Guosen Securities: Federal Reserve's Policy Shift – How Will It Impact A-Shares?

Source: Guoxin Securities Co., Ltd.

Core Conclusions: ① Recently, geopolitical tensions have disrupted inflation expectations, and hawkish Fed comments have caused market volatility to weaken this week. ② Historically, rising resource prices have not necessarily been accompanied by overall U.S. inflation, and Fed policy changes have a short-term impact on A-shares. ③ Short-term disturbances do not alter the overall bullish trend for the year. Structurally, technology remains the mid-term mainline, with emphasis on strategic resource commodities and domestic demand-related assets.

This week’s increased trading volume and hawkish Fed statements have disturbed global stock markets. Since early March, tensions between the U.S. and Iran have escalated, leading to a significant rise in strategic resource prices such as oil. Currently, the Strait of Hormuz blockade remains unresolved, adding considerable uncertainty to future oil prices and inflation. The rate decision emphasized that “the development of Middle East tensions remains uncertain for the U.S. economy.” Against this backdrop, the Fed’s stance has been hawkish, with Powell mentioning that most officials have lowered their expectations for rate cuts and that rate hikes are still possible. After the meeting, market expectations for rate cuts quickly declined, and global stock markets generally weakened, with A-shares performing relatively poorly.

Historically, rising resource prices have not always been accompanied by broad-based inflation. Reviewing commodity price trends since the 1970s, there have been roughly four typical upward cycles. From the U.S. inflation perspective, the transmission effects of resource price increases have varied significantly. In the 1970s and 2021-22, commodity rallies were accompanied by broad inflation, whereas during 2003-08 and 2009-11, U.S. core inflation remained relatively stable. The differing inflation transmission effects mainly stem from several factors: first, the varying importance of oil in the economy; second, the monetary policy environment determines the strength of inflation transmission; third, wage rigidity influences whether a “wage-price spiral” forms; and fourth, the drivers of price increases differ. Currently, the U.S. macro environment may not support rapid inflation growth.

Firstly, the importance of oil in the U.S. economy has significantly declined, so the direct impact of rising commodity prices on overall inflation is weaker than in the 1970s. Secondly, the current monetary policy cycle is different; policy rates remain relatively high, unlike the low-rate environment before the 1973-79 and 2021-22 inflation surges. Thirdly, the labor market is not strong enough to sustain a wage-price spiral, as vacancy rates and wage growth have fallen since their peaks in 2022. Overall, we believe that resource price increases may temporarily boost inflation and disrupt the rate cut pace but are unlikely to reverse Fed policy.

Changes in Fed policy do influence A-shares but generally have a short-term effect. Each time the Fed begins a new rate hike cycle, equity markets tend to experience some correction in the short term. However, over the longer term, after corrections, stock markets tend to recover and rise as fundamentals improve.

For A-shares, in the short term, Fed rate hikes mainly impact market sentiment through external shocks. In December 2015, when the Fed started raising rates amid weak domestic fundamentals, A-shares experienced a notable correction. Since early 2016, with policies supporting growth, market sentiment has improved, and A-shares have entered an upward trend. Compared to A-shares, Hong Kong stocks are more affected by overseas monetary policy changes, partly due to the larger proportion of foreign institutional holdings.

Short-term volatility and consolidation do not change the overall bullish trend for the year. Structurally, attention should be paid to strategic resource commodities. Geopolitical tensions remain unresolved, and hawkish Fed comments have dampened rate cut expectations. Coupled with the approaching earnings season, market risk appetite may remain under pressure, and short-term disturbances could continue. However, the bullish atmosphere since September 24, 2024, remains intact. As fundamentals gradually recover and household funds continue to enter the market, the A-share bull market is expected to advance into its latter stages by 2026. Structurally, focus remains on strategic resources and domestic demand-related assets, with technology still the mid-term mainline.

Risk Warning: Unexpected tightening of global liquidity.