CITIC SEC: The aftermath of tariffs still remains, short-term focus on four major directions such as independent controllable.

CITIC SEC released a research report stating that there is still uncertainty about the progress of tariffs, but the trade from recession expectations to recession trading is accelerating, and the synchronization of the economic cycles between China and the US may happen earlier. In the short term, Trump is using a maximum pressure strategy to gain greater benefits, and future attention will be on the progress of negotiations between countries and industry exemptions. Before that, it is expected that risk preferences will decrease, market volatility will intensify, but will still be in the stage of recession trading. In the medium term, the tariff policy exposes the US economy to greater stagflation risks, and also constrains the hedging policies of the Federal Reserve, increasing the possibility of the market transitioning from recession expectation trading to recession trading. The timing of China's policy implementation may be advanced, the synchronization of economic cycles between China and the US may be advanced, and the window of opportunity for core asset allocation may also be advanced, possibly coinciding with trading opportunities brought by this external shock. In terms of style, from the four dimensions of policy economic cycle, relative profit advantage, long-term fund pricing, and market ecosystem changes, core assets will usher in a new cycle, and GARP strategies are expected to outperform significantly. In terms of allocation, it is recommended to focus on four major directions in the short term: autonomous controllable, military industry, domestic demand, and dividends. In the long term, attention should be paid to the trend of global manufacturing industry reconstruction demand and Chinese technology going global. The main points of CITIC SEC are as follows: Market volatility intensifies but the world is still in the stage of recession expectation trading 1) The maximum pressure strategy is evident, and there may be variables in the progress of negotiations between countries and industry exemptions. The bank believes that the current tariff policy is more of a negotiating tactic by the US: first, maximum pressure, giving unexpected pressure and short response time to various countries, ensuring the 10% comprehensive tariff increase is achieved, while also obtaining concessions from other trading partners; second, group games, where many countries watch each other, and if a country compromises first, it will speed up negotiations with other countries. It is expected that the tariffs actually imposed by many countries will be reduced, and many industries and companies may be exempted. Despite the repeated events, the overall direction is difficult to reverse. 2) China's resolute tariff retaliation will drive the substitution of domestic products in some high-end manufacturing and consumer sectors. From the perspective of key imports from the US in 2024: one category is those with a high dependence on the US, where short-term substitution with domestic products or importing from other countries may be difficult, such as optical lenses, medical equipment, aerospace equipment, and blood products. Another category is high-end manufacturing categories that can avoid the impact by upgrading domestic production or importing from other countries, such as mineral fuels, machinery and equipment, motors, electronics, etc. The third category includes consumer goods with relatively low global import volumes but a high proportion from the US, which may also see more domestic substitution, such as pork, dairy products, personal care cosmetics, health products, etc. 3) Market investors will lower risk preference in the short term, but the framework is still in the stage of recession expectation trading for now. After the implementation of the tariff policy which is characterized by its wide scope, high rates, strong retaliation, and significant impact, market uncertainty has increased. From the perspective of market resilience, A-shares are better than Hong Kong stocks and US-listed Chinese stocks, mainly due to investor structure. In the short term, it is not appropriate to price in all negative news, nor is it reasonable to amplify panic-driven declines. Since there are still uncertainties about tariffs, and economic recession will not occur immediately, it is expected that the global investors' trading framework will still be focused on recession expectation trading, with a priority on reducing risk preference and waiting to observe. In the medium term, the actual impact of the global economic recession is limited, and the sectors that align with China's long-term strategic and policy directions are those that are truly innovation-driven in autonomous technology. However, in the short term, these sectors are most affected by emotional fluctuations. The sectors may continue to see a struggle between "sell decisions driven by who is more pessimistic" and "buy decisions driven by who is more determined". This sector will experience the best buying opportunity of the year in this round of adjustment. US recession trading is heating up, and the synchronization of economic cycles between China and the US may occur earlier 1) The possibility of transitioning from recession expectation trading to recession trading is increasing. Before the tariff policy was implemented, US soft data (such as manufacturing and services PMI, consumer confidence index, etc.) had already weakened significantly in the last five months. The unexpectedly harsh tariff policy has heightened concerns in the market about the possibility of "stagflation" in the US. According to the overseas research team of CITIC SEC, a series of tariff measures could boost the US PCE price index by as much as 1.65%. The recurring inflation is a core obstacle to the Fed's rate cuts, as confirmed by the statement of the Fed Chairman on April 4th, indicating a hesitant attitude of wait-and-see before taking action. The bank believes that the downward trend in corporate EPS is a key confirmation of the transition from recession expectation to actual recession trading. Through reviewing historical data, it is found that the start of actual recession trading typically occurs at the end of the business cycle when corporate EPS begins to slow down and decline continuously. Therefore, it is worth closely tracking the performance reports and guidance adjustments of important US companies in the next two months. 