everyone is most worried about and is currently the most unavoidable risk at this position. Imagine if there were no such risk; for the U.S. stock market, if valuations have adjusted, the Federal Reserve can cut interest rates, and rates have decreased, it would actually be a very good entry point. So this is the most critical factor that the market is concerned about. But to be honest, this is also the factor for which we currently find it most difficult to provide a clear evolution path. In the trend of "the East rises and the West falls," pay attention to the April time point President Trump has only been in office for eight weeks since January 20, but it feels like a long time. The policy swings, especially the reflection of policy signals through social media, have indeed caused a lot of confusion and distress, which is also the key factor affecting everyone's expectations. We do not want to provide a strong, definitive judgment on which direction to go, as this is indeed very difficult and is a key factor troubling everyone. But I want to mention two points that may slightly differ from what everyone is thinking. First, regarding tariffs, although he has said so much and swung back and forth, in fact, up to now, the overall tariffs on Europe, Canada, and Mexico have been postponed repeatedly without any increases. Although everyone has seen him oscillate and say a lot, on the contrary, the tariffs on China have actually increased, directly imposed. This indicates that there are still some constraints, or at least he treats it as a means. Although it seems there are various oscillation risks, with daily talk of increasing this tariff or that tariff, in reality, not much has been added so far. We need to observe on April 2nd whether he will take further actions regarding the reciprocal tariffs and the 301 investigation. If he continues to talk a lot but does little, the market will feel somewhat reassured, at least not as worried as everyone is about the constant back-and-forth on these policies. The second point is about timing. This was the case before he took office in 2017. Everyone can look at the performance at that time; Trump's trade policies reversed for three quarters. Timing still emphasizes that he has only been in office for eight weeks and can only implement some market-unfriendly policies through executive orders. Policies that the market likes, such as infrastructure investment, increasing other investments, and tax cuts from Bessenet, currently show no progress, and it is impossible for them to happen so quickly in terms of timing. So these two points may have been overlooked by everyone, surrounded by all the negative information, forgetting that there is a necessary process in terms of timing. What we want to convey is that while everyone is completely following the trend to deduce directions, do not overlook the different pieces of information I just mentioned. When will these pieces of information be validated? One is on April 2nd; we will see whether the reciprocal tariffs are still being ignored and significantly increased. If the market sees that after all the talk, there are actually no major increases, then the market will understand that it might just be a routine, and this issue will become somewhat dulled. The second is after April; will there be any signs of growth policies like tax cuts from Bessenet? If we see that the policy risks are still significant, but no growth policies emerge, then we may need to further lower our overall expectations for the U.S. stock market. But at this position, I think there is no rush to make a complete and thorough reversal judgment. If things evolve slightly in a positive direction, even leading to some rebounds or gradual, small accumulation opportunities, it is entirely possible. So this point regarding "the East rises while the West falls" is worth reminding everyone to pay attention to, especially the several time points we just mentioned. This narrative indeed carries risks, but the main risk is actually everyone's concern about the arbitrariness of (U.S.) policies, rather than the natural slowdown in growth and the risks of AI that I just mentioned. The risks of AI cannot be completely falsified or reversed so quickly. Hong Kong stocks' leading companies contribute most of the profits, still a structural market Let me talk about the Hong Kong stock market, including changes in capital flows. First, we must clarify that the Hong Kong stock market, up to now, remains a clearly structural market. That is to say, leading companies, especially in the internet sector, have contributed the vast majority of profits. Until last Friday, the consumer sector significantly expanded, attracting more attention and interest from everyone So why emphasize this point? First, if we are active equity investors, it becomes quite difficult to outperform once there is a slight deviation in style. Second, everyone prefers to use ETFs to speculate on such a market. It may seem like an index-type market, but it is actually very structural, which means that the AH premium is not a good measure of the performance difference between A-shares and Hong Kong stocks. Most of the more than 200 companies in H-shares are state-owned enterprises with dividend cycles, rather than internet companies, which are completely absent. The difference between A-shares and Hong Kong stocks is mainly because the leading companies that have risen are all in Hong Kong stocks. However, from another perspective, if we price these state-owned enterprise dividends from the perspective of dividends rather than from the growth perspective, which can only be achieved with fiscal support, then 125% may already be break-even for most investors. Because you have to pay a 20% dividend tax, 1:0.8, which does not apply to insurance investors. Now the position is only five points away, relatively speaking, this gap is what we discussed in the first point regarding dividends. The second point is the risk premium in the technology sector. Over the past period, we have seen a rapid decline to what position? Basically, it corresponds to the emotional position of the historical high of the Hang Seng Index in 2021. These two differences basically explain the structural market I mentioned earlier. To make it easier for everyone to understand, let me give an analogy: the Hang Seng Index has a technology component of 40%, so this is the 40% technology part, while the remaining 60% does not include technology. The ratio of 4 to 6 adds up to the overall concept of the Hang Seng Index. There is still a space of 600 to 800 billion HKD for southbound funds So why does this situation occur? The funding situation and narrative are clear; the funding situation plays a very important role. Southbound funds could be at least one of the main forces in this funding. We can see that every time there is a large inflow of southbound funds, the AH premium quickly converges. How strong have southbound funds been this year? From the beginning of the year until now, a total of 380 billion has flowed in, averaging over 8 billion per day. Last year, the total was only 800 billion, which is about 3.4 billion per day. If this pace continues, with such inflows every day, the total inflow this year could reach nearly 2 trillion, which is very considerable and a significant increase. However, whether it can reach such a level, we think is still somewhat forced. Why do we say that southbound funds are the main force? Because overseas funds, so