Global stock markets have rarely fallen sharply, can A-shares remain immune?

Concerns over the U.S. economy falling into recession and the appreciation of the yen have fueled market panic, leading to a historically rare plunge in U.S. stocks and Asia-Pacific stock markets.

Following the "Black Friday" that global stock markets experienced last week, on August 5th, major stock markets in the Asia-Pacific region encountered a "Black Monday."

How severe was the decline in Asia-Pacific stocks? On August 5th, the Nikkei 225 index fell by 12.4%, with the Nikkei index futures triggering the circuit breaker mechanism during the trading session, causing a temporary trading halt; the Taiwan Weighted Index in Taiwan, China, fell by 8.35%; the South Korean Composite Index saw a drop of 8% in the afternoon, triggering the circuit breaker mechanism and leading to a 20-minute market suspension, ending the day down by 8.77%; the FTSE Straits Times Index in Singapore fell by 4.07%; the S&P/ASX 200 in Australia fell by 3.7%; the three major indices in the Hong Kong stock market all closed lower, with the Hang Seng Index down by 1.46%.

On the same day, U.S. stock index futures plummeted during the Asian trading session, with Dow futures down by 1.3%; S&P 500 index futures down by 3%; and Nasdaq index futures down by 5.45%. The pre-market decline in the U.S. did not stop, with the Nasdaq index falling more than 5% before the market opened, and as of the time of writing, it was down by 1.76%.

Compared to the sharp declines in Japanese and South Korean indices, the three major A-share indices were more resilient. On August 5th, by the close of trading, the Shanghai Composite Index reported at 2860.70 points, down by 1.54%; the Shenzhen Component Index reported at 8395.05 points, down by 1.85%; the ChiNext Index reported at 1607.29 points, down by 1.89%; and the STAR 100 reported at 728.35 points, down by 2.58%.

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Affected by the global stock market, cross-border ETFs collectively declined. The Nikkei 225 ETF (513880), Nasdaq Technology ETF (159509), Nikkei ETF (159866), Asia Pacific Selection ETF (159687), and Nikkei 225 ETF Yifangda (513000) all saw declines exceeding 9%.

"The significant adjustment in the Japanese stock market in recent trading days is partly due to the unexpected interest rate hike by the Bank of Japan in its July meeting, while the probability of a rate cut by the Federal Reserve in September has increased, narrowing the U.S.-Japan interest rate differential and triggering a rapid appreciation of the yen," said Jiang Xianwei, Senior Global Market Strategist at J.P. Morgan Asset Management China. The rapid appreciation in the short term means that the profits obtained from yen carry trade cannot compensate for the losses brought about by the currency appreciation, leading to a surge in liquidation trades, which further drives the short-term cycle of yen appreciation. A strong yen has a negative impact on Japan's export industry, which has been performing well this year. On the other hand, the downward surprise in U.S. employment data for July has sparked market concerns about a potential recession in the U.S. economy, leading to adjustments in U.S. stocks and affecting Asian stock markets.

In addition to the aforementioned factors, Yongying Fund believes that the ongoing uncertainty of the U.S. elections, the risk of escalation in the Israeli-Palestinian situation, and further challenges to trading psychology also impact market trends.

What impact does the general decline in global stock markets have on the A-share market? Several interviewed individuals believe that under the circumstances of a general decline in global markets, A-shares' ability to withstand the market downturn fully demonstrates that previous adjustments have been quite sufficient. As global stock markets fall, some risk-averse funds are expected to flow towards A-shares.Why are global stock markets generally falling?

Yongying Fund believes that behind the chain reaction of the unwinding of the yen carry trade, there are two important logical threads: on the one hand, the Federal Reserve's interest rate meeting implies the prospect of a rate cut in September, followed by macroeconomic data such as PMI (Purchasing Managers' Index) and non-farm payrolls that fail to meet expectations one after another, intensifying the market's expectation of a hard landing, coupled with weak financial guidance from some technology companies, and the expected return on the leveraged "asset side" becomes worse. On the other hand, after Japan confirmed the interest rate hike, it provided a hawkish guidance for consecutive rate hikes, and the expected cost on the leveraged "liability side" becomes higher. In addition, the uncertainty of the U.S. election continues to exist, and there is a risk of escalation between the U.S. and Israel, further challenging the trading mentality.

UBS Wealth Management Investment Director's Office believes that the Japanese stock market has led the decline in the global market in the past few days, which occurred after the yen's sharp rebound against the Bank of Japan's interest rate hike last week. As investors continue to close their short yen positions, the U.S. dollar against the yen has fallen rapidly. The upcoming Federal Reserve rate cut cycle, ongoing scrutiny of AI development, and political uncertainty before the U.S. presidential election in November mean that investors should be prepared for volatility.

The U.S. dollar to yen exchange rate fell from 160.8 in early July to 143 on August 5. UBS believes that the level of the Nikkei index is equivalent to the U.S. dollar to yen being below 150. If the U.S. dollar to yen exchange rate remains or is above 150, a short-term rebound in the Japanese stock market may be seen. If the U.S. dollar to yen exchange rate is far below 150, it will take more time to restore investor confidence.

