**High Probability of Fed Resuming Rate Cuts This Month**
The Federal Reserve initiated the current rate-cutting cycle in September 2024, implementing three rate cuts throughout 2024. However, due to various uncertainties in 2025, no further cuts have been made. Recent data shows manageable US inflation pressures and weakening employment conditions. Fed Chairman Powell delivered dovish signals at the Jackson Hole meeting, reigniting market expectations for US rate cuts.
The August CPI data released on September 11 showed year-over-year growth of 2.9%, with core CPI at 3.1%, slightly higher than the previous month's 2.7%/3.0% but with modest increases. August non-farm payrolls added only 22,000 jobs on September 5, below market expectations. Following significant prior job data revisions, preliminary revision data released by the Labor Department on September 9 indicated that US job gains from April 2024 to March 2025 were 911,000 fewer than initially reported.
As of September 13, according to CME FedWatch, market expectations for the Fed to resume rate cuts in September exceed 90%, with October and December rate cut probabilities both above 70%.
**How Will Fed Rate Cuts Affect Chinese Assets?**
We outlined the logic of how Fed rate cuts impact Chinese assets in our research report published when the current Fed rate-cutting cycle began last September, covering three main aspects:
1) **Fed rate cuts may help alleviate external constraints on China's monetary policy.** Since the current Fed rate-cutting cycle began, China has cut rates twice, implementing "moderately accommodative monetary policy."
2) **US rate cuts may lead to a weaker dollar.** Since the beginning of 2025, the USD/CNY has trended downward, declining from around 7.3 at year-start to near 7.1 recently. Relative RMB appreciation may impact export and overseas expansion companies, but correspondingly reduces repayment pressure for companies with USD borrowings, requiring consideration of foreign exchange gains/losses on different enterprises.
3) **Fed rate cuts typically accompany global capital reallocation.** Rate cuts promote global liquidity release, potentially benefiting Chinese assets relatively, especially under the current global monetary system restructuring backdrop.
The strategy team recently published research suggesting that the combination of dollar depreciation and innovation narrative reversal reflects global monetary order restructuring, which may be the core driver of this market rally. Under the new monetary order, RMB assets benefit relatively. With appropriate policy responses, RMB assets may benefit from the dual dividends of accelerated fragmentation and diversification of the global monetary system – fragmentation accelerates China's overseas capital repatriation, while diversification drives global capital rebalancing, potentially directing some funds toward Chinese capital markets.
Fed rate cut resumption may promote global liquidity release and create downward pressure on USD exchange rates, potentially further driving global capital reallocation.
**Which Industries Performed Best During Historical Fed Rate-Cutting Periods? How Have They Performed This Cycle?**
It has been approximately 9 months since the Fed's last rate cut. We reviewed A-share and Hong Kong stock market style and sector performance following the initiation of six Fed rate-cutting cycles since the 1990s as reference:
**Style-wise:** Following Fed rate cuts, A-shares and Hong Kong stocks showed relative outperformance in growth styles and A-share small caps, while dividend styles underperformed.
**Sector-wise:** In the first ~11 weeks, non-bank financials, which directly benefit from market activity, performed prominently in both A-shares and Hong Kong stocks. Over the medium-term ~20-week horizon, A-share computers, electronics, and telecommunications, along with Hong Kong hardware equipment, semiconductors, and environmental protection sectors led gains. A-share coal, utilities, and transportation, along with Hong Kong industrial trading, real estate, and non-bank financials underperformed.
**Performance This Cycle**
From market performance perspective, A-share telecommunications, electronics, computers, media, and non-ferrous metals led gains this cycle. Food & beverage and home appliances, which historically gained significantly after Fed rate cuts, underperformed relative to the Shanghai Composite Index. Hong Kong durable consumer goods, semiconductors, hardware equipment, pharmaceuticals, and consumer services led gains, while environmental protection, coal, and construction, which historically performed well after Fed rate cuts, underperformed relative to the Hang Seng Index.
From valuation perspective, as of September 12, in A-shares, computers, defense & military, electronics, real estate, commercial retail, and steel sectors' P/E TTM exceeded historical 75th percentiles and ranked among industry leaders. Among the top ten medium-term gaining industries after Fed rate cuts, media, beauty care, and basic chemicals valuations have not exceeded 75th percentiles. In Hong Kong stocks, materials and telecommunications services P/E TTM exceeded historical 75th percentiles, while information technology sector valuations, which gained significantly after Fed rate cuts, have not exceeded 75th percentiles.
US rate cuts are just one market influencing factor, and specific performance may vary across cycles. This cycle has seen prominent growth sector performance, similar to historical patterns, while non-ferrous metals benefited from rising gold prices and rare earth strategic positioning amid international trade uncertainties. Some upstream cyclical industries and consumer sectors were relatively weak, reflecting market sensitivity to liquidity while structurally correlating with fundamentals.
Current domestic economy still faces some structural challenges, with persistent deflationary pressure and awaiting recovery in domestic demand and real estate. Growth sectors like technology are supported by longer-term technological development expectations with relatively low correlation to current economic fundamentals, while cyclical and consumer industries' structural advantages may await stronger economic fundamental expectations.
**Investment Outlook**
We believe in recent research that when A-share turnover rose rapidly earlier, staged profit-taking pressure increased and indices faced heightened short-term volatility risks. Historical experience shows that when A-share turnover rates rise above 5%, indices typically see subsequent corrections of certain magnitude, but generally don't affect medium-term trends.
Recent market experienced a period of volatile adjustment, with turnover rates calculated by free-float market capitalization returning below 5%. We believe the A-share upward trend since September 24 last year has not ended and will continue.
Combining US rate cut resumption with recent domestic liquidity changes, the following areas deserve attention:
1) **Industries and companies with high foreign ownership,** including electronics and power equipment.
2) **Companies holding significant USD debt,** potentially benefiting from dollar depreciation.
3) **From liquidity expectation perspective,** technology and thematic tracks with medium-to-long-term performance advantages, focusing on industries with relatively solid industrial logic, such as telecommunications equipment, semiconductors, electronic hardware, solid-state batteries, innovative drugs, and robotics.
4) **Industries with growing trade to non-US economies and established overseas capacity,** less affected by trade uncertainties and USD exchange rates, such as white goods, construction machinery, and power grid equipment.
5) **Capital market recovery boosting performance,** focusing on insurance and securities.
6) **"Anti-involution" aspects,** focusing on solar and other industries.
7) **Dividend sectors may face differentiation.** From quality cash flow, volatility, and dividend certainty perspectives, focus on telecommunications and banking.