China's stock market rebounded slightly earlier this week, driven by the expected warming of the US Federal Reserve's interest rate cut, pointing back 18,000 points. However, the rebound did not last long, with a major pullback over the past week, especially on Friday (19th), and the Hang Seng missed the 18,000 point mark again. Accordingly, investor sentiment was also more subdued, with short trades climbing rapidly to a relatively high of 18.5% from a previous low of 12.9%. On the capital front, foreign funds continue to be weak, with cyclical outflows to the north again approaching $20 billion, and EPFR data show that foreign outflows have also accelerated. While the index weakened, some of the top red sectors, such as energy and raw materials, which had risen since the beginning of the year, also caused investor concern.

The Chinese consider the internal environment to be the key to determining the direction of Hong Kong stocks. US bond yields fell sharply at the end of last year, but Hong Kong stocks continued to fall. Hong Kong stocks continued to stagger when the US Federal Reserve opened its interest rate cuts in July-September 2019, and overseas active capital continued to flow in as examples. From this perspective, weak recent data and uncertain expectations for further policy direction may be a more important factor dragging on market movements. China's second-quarter GDP grew by 4.7% year-on-year, below market expectations of 5.1% and 5.3% in the quarter. In these, exports continued to show resilience, but slowing domestic demand led to weaker aggregate demand. The lack of consumer spending capacity and willingness, coupled with the run-up and rally in external demand in the first half of the year, and the possible variables of post-election trade policy for exports, still point to the need for fiscal efforts to hedge against a still weak and shrinking credit cycle in the private sector to boost internal demand.

In addition, the high red pattern that had risen since the beginning of the year has also clearly rebounded recently, reigniting the market's discussion of whether the high yield factor is “extinguished”. The CCP believes that the recent pullback in what seems to be a high dividend is not necessarily “to blame” on the dividend factor itself, but more to do with industry factors, such as the volatility of the energy and raw materials sector affected by the Trump deal. HOWEVER, THE HIGH DIVIDEND MARGINS OF A SHARES AND HONG KONG STOCKS ARE HIGHLY CONCENTRATED WITH THE ENERGY AND RAW MATERIALS SECTORS, AND THEREFORE ATTRIBUTE THEIR VOLATILITY TO THE DIVIDEND FACTOR. SECONDLY, THE HIGH DIVIDEND FACTOR IS NORMAL AFTER A LARGE INCREASE IN THE BALANCE SHEET, AS THERE IS SOME PULLBACK IN THE ROTATION AND DOES NOT CHANGE THE LONG-TERM INVESTMENT LOGIC. Edit. Given that the current 10-year debt ratio is around 2.3%, plus some risk compensation, the Bank advises caution if (A shares) yield is below 4% (Hong Kong stocks below 5%), pending a full pullback before intervening again.

Thirdly, but the short-term volatility does not change the long-term investment logic determined by the macro environment. In the absence of a significant opening of the credit cycle and the expected downside of long-term growth, the dividend factors that provide stable returns against the downside of the long-term rate of return are still worth investing in, unless fiscal momentum is strong. But the recent volatility is again evident, and the bank has always advised that when filtering high dividends, the focus should be on profitability and dividend capacity rather than simple low dividends, so those indicators with stable earnings and stronger subsequent dividend capacity offer better positioning opportunities in the recent volatility.

In summary, in the benchmark situation, the CCP believes that the expectation of strong stimulus remains unrealistic and internal and external constraints make it difficult to present policy in a “settled” way. In this case, the market is more likely to maintain a structured pattern of turbulence compared to index level actions. At the configuration level, growth blocks benefiting from divisional logic may have greater flexibility in short-term overseas bearish transactions, such as semiconductors, automotive (including new energy), media entertainment, software, biotech, etc. Conversely, high-dividend may run in phases, but this does not change the overall configuration landscape.

Overall, the CCP continues the bank's allocation logic in the outlook for the second half of the year, recommending three directions in structural terms: a downward trend in overall returns (high dividend yield and high buybacks, i.e. the “cash cow” with ample cash flow), local leverage (especially with the new PMI policy support in the third quarter of the year. Productivity related to technological growth that is still on the scene), and local price increases (natural monopoly blocks, upstream and utilities).