What progress has been made in the "reversal trade" of U.S. stocks, European stocks, Hong Kong stocks, and Chinese bonds since the beginning of the year?

Core Viewpoints Since the beginning of this year, some previously strong trend assets (including both positive and negative trends) have experienced varying degrees of reversal, such as U.S. stocks, European stocks, Hong Kong stocks, and Chinese bonds. The reversal trades of these assets generally exhibit two typical characteristics: extreme price performance in the prior period + changes in driving factors. We believe that the valuation repair of the "reversal trade" varieties such as U.S. stocks, Hong Kong stocks, European stocks, and Chinese bonds has largely been completed this year, and whether a new trend can form in the future still requires confirmation from data and performance. Looking ahead, there are signs of a turnaround in domestic consumption sectors and black commodities, which may have the potential to become assets with reversal potential. In terms of allocation suggestions for this week, overseas market sentiment has slightly repaired, backed by a dovish stance from the Federal Reserve + softening of Trump’s tariffs + stabilization of some data; however, tariff disturbances and concerns about the U.S. fundamentals still exist. With the arrival of domestic performance season + external tariff disturbances, market risk appetite is suppressed, making safe-haven assets more favored. Core Theme: Review and Outlook of This Year's "Reversal Trade" Some previously strong trend assets have experienced varying degrees of reversal, characterized by extreme price performance in the prior period + changes in driving factors. Specifically: 1) The exceptionalism of the U.S. has significantly shaken this year, with a sharp correction in U.S. stocks, which are expected to stabilize in the short term, but remain cautious in the medium to long term. 2) Germany's fiscal expansion injects medium to long-term certainty into European stocks, but internal differentiation in Europe + imminent tariff shocks may lead to regional and structural opportunities outperforming the index. 3) The domestic policy support stance is clear + the AI technology revolution has driven Hong Kong stocks to achieve two rounds of valuation reassessment, but valuations have been repaired to a reasonable level, facing short-term performance season + tariff disturbances + entering a seasonally weak period, leading to increased cautious sentiment among funds. 4) Chinese bonds have basically completed the correction of overdrawn expectations, and the volatility space in the bond market is likely to narrow, with short-term directional guidance needed from liquidity and fundamental data. We attempt to identify high-odds assets that may have reversal trading opportunities from the dimensions of extreme price performance + marginal changes in driving factors, suggesting attention to domestic consumer stocks, the steel sector, and U.S. Treasury bonds. Market Condition Assessment: Positive Domestic High-Frequency Data, Repeated Overseas Tariff Remarks Domestic high-frequency data conveys positive signals, and market economic expectations have improved, but uncertainties regarding tariffs, external demand, and employment remain significant. The overall U.S. fundamentals continue to cool, with the March FOMC maintaining interest rates unchanged, releasing a slightly dovish signal, while uncertainties regarding Trump’s tariffs continue to disturb the market. In terms of domestic monetary policy, the change in MLF bidding method has completely exited the policy interest rate attribute, and will subsequently become a purely quantitative tool; the policy intention is not to implement substantial interest rate cuts, but it has a similar effect. The Ministry of Finance has released the "2024 Report on the Implementation of China's Fiscal Policy," mentioning that fiscal policy for 2025 should be more proactive, continuously exerting effort and being more forceful. Allocation Suggestions: Overseas Market Sentiment Repair, Domestic Safe-Haven Assets More Favored In the short term, under the narrative of reducing costs + stabilizing funds in the domestic bond market, trading sentiment for long bonds may be maintained, but caution is advised as the 10-year Treasury bond approaches the lower limit of 1.7%; opportunities in the medium to short end remain certain With the arrival of the performance period and disturbances such as external tariffs, the risk appetite in the stock market is suppressed. It is recommended to increase attention to sectors like steel that are at low levels and have supply-side expectations. If the "recession trade" in the U.S. is completely falsified and inflation faces upward risks due to tariff impacts, the market focus may gradually shift from "stagnation" to "inflation," putting upward pressure on U.S. Treasuries, suggesting a moderate reduction in duration. In the past week, both the Trump put and the Fed put have boosted market sentiment, combined with the U.S. March services PMI exceeding pre-expansion expectations, leading to a warming of market risk appetite, slightly favoring U.S. stocks in the short term, while being overly