far, we have observed that they are still mainly passive and trading-type funds. Long-term funds are not absent from returning, there are some, but they are more localized. Where are they localized? In the Asia-Pacific region, and even funds with a Chinese background that originally invested in the U.S. are quickly returning their dollar funds that remain overseas But overall overseas funds are still underweight, and long-term funds have not significantly flowed back, which can only indicate that the actions of European and American investors will be relatively slow. This is also why last Friday, when everyone saw broad consumption and traditional consumption rising, many investors were paying attention to whether long-term funds from European and American investors had returned, as this aligns very well with their aesthetic. This may require some observation and time. So where will the incremental funds for southbound capital come from in the future? As a main force, southbound capital is definitely a key factor. We can see that we have sorted out the four rounds of significant capital inflows since 2014, and each time there was an accelerated inflow, it was actually when the market was relatively overdrawn. The nature of southbound capital can easily lead to overdrawing, and of course, the shareholding ratio is also continuously increasing. So far, the transaction ratio of southbound capital has reached 30%, and the shareholding ratio is around 10% to 15%. We have conducted an estimation on southbound capital, and the overall conclusion is that there is still a space of about HKD 600 billion to 800 billion. In addition to insurance funds, there are also specific calculations for private equity, public funds, and individual investors. The confirmed incremental space is HKD 300 billion But aside from insurance funds, the other types of funds are relatively related to trends. In simple terms, the strength or weakness of the trend is closely related to the flow of funds. If the market weakens, this capital may slow down immediately. For example, in the case of public funds, at the end of last year, they overall allocated 25%, with a maximum allocation of 50%, but it is unlikely to reach that high. They increased a bit in the first quarter of this year. The total investable Hong Kong stocks for public funds is HKD 2.2 trillion, with active equity funds around HKD 1.5 trillion. So combined, this part of the increment may be around HKD 200 billion to 300 billion. However, this part of the funds may also be related to market trends. So we calculated this volume; last year it was HKD 800 billion, and this year it has already reached HKD 370 billion. Assuming an optimistic scenario, if there is still HKD 600 billion to 800 billion, the relatively confirmed increment is around HKD 300 billion. Southbound capital does not have absolute pricing power; the movements of long-term European and American funds are more critical Another question that everyone is more interested in is whether southbound capital has absolute pricing power? It is feared that this does not exist, but southbound capital clearly has stage-specific and marginal pricing power. For example, when there is a lot of inflow at a certain stage, we can see the performance of the funds, and the decline in AH premium is very obvious. This has been very significant in the performance since this year and in last year's dividend sector. But the issue of absolute pricing power is, who are the two relatively major opponents of southbound capital? The first is foreign capital, which, although it does not hold shares, can borrow securities, making it a major relative opponent. The second is placement, as Hong Kong stocks can do flash placements Recently, we have seen an increase in placements, and major shareholders can theoretically provide unlimited supply of chips. Southbound funds cannot participate in placements, and the lightning placements quickly emerged overnight, so overall, it is equivalent to everyone's holdings being diluted. As you can see, in just half a month since March, the scale of placements has already caught up to half of the market peak in 2021. This is something to pay attention to, the movement of long-term funds from Europe and the United States is more critical. In comparison, it may have a higher threshold or take longer compared to southbound funds. If the overall macroeconomic consumption can stabilize significantly, I think it is more likely that long-term funds from Europe and the United States will return. This is why everyone is paying more attention to this area, and it is also what we discussed with you earlier about what foreign capital ultimately cares about. Maintain the judgment of Hong Kong stocks at 23,000-24,000 points, balancing four major directions In terms of our final viewpoint, we still maintain our previous judgment. (Hang Seng Index) The level of 23,000 to 24,000 is familiar to everyone as the range we provided. This level is still relatively reliable so far, and the market has been oscillating back and forth within this range. The market's divergence will also widen; we originally provided this level not to say it cannot be broken through, nor that it will immediately correct after touching it, but rather that at this position, it has at least incorporated optimistic sentiment and narratives, which naturally leads to market divergence, with some investors feeling the need to take profits temporarily, while others remain relatively optimistic. Essentially, everyone is using their expectations to speculate, betting at different costs, so divergence will naturally increase. Next, it may again oscillate at a position like last October, not necessarily undergoing a significant correction, but waiting for new catalysts. These catalysts include the upcoming earnings period, especially for leading internet companies; the tariffs on April 2; and more predictions about other macroeconomic policies and consumption policy prospects provided by the Politburo meeting in the first quarter. I think the rhythm, the intensity of policy implementation, and the realization of profits are all very critical. As for the calculations of these levels, the timing, and the logic, I won't elaborate in detail due to time constraints. We have previously reported to you that we temporarily still need to maintain this range level judgment. At this position, you can make some slight adjustments. Because we previously indicated to intervene during downturns and take profits during exuberance, creating a balance in market structure. You can balance some dividends, waiting for consumption, waiting for technology, and if there is a slight pullback, I can cut back in. If recent consumption can significantly rise, of course, this must be based on policy support, I think sustainability may need to be observed for better results. Our overall judgment is focused on four major directions. The first two directions are stable returns and technological growth. You can do sector rotation like a seesaw, slightly shifting to this side while leaving some space without reducing overall positions Wait for a slight pullback on this side, and when there are catalysts, I will switch back. As for new consumption and going overseas, everyone can do bottom-up stock selection, which can capture some alpha market opportunities, and the results will be better. Source: Investment Workbook Pro Author: Wang Li Risk Warning and Disclaimer The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk