CITIC SEC: If the United States falls into a real recession, it may have a short-term impact on Chinese equity assets.

CITIC SEC released a research report, stating that historically, the turning point from the expectation of a US stock market decline to actual trading decline is when corporate EPS starts to decline continuously. Among them, the performance/stock price of the financing industry (investment banks, consumer credit) is the most leading indicator representing the confidence cycle in historical downturn trading. Recently, the US stock market has entered a period of intensive financial report disclosures. It is recommended to pay attention to the operating data of core cyclical companies, management guidance (especially in the investment banking and consumer credit industries), and core macroeconomic data. In response, if the US falls into a real recession, there may be short-term impact on Chinese equity assets, but in the medium to long term, the economic cycles of China and the US may resonate with each other, bringing core asset allocation opportunities. CITIC SEC's main points are as follows: A tracking system has been established to address the impact of the shift from the expectation of a North American recession to an actual recession on Chinese assets. The impact of tariff trading or recession expectation trading on Chinese assets may be relatively limited, but if it evolves into a recession trading, the impact may be significantly enlarged and intensified. Therefore, a tracking system covering macro "soft/hard" data, core corporate operating data, and leading confidence indicators has been established, combined with a timetable of key events, to facilitate investors in tracking and understanding the current stage. Recently, the US stock market has continued to evolve in recession expectation trading, with macroeconomic data weakening and fundamental expectations playing off. From the perspective of macroeconomic data, hard data, which reflects the actual state of the US economy, has not shown significant deterioration (such as stable CPI, overall stability in new non-farm employment numbers), while soft data from survey-based sources has shown clear differentiation (such as weakening month-on-month PMI in manufacturing and services, significant decline in consumer confidence indexes). From the perspective of listed company performance, the main operating indicators for 4Q24 are still healthy, but analyst forecasts have started to weaken. As of 4Q24, 55% of the sample companies are still accelerating in core operating indicators, but according to S&P's consensus forecast, the proportion of sample companies whose core indicators can continue to accelerate will see a significant downturn in 1Q25 and 2Q25 (33% in 1Q25 and 43% in 2Q25). The downturn in US corporate EPS is a key turning point from expectation trading to recession trading. Historically, the turning point from the expectation of a US stock market decline to actual trading decline has been when corporate EPS starts to decline continuously in a high-interest-rate environment. From a rhythm perspective, most recessionary periods can be divided into three trading stages: recession expectation trading, first-round recession trading, and second-round recession trading. Recession expectation trading mostly occurs after a hot economy before and after rate hikes, usually only resulting in valuation declines; first-round recession trading usually occurs at the end of a high-rate prosperity cycle (the starting point of continuous slowdown and decline in corporate EPS), presenting a double blow of valuation and performance; second-round recession trading usually occurs during a rapid rate cut by the Federal Reserve, when macroeconomic indicators greatly weaken, corporate EPS starts to weaken significantly and has not yet stabilized, with the last wave of performance declines. The performance/stock price of the financing industry is a leading indicator representing confidence cycles in historical downturn trading. Investor confidence changes the fastest, followed by consumer confidence. In the past 30 years, during 18 stages where the S&P 500 fell by more than 8%, representative investment banks (Goldman Sachs, Morgan Stanley, J.P. Morgan) and consumer credit companies (Synchrony Financial, Ally Financial) had average declines of -7% and -5% respectively in the early stages (the first quarter of each declining cycle), and the cumulative declines for the entire period reached -26% and -28%. The US stock market is about to enter a period of intensive earnings disclosures, and Chinese assets will face short-term resilience tests, but long-term will usher in allocation opportunities. With the recent intensification of earnings disclosures in the US stock market, it is recommended to pay attention to the operating data of core cyclical companies, guidance (especially in the investment banking and consumer credit industries), and core macroeconomic data, as well as to track the capital expenditures of US tech companies. When the market shifts from trading recession expectations to real recessions, short-term negative impacts are difficult to avoid, but in the medium to long term, the economic cycles of China and the US may resonate, bringing core asset allocation opportunities. Risk factors: Increased friction in the technology, trade, and financial sectors between China and the US; domestic policy efforts and implementation results fall short of expectations; escalation of conflicts in Russia-Ukraine and the Middle East; unexpected slowdown in the absorption of inventory in China's real estate market.