optimistic in the medium to long term is not advisable. Gold remains generally in line with trends, suggesting buying on adjustments; tight copper spot prices are pushing up prices, with short-term volatility likely increasing due to tariff comments and U.S. growth prospects; under expectations of domestic production reduction policies, black commodities may have short-term recovery opportunities; crude oil may present trading opportunities, but remains bearish in the medium to long term. Follow-up Attention: China PMI, overseas economic data Domestic: 1) March official manufacturing PMI; 2) March Caixin manufacturing PMI; Overseas: 1) U.S. February core PCE; 2) U.S. February durable goods orders; 3) U.S. February existing home sales index; 4) U.S. initial jobless claims for the week ending March 22. Risk Warning: U.S. inflation may exceed expectations again, and geopolitical relations remain tense. Report Body Review and Outlook of This Year's "Reversal Trade" Since the beginning of this year, some previously strong trend assets (including both positive and negative) have experienced varying degrees of reversal, such as U.S. stocks, European stocks, Hong Kong stocks, and Chinese bonds. The reversal trade of these assets generally exhibits two typical characteristics: extreme price performance in the early stage + changes in driving factors. Specifically: Since the beginning of this year, the cooling of the U.S. fundamentals + convergence of technological advantages + rising policy uncertainty have significantly shaken the exceptionalism of the U.S. Firstly, Trump's tariff comments have increased trade frictions externally, worsening geopolitical relations between the U.S. and its allies, and internally bringing risks of economic "stagflation," leading to a noticeable cooling of fundamentals. Secondly, fiscal tightening + DOGE-driven layoffs further suppress domestic demand, dragging down economic growth. In addition, DeepSeek has driven a revaluation of Chinese tech stocks, and Germany's fiscal expansion has injected certainty into the economy, causing the U.S.'s relative advantage over other economies to decline significantly, leading to a global reallocation of funds back to domestic markets. Ultimately, this has resulted in a trend reversal of U.S. stocks with high valuations and high crowding, especially the index of the seven major U.S. tech giants, which has seen a larger correction. Recently, the European economy has exceeded expectations + Germany's fiscal expansion + expectations of a ceasefire in the Russia-Ukraine conflict and the demand for Ukraine's reconstruction, combined with the relatively low valuation levels of European stocks, have led to a continuous rise in European stocks. The Eurozone's composite PMI for February is 50.2, remaining in the expansion zone for consecutive months, and since February, Citigroup's European Economic Surprise Index has significantly turned positive. On March 22, local time, German President Frank-Walter Steinmeier officially signed the amendment to the Basic Law, clearing the last obstacle for the German government to implement a massive fiscal plan financed by new debt, establishing a special fund of €500 billion that is not subject to debt constraints, and increasing the debt capacity of local governments. From a static valuation perspective, as of March 21, the Eurozone STOXX 50 index has a price-to-earnings ratio (TTM) of 16.9 times, significantly lower than the S&P 500 index's valuation level of 26.1 times. With multiple favorable factors, global funds have begun to accelerate their return to the European market. Since the end of last year, the domestic policy has clearly supported the economy + the AI technology revolution has driven the Hong Kong stock market to achieve two rounds of valuation reassessment, breaking free from a three-year bear market logic. Since 2021, the price-to-earnings ratio of Hong Kong stocks has continuously adjusted from a high of 16 times to around 8 times by the end of September 2024, which is at the 10th percentile level over the past 10 years, offering relatively high cost-effectiveness for allocation. With the policy shift, improvement in corporate earnings, and the catalyst of the AI narrative, from the bottom in September 2024 to the peak in March 2025, the Hang Seng Index has achieved an increase of about 45%, and the Hang Seng Tech Index has reached a maximum increase of 80%, representing a typical "reversal trade." Since February, the Chinese bond market has also experienced a round of reversal trading, correcting the overly high interest rate cut expectations after last year's "moderate easing." On one hand, the 1.6% yield on ten-year government bonds has already priced in future rate cut expectations, and after extreme price movements and monetary policy falling short of expectations, the Chinese bond market quickly adjusted to a yield of 1.9%, modifying expectations. On the other hand, under the stock-bond seesaw effect, the rise in the stock market has boosted risk appetite, leading to capital outflows from the bond market and triggering a decline in net value - a negative feedback spiral of bond fund and wealth management redemptions. Looking ahead, whether