SINOLINK SECURITIES: The Federal Reserve's "preventive interest rate cuts" may lead to a new round of global physical demand expansion

According to the Zhitong Finance APP, SINOLINK SECURITIES released a research report stating that as the Federal Reserve restarted interest rate cuts in the September meeting, market attention to the subsequent rate cut path continues to heat up. The Federal Reserve's rate cut cycle will create threefold benefits for Chinese corporate profits: first, a "soft landing" for the U.S. economy is expected to boost market demand in the U.S., thereby driving exports from Chinese companies; second, the narrowing of the interest rate differential between China and the U.S. provides room for domestic monetary policy adjustments, and the expectation of a reduction in the Loan Prime Rate (LPR) further lowers domestic financing costs; third, it reduces the overseas debt costs for Chinese companies, especially benefiting high-leverage industries such as real estate and infrastructure.

The main points of SINOLINK SECURITIES are as follows:

The September FOMC meeting temporarily passed the Federal Reserve's independence stress test

The focus of the September FOMC meeting was not on the magnitude of the rate cut, but on whether the FOMC committee, as a collective, could pass this independence stress test of the Federal Reserve, given the rapid addition of new member Milan, the legal troubles faced by member Cook, and the previous dissenting votes from members Waller and Bowman.

From the voting results, only new member Milan supported a 50 basis point rate cut in this decision. Neither the meeting decision nor the Summary of Economic Projections (SEP) showed any significant anomalies apart from Milan, reflecting, to some extent, the continued independence of the Federal Reserve: Powell mentioned in the press conference that "persuasion through reason" is part of the Federal Reserve's DNA, implying that Milan's 50 basis point decision (which aligns with Trump's significant rate cut advocacy) did not gain widespread acceptance; at the same time, Powell chose to "honestly avoid" questions related to independence. If this was a test of the Federal Reserve's independence, Powell's performance was undoubtedly qualified.

However, the significant divergence between Trump and the Federal Reserve on rate cuts mainly stems from fundamental differences in their economic growth demands, so his political pressure on the Federal Reserve will continue. The September FOMC was merely the first stage of the Federal Reserve's independence stress test.

Strategy: The Federal Reserve's "preemptive rate cuts" may guide a new round of global physical demand expansion

In the past 30 years, the Federal Reserve has implemented preemptive rate cuts in 1995, 1998, 2019, and 2024, after which the U.S. economy generally achieved a "soft landing," meaning GDP growth reversed its downward trend, and the unemployment rate slightly decreased. For the U.S. stock market, the Federal Reserve's "preemptive rate cuts" mean increased liquidity and a higher probability of economic stabilization, thus the U.S. stock market often performs well after previous "preemptive rate cuts." For emerging markets, the impact of the Federal Reserve's rate cuts mainly occurs through two pathways: (1) rate cuts relieve the depreciation pressure on emerging market currencies, providing greater policy space for internal monetary policy; if economic growth stabilizes, their capital markets may benefit from the spillover of the U.S. dollar; (2) if the U.S. achieves a "soft landing" post-rate cut, emerging markets will also experience some demand spillover from the U.S. on a fundamental level. For a net-exporting country like China, a "soft landing" after preemptive rate cuts means that external demand driven by overseas capital expenditure and the recovery of emerging markets will further increase.

Domestic economic data for August continues to show a downward trend under the influence of "anti-involution," but some positive factors should also be noted: (1) New price increase factors in the Producer Price Index (PPI) are stronger than in July, marking the first turning point of the year; upstream "anti-involution" production restrictions have driven coal and black metal prices to turn positive month-on-month, and the current PPI may stabilize due to external demand support; 2) High value-added products in exports remain strong; 3) There has already been some phenomenon of raw material replenishment domestically. The domestic economic model has shifted from strong "supply-driven" to "supply clearing + recovery of overseas commodity demand," which means that under the same nominal GDP growth, corporate profit levels will begin to recover.

Contrary to market investors' perceptions, we believe that a bull market driven by the recovery of China's profit fundamentals may be in the making. Currently, after the interest rate cut, a new scenario transition is beginning, and two types of opportunities can be focused on: ① After the liquidity suppression is lifted, the Hong Kong stocks that have stagnated from June to August may have a catch-up rally; ② Growth investment will gradually shift from technology-driven to export-oriented.

Recommended focus: First, physical assets that benefit from improved operating conditions due to domestic anti-involution, recovery of manufacturing activities after overseas interest rate cuts, and accelerated investment: upstream resources (copper, aluminum, oil, gold), capital goods (construction machinery, heavy trucks, lithium batteries, wind power equipment), and raw materials (basic chemicals, fiberglass, paper, steel); Second, after profit recovery, opportunities will gradually emerge in domestic demand-related fields: food and beverages, pork, tourism, and scenic spots; Third, the long-term asset side of insurance will benefit from the bottoming and recovery of capital returns, followed by securities firms.

From an industry perspective, what opportunities will the Federal Reserve's interest rate cut cycle bring?

(1) Building Materials: Long-term benefits from interest rate cuts for overseas expansion

The global investment expansion cycle is expected to begin, focusing on countries and regions along the "Belt and Road" such as Africa, Southeast Asia, the Middle East, and Central Asia, where China has a competitive advantage in industries. Key recommendations include African tiles, African glass, African cement, fiberglass, and the African electrolytic aluminum sector.

Africa has experienced elections, and if the investment cycle expands, leading companies that continue to lay out in Africa and participate in international competition are expected to benefit.

The fiberglass industry had an export volume share of 26.7% in 2024, having already undergone domestic substitution and formed a pattern where China is the world's primary supplier. Against the backdrop of U.S. interest rate cuts, both export volume and price have elasticity, for example, ① the U.S. real estate market's prosperity drives inventory reduction, ② demand from emerging market countries is expected to exceed expectations.

(2) Construction Machinery: Positive outlook for global demand resonance recovery during the interest rate cut cycle

During the interest rate cut cycle, we are optimistic about the upward trend in overseas construction machinery demand. Currently, overseas demand has been declining for two and a half years, and inventory reduction is nearing its end, with expectations for recovery in overseas demand driven by the recovery in Europe and the U.S.

1. North America: From a long-term perspective, demand delayed by the elections in 2024 is expected to be gradually released starting in 2025; in the short term, Caterpillar's positive sales in Q2 and two consecutive quarters of inventory replenishment are important signals of a turning point in Europe and the U.S., and on September 18, the Federal Reserve cut interest rates by 25 basis points, with two more cuts expected by the end of the year, which may further drive market recovery.

2. Europe: From a vertical perspective, due to the decline in demand in the real estate sector, European construction machinery demand will be significantly pressured in 2024, dropping to 2020 levels and remaining at the bottom; in the short term, from April to July 2025, exports of excavators to Europe from China and Japan achieved four consecutive months of positive growth, with growth rates of 34.6% and 53.1% in June and July, respectively, indicating accelerated growth. Considering inventory consumption in 2023-2024, demand for the construction market driven by interest rate cuts, and infrastructure policy promotion, we are optimistic about Europe entering an upward phase

3. The prosperity of emerging markets is expected to be maintained: Economic growth in Southeast Asia, urbanization, and mining activities are jointly driving the demand for construction machinery; infrastructure policies in countries like Saudi Arabia and high prices for resources such as copper and aluminum are likely to sustain high demand for infrastructure and mining in the Middle East, Latin America, and Africa.

In the domestic market, the performance of earthmoving machinery sales in H1 2025 remains strong, and there is an increasing number of non-earthmoving sectors, such as engineering cranes, showing signs of recovery. Currently, several major manufacturers have valuations of 12X or below for 2026, marking a narrative turning point for the engineering machinery sector as it enters a global cyclical recovery. It is recommended to adopt a long-term sector allocation.

(3) Pharmaceuticals: Interest rate cuts benefit new drug development and upstream supply chains

The Federal Reserve's interest rate cuts reduce the financing costs for biotechnology companies, encouraging them to increase R&D investment and promote new drug development pipelines, bringing more orders to CXO companies. The upward trend in the innovative drug industry remains unchanged. As major products from overseas multinational corporations face patent cliffs, the strategy of introducing pipelines through business development to fill revenue gaps is expected to continue. In the past, global collaborations for innovative drug product licensing have been more concentrated in the second half of the year, awaiting further business development catalysts.

(4) Petrochemicals: Macroeconomic interest rate cuts support prices

The dot plot indicates that the Federal Reserve is expected to cut rates twice this year, with macroeconomic rate cuts providing some support for prices. In the short term, geopolitical factors remain disruptive, with Russia-Ukraine, Venezuela, and Israel-Iran being major areas of concern; in the medium term, weak supply and demand remain the main contradiction. After the decline in electricity demand in the Middle East in September, exports from the Middle East may further increase. Attention should be paid to the impact of domestic Strategic Petroleum Reserve replenishment on the Q4 and H1 2026 balance sheets.

(5) Metals: Expectations of interest rate cuts further boost industrial metal prices

In the context of continuous interest rate cut expectations, precious metals maintain high prosperity; copper downstream shows strong resilience during price corrections, with demand performing better than expected; we continue to be optimistic about the recovery of aluminum indirect exports after interest rate cuts, and under low inventory and tight supply, the electrolytic aluminum sector is expected to enter a new normal of sustained high profitability