The core issues of the global capital markets have shifted

Report Introduction The narrative of "the East rises while the West falls," led by technology stocks, has basically come to an end. Both the Chinese and U.S. stock markets are paying more attention to economic data, and global issues have shifted. In the future, for the domestic market, changes in the short-term inventory cycle will be key to stabilizing physical consumption; however, this is not the whole story of physical assets. During the global industrial reconstruction process, overseas manufacturing is also beginning to expand, which will bring better opportunities for globally priced physical assets. For domestic investors, globally priced commodities and China's midstream manufacturing exports to non-U.S. economies will become linked assets in a new round of global physical consumption. Summary The core issues of the global capital markets have changed. This week (March 17, 2025, to March 21, 2025), both A-shares and Hong Kong stocks experienced declines, primarily led by the TMT sector, representing technology stocks. We believe that the narrative of "the East rises while the West falls," led by technology stocks since January 2025, has basically come to an end. In our previous commentary "Uncertainty in an Independent Market," we mentioned that Chinese technology stocks have shown an independent market trend relative to U.S. technology stocks, which has caused the negative correlation between A-shares and U.S. stocks to reach a historical extreme, and there may be a mean reversion in the future. It is worth noting that, whether in A-shares or U.S. stocks, sectors that are more related to the economy have shown resilience. As we mentioned earlier, when investments in artificial intelligence-related infrastructure have reached historically high levels (roughly equivalent to the proportion of information infrastructure in the U.S. economy during the early 2000s tech bubble), a lack of phased applications may lead to a continued decline in capital expenditures. When the world's largest technology financial country begins to shift its narrative, it also signifies the start of a transformation in capital market issues. Recently, the rebound in the U.S. stock market has been more driven by a correction of overly pessimistic expectations regarding U.S. macroeconomic data, with objective data outperforming subjective data like PMI being the main driver, rather than more breakthroughs in the technology sector. Domestic: How to understand the divergence between electricity consumption and industrial added value? In January and February 2025, the cumulative year-on-year growth rate of electricity consumption in the secondary industry was only 0.9%, while the cumulative year-on-year growth rate of industrial added value was as high as 5.9%, resulting in a difference of 5%. We believe there are three main factors that can explain this divergence between electricity consumption and industrial added value: (1) The most competitive period for domestic manufacturing may have passed, with significant differentiation in production activities among large, medium, and small enterprises. The statistical criteria for electricity consumption and industrial added value are inconsistent: industrial added value is measured for large-scale industrial enterprises, while electricity consumption is measured across all enterprises. This may indicate that the decline in electricity consumption is due to the stagnation of production activities in small and medium-sized enterprises, in other words, the clearing out of small and medium-sized enterprises has begun. (2) Influenced by the transformation of the economic structure, the proportion of high-end manufacturing with low electricity consumption per unit of added value is gradually increasing. Under the trend of economic transformation, since 2021, the proportion of high-end manufacturing added value has gradually increased, while the proportion of high-energy-consuming industries has decreased, which will also lead to the divergence between electricity consumption and industrial added value. (3) The impact of the inventory cycle, which is currently still in the "stable prices and declining volumes" de-inventory phase, has led to the divergence between electricity consumption and industrial added value, similar to what occurred in 2005 and 2015 It can be confirmed that the freight volume from January to February did not decline along with electricity consumption; instead, it continued to rebound. At the same time, the high-frequency economic activity index is also performing well, even reaching a new high since 2023. (1) and (2) are more inclined towards medium to long-term factors, while the inventory cycle is a relatively short-term variable. The future stabilization and rebound of electricity consumption brought about by corporate restocking may depend on changes in expectations. The best time for physical consumption brought about by the "involution" of domestic manufacturing may have passed, but a significant short-term decline will face correction. Since 2023, the environment dominated by coal and electricity related to domestic manufacturing activities of physical assets is expected to be reversed starting in the fourth quarter of 2024 for the reasons mentioned above, but this is not the entirety of the physical asset story. Third, a new topic in repetition: Financial and technological countries going down, manufacturing countries going up. In the past period, the U.S. stock market has priced in a considerable expectation of an economic recession, while the European stock market has priced in expectations of fiscal expansion plans. The differences between the two have been priced in at a stage, whether from the exchange rate (U.S. dollar depreciation) or the stock market (German stocks significantly outperforming U.S. stocks). With Powell's speech correcting the market's pessimistic expectations for the U.S. economy and the passage of the German defense spending bill (due to market concerns about a one-year lag in the impact of European fiscal policy on the fundamentals), previous trades have entered the expectation realization phase: U.S. stocks rebounded, German stocks fell, while the U.S. dollar index stabilized and rebounded. Although the expectation of financial + technological countries going down versus manufacturing countries going up has entered a phase of repetition, the short-term rebound of the dollar may exert some pressure on globally priced commodities, but our medium to long-term trend has not changed. In the process of global industrial reconstruction, the unit resource consumption of GDP in non-U.S. economies is higher than that in the U.S., and the return of U.S. manufacturing itself is also increasing its unit GDP resource consumption, which will become a source of demand support for globally priced physical assets. Future observations should focus on the manufacturing PMI trends represented by Germany. Since 2023, globally priced commodities have not been the dominant assets globally, and this trend may systematically reverse after 2025. For domestic investors, globally priced commodities and China's midstream manufacturing exports to non-U.S. economies will become the linked assets for a new round of global physical consumption. Fourth, layout for the transformation of global topics. Since the second half of 2024, the trend of physical consumption growth > GDP growth > corporate profit growth in China under the continuously "involuted" environment of manufacturing has been alleviated, but the short-term market may underestimate the potential disturbance of changes in the inventory cycle on this alleviation. Moreover, a new logic of physical consumption is emerging: globally, the reconstruction of manufacturing industries in non-U.S. economies is beginning, and the rising structural proportion of U.S. manufacturing is being nurtured. After the short-term expectation realization trades, the world will return to the medium to long-term trend of financial and technological countries going down and manufacturing countries going up. We recommend: First, capital goods (engineering machinery, steel, automation equipment, etc.) and upstream (copper, aluminum, gold, and some minor metals like cobalt, antimony, germanium, etc.) that will benefit first from the recovery of domestic investment activities and global manufacturing activities. Second, the cyclical consumer sector (food, dairy products, beer, cosmetics, garment manufacturing, tourism, etc.) that has gradually alleviated past inhibiting factors, strengthened policy support, and is more focused on long-term mechanism reforms; Third, undervalued assets in the financial sector (banks, insurance). Risk Warning: Trump's tariff policy exceeds expectations; domestic economic recovery is not as expected. Report Body 1 The core issue of the market has shifted: from technology to the economy Since January 2025, the narrative of "the East rises and the West falls" led by technology stocks has come to an end, and both A-shares and U.S. stocks have begun to reflect more attention to the state of economic operations. This week (from March 17 to March 21, 2025, the same below), both A-shares and Hong Kong stocks experienced declines, mainly led by the TMT sector representing technology. We previously mentioned in our commentary "Uncertainty in an Independent Market" that Chinese technology stocks have shown an independent trend relative to U.S. technology stocks, which has caused the negative correlation between A-shares and U.S. stocks to reach a historical extreme, and there may be mean reversion in the future. It is worth noting that, whether in A-shares or U.S. stocks, sectors that are more related to the economy have performed better, which may indicate that the force driving the mean reversion of the negative correlation between A-shares and U.S. stocks in the future may come from: technology stocks no longer having an "independent" trend, but rather resonating with sectors that are more strongly related to the economy. This establishes the transformation of the market's core issue: from a technology narrative to an economic one. The direct reasons triggering the continued "March transition" this week are mainly twofold: first, the capital expenditure plans of some typical technology stocks are actually not as optimistic as previously reflected in market valuations; second, the speech by Federal Reserve Chairman Jerome Powell on Wednesday night corrected the external market's expectations for a U.S. economic recession, which may have led to a rebalancing of overseas funds between the Chinese and U.S. markets. At the same time, the disclosure of economic data for January and February in China, including a significant decline in electricity generation and consumption, has led the market to begin to focus on whether physical consumption has already bottomed out, while the market's pricing of domestic physical consumption has been quite pessimistic. 2 How to understand the divergence between electricity consumption and industrial added value? An important issue that we believe is worth paying attention to and discussing in the domestic economic data released for January and February is: why has there been a significant divergence in the year-on-year growth rates of electricity consumption and industrial added value? In January and February 2025, the cumulative year-on-year growth rate of electricity consumption in the secondary industry was only 0.9%, while the cumulative year-on-year growth rate of industrial added value was as high as 5.9%, with a difference of 5% In fact, similar situations have occurred in history, but they are relatively rare: they happened in 2005, 2007, and 2015. We believe there are three main factors that can explain the divergence between electricity consumption and industrial added value in this round: (1) The most competitive moment for domestic manufacturing may have passed, with significant differentiation in production activities among large, medium, and small enterprises. The statistical criteria for electricity consumption and industrial added value are inconsistent: industrial added value is calculated for enterprises above a certain scale, while electricity consumption is calculated for all enterprises. This may indicate that the decline in electricity consumption is due to the stagnation of production activities in small and medium-sized enterprises. This is also easy to understand, as small and medium-sized enterprises are the first to be affected in the process of supply clearing in manufacturing, which is reflected in the significant differentiation in PMI among large, medium, and small enterprises: small and medium-sized enterprises may have already begun to clear out. (2) Influenced by the transformation of the economic structure, the proportion of high-end manufacturing with low electricity consumption per unit of added value is gradually increasing. In 2024, the industries with the highest proportion of industrial added value in manufacturing include the chemical raw materials and chemical products manufacturing industry, computer, communication and other electronic equipment manufacturing industry, automobile manufacturing industry, non-metallic mineral products industry, electrical machinery and equipment manufacturing industry, and black metal smelting and rolling processing industry. However, traditional industries have a higher proportion of electricity consumption, especially the non-ferrous metal smelting and rolling processing industry, which has the largest proportion of electricity consumption but a relatively low proportion of industrial added value. It can be seen that under the trend of economic transformation, the proportion of added value in high-end manufacturing has gradually increased since 2021, while the proportion of high-energy-consuming industries has decreased, which will also lead to the divergence between electricity consumption and industrial added value. ![](https://mmbiz-qpic.wscn.net/mmbiz_png/8npuEFsWaVR4avwd5T9pM3TDEaS7Nq7WDicdZ8C6JzicfddFPShnP8odPRKcIdfPQia1zwIfDiby2lnt27OrFHn6sQ/640? (wx_fmt=png&from=appmsg) (3) The impact of the inventory cycle: Currently, we are still in the "stable prices and declining volumes" destocking phase, which has led to a divergence between electricity consumption and industrial added value, similar to what occurred in 2005 and 2015. Evidence shows that freight volume in January-February did not follow the decline in electricity consumption but instead continued to rise, while the high-frequency economic activity index is also performing well, even reaching a new high since 2023. In summary, the divergence between current electricity consumption and industrial added value is jointly caused by the "involution" efficiency improvement in manufacturing, economic structural transformation, and destocking. The first two factors are more aligned with the medium to long-term dimensions, while the inventory cycle is a relatively short-term variable. Whether companies will replenish inventory to stabilize and increase electricity consumption in the future may require observing a broader recovery in physical demand leading to an inventory cycle rebound: from equipment demand driven by investment → more intermediate goods and raw material demand as production equipment gradually comes online after investment is implemented → electricity demand. At the same time, we need to observe whether the recovery of small and medium-sized enterprises' activities will occur, reflected in the stabilization and rebound of the small and medium-sized enterprises PMI. From the aforementioned transmission chain, it seems that before replenishing inventory, the recovery of demand in equipment-related industries will precede that of midstream and upstream raw materials, which will in turn precede energy sources like electricity and coal. We should recognize why the physical consumption sectors more related to domestic manufacturing production activities (represented by thermal coal, hydropower, and highways) performed better than the globally priced bulk commodity-related sectors (copper, aluminum) from mid-2022 to mid-2024. The core reason lies in the domestic manufacturing sector's continuous "involution" through "price for volume," creating demand for physical consumption. Meanwhile, the U.S. economy is relatively strong compared to other economies (represented by Europe), and the relatively high dollar index also exerts some pressure on globally priced bulk commodities. However, the current change is: (1) As the degree of "involution" in manufacturing decreases, leading to clearing + economic structural transformation, the best moments for physical consumption driven by domestic manufacturing "involution" may have passed. In the future, it may change more in line with the inventory cycle itself, but the elasticity may be difficult to return to previous levels; it is just that short-term pricing is overly pessimistic (2) As the economy represented by the United States, a global financial and technological power, begins to show signs of a downturn, manufacturing countries are starting to recover, and the U.S. is also developing its manufacturing sector. The "involution" of manufacturing is spreading from domestic to global. At this time, globally priced physical assets are experiencing a better period compared to domestic manufacturing activities, although short-term pricing may fluctuate. 3 The trend of financial and technological powers declining while manufacturing countries rising enters a phase of fluctuation In recent times, the U.S. stock market has priced in significant expectations of an economic recession, while the European stock market has priced in expectations of fiscal expansion plans. The differences between the two have been reflected in both exchange rates (U.S. dollar depreciation) and stock markets (German stocks significantly outperforming U.S. stocks). With Powell's speech correcting the market's pessimistic expectations for the U.S. economy and the passage of the German defense spending bill, signs of fluctuation have begun to emerge this week: U.S. stocks rebounded while German stocks fell, and the U.S. dollar index stabilized and rebounded. Although expectations for the U.S. economy have been adjusted and there may be a lag between the passage of Europe's fiscal expansion plan and its actual implementation, the short-term rebound of the dollar may exert some pressure on globally priced commodities. However, we believe that the medium- to long-term trend of financial and technological powers declining while manufacturing countries rising has not changed. In the process of global industrial reconstruction, non-U.S. economies consume more resources per unit of total output than the U.S., which will become a source of demand support for globally priced physical assets. In the future, it is essential to closely monitor the PMI trends of the manufacturing sector, represented by Germany. If it continues to strengthen, it will confirm the trend of financial and technological powers declining while manufacturing countries rising. 4 The transformation is still ongoing Since the second half of 2024, the trend of physical consumption growth > GDP growth > corporate profit growth in China, under the continuously "involuted" environment of manufacturing, has been alleviated. However, the clearing of manufacturing capacity and the transformation of the economic structure are variables in the medium to long term. The short-term market may underestimate the potential impact of changes in the inventory cycle on the aforementioned trends. More importantly, from a global perspective, the reconstruction of the manufacturing industry in non-U.S. economies is beginning, and the "involution" of manufacturing is spreading from domestic to overseas. Historically, globally priced physical assets have performed better during periods of strength in non-U.S. economies compared to the U.S. economy. Although there may be fluctuations in the short term due to adjustments in U.S. economic expectations, after the phase of volatility passes, Will return to the medium- and long-term trend of financial and technological countries going down and manufacturing countries going up. Based on the above reasoning, we recommend: First, capital goods (engineering machinery, steel, automation equipment, etc.) that will benefit first from the recovery of domestic investment activities and global manufacturing activities, as well as upstream (copper, aluminum, gold, and some minor metals like cobalt, antimony, germanium, etc.). Second, the cyclical consumer sector (food, dairy products, beer, cosmetics, garment manufacturing, tourism, etc.) where past inhibiting factors are gradually easing, policy support is strengthening, and there is more focus on long-term mechanism reform. Third, undervalued assets in the financial sector (banks, insurance). 5 Risk Warning Trump's tariff policy exceeds expectations. If Trump's tariff policy is implemented beyond expectations, the short-term suppression of global demand will bring shocks, which is inconsistent with the assumptions in this article. Domestic economic recovery is less than expected. The assumption in this article is that the domestic economy will steadily recover in the future. If it encounters setbacks, it will be unfavorable for cyclical sectors. Author of this article: Mu Yiling/Fang Zhiyong et al., Source: Yiling Strategy Research, Original title: "The Transition is Ongoing 丨 Minsheng Strategy". 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