these assets can further evolve from reversal trading into a new trend is worth paying attention to. The Federal Reserve's dovish stance + Trump's softened attitude towards tariffs + some data stopping the decline suggest that the U.S. stock market is likely to stabilize in the short term. However, even after adjustments, valuations remain expensive + uncertainties have not been completely eliminated, making it difficult to return to the previous upward trend. The March FOMC meeting of the Federal Reserve released certain "limited" dovish signals, indicating that future rate cut paths will be more dependent on "hard data" for decision-making, soothing market sentiment. Trump's softened remarks on tariffs and the implementation of reciprocal tariff policies on April 2 have reduced policy uncertainties, which may lead to a temporary stabilization of market risk appetite in the U.S. stock market From a medium to long-term perspective, the current adjustment in the US stock market is mainly contributed by the denominator side, but after the valuation correction, it is still not cheap. However, tariffs have led to rising corporate costs and declining investment confidence, fiscal tightening, and layoffs driven by DOGE have resulted in a decline in terminal demand. The numerator side of the US stock market may still face some adjustment pressure, with attention on the US economic data for March and the first quarter earnings reports. Germany's fiscal expansion injects medium to long-term confidence into European stocks, but internal differentiation in Europe and imminent tariff impacts may lead to regional and structural opportunities outperforming the index. According to calculations by the Huatai Macro team, Germany's new fiscal plan in 2025 may boost GDP growth by 0.7-1 percentage points, significantly higher than the previous five years' average growth rate of 0.1% and the potential growth rate of around 0.7%; the boost to Eurozone growth is estimated at 0.2-0.3 percentage points (from "Germany's Fiscal 'Whatever It Takes' Moment?" March 12, 2025). After the announcement of the fiscal expansion plan, Germany's March ZEW Economic Sentiment Index surged to 51.6, the highest since February 2022. However, over half of the revenue structure of European stocks comes from regions outside Europe. If tariffs drag down global economic growth, there will still be pressure on corporate profits. In contrast, domestic demand sectors such as defense, infrastructure, and manufacturing are more likely to benefit from local fiscal expansion. The improvement in corporate profits, policy tilt towards the technology sector, and the AI narrative still support Hong Kong stocks in the medium to long term. However, valuations have been restored to reasonable levels, and in the short term, they face performance periods, tariff disturbances, and entering a seasonally weak phase. There is a strong wait-and-see sentiment among funds, and it is recommended to wait for sufficient chip exchanges, the release of tariff risks, and layout opportunities after the phenomenon-level AI applications are implemented. After reaching a new high stage, the bullish sentiment among funds in Hong Kong stocks has significantly cooled. The inflow scale of southbound funds, which was the largest buyer of Hong Kong stocks previously, has noticeably narrowed last week. As of March 19, EPFR data shows that the outflow scale of active foreign capital has expanded. After Tencent's earnings report was released last week, the CAPEX guidance fell short of market expectations, and the short-term AI investment enthusiasm may have cooled. Xiaomi's announcement of a $5.3 billion placement also impacted short-term sentiment. The China Bond Market has basically completed the adjustment of overdraft expectations, and the volatility space in the bond market is likely to narrow. In the short term, directional guidance is needed from the liquidity and fundamental data. The MLF operation method has changed to multiple price bidding, indicating the central bank's protective attitude towards liquidity, which has a similar effect to interest rate cuts. In terms of operations, it has been previously suggested to adopt a high-position accumulation mode. In the short term, under the narrative of cost reduction + stable funds, the trading sentiment for long-term bonds may be maintained, but caution is required as the 10-year government bond approaches the lower limit of 1.7%. Opportunities in the medium and short term remain relatively certain. Finally, we attempt to find high-odds assets that may have reversal trading opportunities from two dimensions: extreme price interpretation + marginal changes in driving factors: First, the valuation of the domestic consumption sector is relatively cheap. Policies such as the "Special Action Plan to Boost Consumption" bring marginal benefits, but the key lies in whether the improvement in residents' income expectations can lead to endogenous growth in consumption demand. In terms of valuation levels, as of March 21, the Wind Consumer Index's price-to-earnings ratio is 23 times, at the 23% percentile level over the past five years, having corrected more than 60% from the 61 times peak in 2021. In terms of policy changes, the consumption-boosting plan prioritizes improving residents' income, including promoting wage income growth and broadening property income channels through stabilizing the stock market. However, considering that the proportion of stocks in residents' wealth is still low and the stock market is volatile, it is difficult to form a sustained wealth effect. In contrast, real estate sales and housing price data have a better indicative effect on consumption demand in creating consumption scenarios, representing income expectations, and expanding property income. Attention should be paid to whether subsequent real estate data will recover. Second, the 10-year U.S. Treasury bond has entered the lower edge of the fluctuation range. As market risk appetite rises and the impact of tariffs on prices gradually becomes apparent, the market may gradually shift from trading "stagnation" to trading "expansion," with potential upward pressure on interest rates. With the cooling of the U.S. economy and adjustments in the U.S. stock market, Trump's tariff policy has softened somewhat, providing short-term support for the economy and the stock market through the Trump put and Fed put. The probability of a U.S. economic recession remains low. Tariffs have already manifested in commodity inflation, such as copper and steel. In March, the University of Michigan's one-year inflation expectation rose to 4.9%, and the five-year inflation expectation rose to 3.9%, the highest level since 1993. Third, the trend characteristics of commodity prices are obvious, with major commodity prices being extremely high, such as gold and COMEX copper nearing historical highs. If tariffs do not meet expectations, a short-term pullback is not ruled out. At the same time, domestic black series commodities continue to decline in price. Under the expectation of reduced domestic steel production, attention should be paid to the potential reversal trading opportunities in steel prices and steel stocks Since 2021, the price of rebar has continuously adjusted from a peak of 5,898 yuan/ton to the current price of about 3,200 yuan/ton, a decline of nearly 50%. The profit margins for steel mills have significantly narrowed, while production restriction policies are conducive to optimizing supply-demand contradictions from the supply side. However, a substantial rebound in steel prices may still require support from the demand side. The demand for steel in the manufacturing sector has shown some signs of recovery, but the demand from the real estate sector still needs to stabilize, limiting the space for demand recovery. For steel stocks, as of March 24, the steel index PB was 0.97 times, only at the 27th percentile of the past 10 years. From a pricing logic perspective, the price trend of steel stocks is influenced by the market beta (since 926, valuations have synchronized with the market recovery) and the alpha returns from steel prices. Attention should be paid to the subsequent strength of production restriction policies, real estate demand, and steel price trends. (See Huatai Nonferrous and Steel Group report "The Simulation of Restarting Supply-Side Optimization in Steel" March 4, 2025) Insights First, asset reversal trading generally exhibits two typical characteristics: "extreme price interpretation + marginal changes in driving factors." After an asset runs along a single trend for a long time, the forces of reversal are also accumulating, where significant events often mark the turning points for reversal trading, such as Trump's tariff policy and the domestic 926 policy combination. Second, the transition from "reversal trading" to a new trend is not instantaneous. The former largely represents a return of price and sentiment pendulums, while the latter relies more on continuous improvement in fundamentals and ongoing confirmation of data; otherwise, it may only be a temporary "rebound" rather than a true "reversal." Third, we believe that the valuation repair of "reversal trading" varieties in U.S. stocks, Hong Kong stocks, European stocks, and Chinese bonds has largely been completed this year. Whether a new trend can form in the future still requires confirmation from data and performance. Looking ahead, signs of a turnaround have appeared in domestic consumption sectors and black commodities, which may have the potential to become assets with reversal potential. This Week's Allocation Suggestions 1) Major Asset Classes: Overseas market sentiment has slightly repaired, backed by a dovish stance from the Federal Reserve + softening of Trump's tariffs + stabilization of some data. However, tariff disturbances and concerns about the U.S. fundamentals still exist. With the arrival of domestic performance periods + external tariff disturbances, market risk appetite is suppressed, making safe-haven assets more favored; attention should be paid to dividend styles. 