On the other hand, the downward surprise in U.S. employment data for July has sparked market concerns that the U.S. economy may be heading into a recession, leading to adjustments in U.S. stocks and affecting Asian stock markets. Data released last week showed that the number of U.S. jobless claims reached a new high in nearly a year, and the manufacturing industry shrank. In response, a research report from China Merchants International stated that a significant increase in the unemployment rate and the triggering of the Sam Rule does not necessarily mean a recession is coming, as the main reason for the rise in unemployment rate this time is the increase in labor supply due to immigration, while the number of employed people is still growing steadily, and the level of corporate layoffs has not risen significantly.

It is worth noting that before the outbreak of this crisis, some industry insiders had already sensed the signs of danger. Data from the Japan Exchange Group shows that as of July 26, foreign investors net sold 1.56 trillion yen (equivalent to $10.4 billion) worth of Japanese cash stocks and futures in a week.

The panic sentiment in the Asia-Pacific stock market spreads, and major market regulators have made statements.

Japanese Finance Minister Shunichi Suzuki expressed strong concern about the stock market decline, mentioning that the government should remain calm when judging the situation, and the Financial Services Agency is also paying attention to market dynamics and will not comment on whether the current yen level is too high.

The Taiwan Stock Exchange in Taiwan, China, held a press conference on the afternoon of August 5, stating that the decline in the Taiwan stock market in the past two days was mainly affected by poor U.S. economic data and tense Middle East situation. It will continue to closely monitor the impact of international events on the Taiwan stock market, and will take various measures to stabilize the market if necessary, but there are no specific measures to be introduced at present.The South Korean Ministry of Economy and Finance stated that as global financial market volatility intensifies and uncertainties in the Middle East persist, authorities will strengthen market monitoring systems and closely coordinate with various institutions to address the ongoing fluctuations in global financial markets.

"Before the unwinding of yen carry trades and the yen's appreciation trend subsides, Japanese stocks may continue to face pressure. However, the main driver of the recent decline in Japanese stocks is the change in liquidity rather than a deterioration in fundamentals. Companies with strong profit growth potential in the Japanese stock market may present opportunities for medium to long-term positioning after this round of adjustment," Jiang Xianwei told Caijing. In the short term, he expects stabilization after the US stock market's downward trend eases, but markets with a higher proportion of technology stocks may take longer to recover.

Morgan Asset Management holds a relatively optimistic view for the future. "In the medium to long term, the Federal Reserve's initiation of rate cuts is expected to open up room for monetary easing by central banks in Asia, which is also conducive to the reflow of funds. Additionally, FactSet (a US financial services company) estimates that the earnings growth of MSCI Asia Pacific Index constituents this year could exceed 15%, making them somewhat attractive at the adjusted valuation levels."

What impact does this have on A-shares?

Several research reports mention that global economic growth panic and hawkish policies have triggered the liquidation of investment targets that have performed strongly since the beginning of the year. So, in this round of global asset rotation, what opportunities are Chinese assets facing?

"Over the past three years, stock markets in Europe, America, and Japan have continuously hit new highs, and with a large amount of capital chasing these stocks, significant asset bubbles have emerged. Recently, there are clear signs of a peak in the US stock market as well," said Yang Delong, Chief Economist at Qianhai Open Source Fund. In contrast, the A-share market resisted the sharp decline in the external market on Monday, showing a narrow range of fluctuations, and many blue-chip stocks have rebounded, which is commendable. Under the general decline in external markets, A-shares' ability to withstand market downturns fully demonstrates that the previous adjustments have been quite sufficient.

"If the global stock market declines, it may benefit the Chinese stock market. The probability of a global stock market decline is high. Once the money comes out, it will first go to the commodity market, but not for long; secondly, it will go to safer assets—the bond market; then, it is hoped that it will also flow to markets with lower valuations, such as China's A-shares or H-shares. Theoretically, it is possible to appropriately allocate in this environment," Zhu Bin, Chief Economist at Nanhua Futures, believes.

Regarding the changes in A-share investment layout caused by the adjustment of external markets, some public fund researchers also warn, "External risks have not been completely cleared, and it is expected that the A-share market will continue to fluctuate at the bottom in the short term. However, external risks do not constitute the main contradiction for the time being, and the signal of domestic policies to stabilize growth is strengthening. The bottom support of the market remains solid, and the probability of market stabilization is further increased. The allocation thinking of A-shares is also expected to usher in a turning point. For A-shares, the global fund re-allocation brought about by the rate cut trade may help improve market liquidity, and A-shares are likely to see a repair of risk appetite. Domestic sectors such as consumption, technology, and pharmaceuticals may be worth paying attention to."

"For the domestic equity market, during the period of external risk appetite pressure, the domestic equity market is hard to receive direct help. However, in the context of a general decline in emerging markets and the Japanese stock market, A-shares, as a direction for diversified allocation, may gain some anti-fall ability. In terms of the domestic bond market, the impact of external factors on the bond market is relatively indirect. On the one hand, pay attention to the impact of the equity market performance on risk appetite; on the other hand, a clearer pace of rate cuts in the United States, smaller exchange rate and interest rate spread pressures, will help the market further speculate on reserve requirement ratio cuts and interest rate cuts, making this benefit clearer and more solid," a person related to Yongying Fund told Caijing.

Bosera Fund believes that as overseas liquidity gradually tends to be loose, the depreciation pressure faced by the renminbi will continue to ease, opening up room for further easing of domestic monetary policy. In the short term, A-shares may continue to fluctuate as market risk appetite is relatively low. The domestic economy continues to repair, the prosperity of the manufacturing industry is relatively low, and domestic effective demand still needs to be further stimulated.

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