2) The synchronization of economic cycles between China and the US may occur earlier. Previously, the bank proposed that the global economic slowdown combined with increased tariff pressures and other external risks will accelerate the synchronization of policy cycles between China and the US, potentially leading to China's fourth round of total volume stimulus policy since 2013 by mid-year. From the perspective of China, based on the calculations of the macro research team of CITIC SEC, under extreme static assumptions, the 54% additional tariffs imposed by Trump since taking office on China could drag down this year's export and GDP growth rates by 8.2 and 0.9 percentage points annually, intensifying external shocks and possibly leading to an earlier or more intense domestic policy response. From the US perspective, according to a poll by Ipsos, Trump's approval rating has fallen to 43%, the lowest since he returned to the White House, and if combined with accelerating pressure from stagflation or even recession, the timing of US economic stimulus and diplomatic easing policies may also advance. 3) The bank's previously anticipated window of opportunity for allocation in the middle of the year may also advance, possibly coinciding with trading opportunities brought by this external shock. The bank previously identified two key points in the year: the trading opportunities brought by external risks landing in early April and the allocation opportunities brought by the synchronization of the economic and policy cycles between China and the US in the middle of the year. With the possibility of an earlier synchronization of the economic cycles between China and the US, the distinction between these two key points will be more blurred, and there may not be a clear timing window. The bank recommends focusing more on core assets on the left side, as more core assets are released from valuation pressure and reach a turning point in performance.The earlier arrival of the most important style switch since 2021.Core assets will have more advantages GARP strategy is expected to significantly outperform From the perspective of economic policy, after the synchronization of the policy cycles between China and the United States, a new round of domestic demand stimulus in China may open up macro upward elasticity, which is more conducive to core assets. From the perspective of relative profit advantages, observing the A-share "New Core Assets 30" and Hong Kong stock "Core Assets 15" portfolios constructed by the Bank, ROE, revenue growth, and net profit margin have already shown turning points ahead of the entire A-share non-financial sector, demonstrating strong operational resilience. From the perspective of long-term fund pricing, many blue-chip companies in A-shares have listed in Hong Kong this year, and the pursuit of these high-quality companies by global institutional investors may serve as a demonstration for domestic investors, helping to reshape the valuation system of high-quality core assets. From the perspective of market ecological changes, the upcoming reforms in public fund management measures through the reshaping of interest mechanisms, optimization of product structures, and enhancement of regulatory efficiency, are expected to gradually shift public funds from the previous "racing mode" to "long-term investment mode", with public funds tending towards long-term allocation of companies that have excellent performance and growth potential. Overall, the Bank believes that the GARP style, which combines value safety margins and high growth certainty, may usher in a systematic re-evaluation opportunity, and the attractiveness of A-share core asset allocation will be further enhanced. In terms of allocation, short-term optimism is placed on self-controlled companies, with long-term recommendations for leading manufacturing 1) In the short term, the Bank recommends focusing on self-controlled companies with pricing power that are not afraid of geopolitical disturbances. Against the backdrop of tariff disturbances and technology restraints, the hard technology sector, with technological barriers and certainty in domestic replacements, may become a safe haven for short-term funds, with minimal substantial impact from global macro downturns. Recommendations include: 1) AI remains the strongest trend in certainty, and the ban on chip and semiconductor equipment may be further intensified, increasing the necessity of self-control; 2) High-end categories such as precision optics, nuclear power equipment, medical devices, industrial software, and special new materials still have high dependence on the United States, with an urgent need for domestic replacements; 3) Innovative drugs are entering an innovation cycle with the bottom turning point of domestic policy, showing good market performance during the earlier period, but require close monitoring of the tightening budget of the US FDA, the proposed data security restrictions on overseas biotechnology companies in the United States, and the disclosure progress of clinical data of domestic innovative drug companies at the ASCO conference in May. 2) Other short-term allocation choices: military industry, domestic demand, dividends. Long-term focus areas: global manufacturing demand re-construction and Chinese technology going overseas. In addition to the direction of self-control, short-term attention can also be given to: firstly, the military industry sector with emotional catalysts. Secondly, selected consumer goods with clear domestic demand attributes and improved fundamentals, especially in industries where some supply comes from the United States but demand is entirely domestic, with potential for increased market share, such as pork, dairy products, blood products, etc. Thirdly, stable dividend areas represented by electricity, telecom operators, and banks. In the long term, the escalation of the trade war has increased global political and economic uncertainty, with countries, especially major powers, possibly making redundant investments in energy, defense, technology, and infrastructure, benefiting China's manufacturing capacity from the global "security-first" strategy. In addition, the globalization of Chinese enterprises and technology going overseas is also the overall trend, which will be reflected in the accelerated growth of Chinese service trade and an increase in technological service exports.