2) Domestic Bond Market: On Monday, changes in the MLF bidding method, along with the first net injection since August 24, are expected to boost bond market sentiment. We previously indicated that the 10-year government bond yield of 1.9% has basically completed the expectation correction, suggesting a shift to a more positive stance. Last week's report indicated that the bond market might shift to trading within a narrow range. Considering changes in fundamental expectations and unchanged regulatory attitudes, the lower limit for the 10-year government bond is still unlikely to reach 1.7% In the short term, under the narrative of cost reduction and stable funding, the trading sentiment for long-term bonds may be maintained. However, caution is advised as it approaches the 1.7% lower limit, while opportunities in the medium and short term remain certain. 3) Domestic Stock Market: Recently, market sentiment has fluctuated, stemming from investors' adjustments to expectations for future trends, related to funding conditions, earnings season, and external disturbances. However, the long-term logic of China's technological progress and market confidence rebuilding has not fundamentally shaken. With the arrival of the earnings season and external tariff disturbances, market risk appetite has been suppressed. It is recommended to increase attention to sectors like steel that are at low levels and have supply-side expectations, and to monitor changes in overseas tariffs. 4) U.S. Treasuries: We previously emphasized that U.S. Treasuries have a "higher win rate and lower odds." However, as some economic data stabilizes, Trump's softened stance on tariffs, and the Federal Reserve's dovish attitude, the tail risks in the U.S. have significantly decreased, leading to a corresponding reduction in the win rate of U.S. Treasuries. It is advisable to moderately reduce duration. Looking ahead, if the U.S. "recession trade" is completely disproven and inflation faces upward risks due to tariffs, the market focus may gradually shift from "stagnation" to "inflation." Pay attention to initial jobless claims and February core PCE prices this week; if prices rebound and employment stabilizes, there may be upward pressure on U.S. Treasury yields. 5) U.S. Stocks: In the past week, both Trump put and Fed put have supported market sentiment, combined with the U.S. March services PMI exceeding expectations, leading to a warming of market risk appetite and a slightly positive outlook for U.S. stocks in the short term. However, the policy uncertainty of the Trump administration may be difficult to eliminate completely in the short term, and risks of "stagflation" due to tariffs may also constrain the Federal Reserve's actions. If there are no breakthrough developments in technology sectors like AI, the upside potential for U.S. stocks may be limited in the medium to long term, and excessive optimism is not advisable. 6) Commodities: With the softening of Trump's tariff policies and a warming market risk appetite, gold has seen slight adjustments but remains overall in line with trends. It is recommended to maintain a strategic allocation mindset and buy on adjustments. Copper supply is tightening, and under tariff expectations, the U.S. is ramping up imports, leading to tight spot markets. The Shanghai copper forward contracts have shown backwardation, and the COMEX-LME price spread remains high. Due to tariff discussions and disturbances in the U.S. growth outlook, short-term volatility in copper may increase. U.S. sanctions on Venezuela have boosted oil prices, and in the short term, there may be trading opportunities influenced by geopolitical factors and Trump's remarks, though the medium to long-term outlook remains bearish. Under expectations of domestic production cuts, black commodities may have short-term recovery opportunities. Market Condition Assessment Macroeconomic Quadrant: Domestic: High-frequency data from the fundamentals is conveying positive signals, and market economic expectations have improved. First, although the structure of social financing in February is not ideal, the total year-on-year growth rate has rebounded. Second, data from January to February shows that production investment is relatively strong, while consumption is overall flat, with GDP growth in the first quarter likely exceeding 5%. Third, recent high-frequency data indicates an acceleration in the resumption of construction work, sustained real estate heat, and significantly exceeding expectations in sectors like construction machinery. Market concerns about some long-term fundamentals have decreased, and short-term positive signals have emerged. However, uncertainties related to tariffs, external demand, and employment remain significant. In the next month or two, various data may continue to show characteristics of differentiation and bottoming out, but compared to the end of last year, economic expectations have clearly improved Overseas: The overall fundamentals in the United States continue to cool down. The March FOMC kept interest rates unchanged, releasing a slightly dovish signal, while the uncertainty surrounding Trump's tariffs continues to disrupt the market. February retail sales increased by 0.2% month-on-month (expected 0.6%, previous value revised down to -1.2%). The New York Fed manufacturing index fell from 5.7 in February to -20.0 in March, marking the largest decline since May 2023, with a significant drop in new orders. January business inventories increased by 0.3% month-on-month (expected 0.3%, previous value -0.2%). The real estate market is cooling down, and financing costs continue to rise. The March NAHB housing market index is 39, the lowest since August 2024 (expected 42, previous value 42). As of the week ending March 14, the MBA 30-year fixed mortgage rate is 6.72%, up from 6.67%; the MBA mortgage application activity index decreased by 6.2% week-on-week, previous value 11.2%. The employment market remains stable, with initial jobless claims for the week ending March 15 at 223,000 (expected 224,000, previous value 220,000). Domestic Policy Judgments: Monetary Policy: The MLF bidding method has changed, and the policy interest rate attribute has completely exited, becoming a purely quantitative tool. On March 24, the central bank announced that to maintain ample liquidity in the banking system and better meet the differentiated funding needs of various participating institutions, starting this month, the Medium-term Lending Facility (MLF) will adopt a fixed quantity, interest rate bidding, and multiple price bidding method for operations. On March 25, a 450 billion MLF operation will be conducted, with a term of one year. There are several notable changes in this announcement: first, the bidding method has changed to "multiple price bidding." The MLF was established in 2014 and had previously always been fixed-rate, quantity bidding. Second, the central bank unusually announced the operation amount for the next day's MLF in advance. Third, this MLF operation is a net injection of 63 billion, marking the first net injection since August of last year. Although it may not directly lead to a loosening of funds, the supportive attitude behind it is evident. The policy is not intended to be a substantial interest rate cut, but it has a similar effect. Fiscal Policy: The Ministry of Finance released the "2024 China Fiscal Policy Implementation Report." Regarding the outlook for fiscal policy in 2025, it mentioned the need to be more proactive, continue to exert force, and provide more support, specifically reflected in five aspects: first, increasing the fiscal deficit ratio, intensifying expenditure strength, and accelerating expenditure progress. Second, arranging for a larger scale of government bonds to provide more support for stabilizing growth and adjusting the structure. Third, vigorously optimizing the expenditure structure, strengthening precise investment, and placing more emphasis on benefiting people's livelihoods, promoting consumption, and increasing momentum. Fourth, continuously working to prevent and resolve risks in key areas, promoting stable fiscal operations and sustainable development. Fifth, further increasing transfer payments to local governments to enhance local financial capacity and ensure the bottom line of the "three guarantees." Real Estate Policy: Last week, real estate policies made efforts on both the supply and demand sides. The first batch of allocated affordable housing in Guangzhou has started accepting applications, with a total of 1,336 units, all of which are existing homes. Anhui issued a document to relax household registration restrictions in the main urban area of Hefei Zhejiang has launched a direct offsetting service for the balance of provincial provident fund accounts against provident fund loans. Henan has released new policies for the provident fund, relaxing loan thresholds, with the maximum loan amount in Zhengzhou urban area raised to 1.2 million yuan and to 1 million yuan in suburban counties. Jining has increased the provident fund loan limit and reduced the down payment ratio for provident fund loans. Follow-up Attention Domestic: March official manufacturing PMI; March Caixin manufacturing PMI; Domestic refined oil will open a new round of price adjustment window; Zhongguancun Forum annual meeting. Overseas: U.S. February core PCE; U.S. February durable goods orders; U.S. February existing home sales index; U.S. initial jobless claims for the week ending March 22; U.S. fourth quarter real GDP revision; U.S. fourth quarter real personal consumption expenditures; U.S. March Michigan University consumer confidence index preliminary value; U.S. March one-year inflation rate; France March CPI; UK February CPI; Eurozone March economic sentiment index; Bank of Japan's summary of opinions from the March monetary policy meeting. Risk Warning 1) U.S. inflation exceeds expectations again. If U.S. inflation does not show significant relief for a long time, it may lead to the Federal Reserve raising interest rates more than expected, triggering a global risk asset correction; 2) Continued geopolitical tensions. Geopolitical conflicts should be classified as "significant impact but difficult to predict." The geopolitical situation and diplomatic negotiations are constantly changing, and can only be continuously tracked and planned, rather than making investment decisions based on emotions. This article is authored by Zhang Jiqiang, Tao Ye, et al., sourced from Huatai Securities Fixed Income Research, original title: "[Huatai Asset Allocation] Review and Outlook of This Year's 'Reversal Trade'" 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. Investment based on this is at one's own risk