This article is transferred from: Securities Times
Securities Times reporter Chen Jiannan
Recently, there has been a wave of correction in global stock markets. The market generally believes that this is similar to the reason for the adjustment in the first quarter of last year, that is, the interest rate of the 10-year US Treasury bonds rose rapidly, and the expectation of raising interest rates was strong, which triggered market adjustment.
How does the Fed’s interest rate hike affect global asset pricing and A-shares?
Data Bao found that the global stock market often fell first and then rose during the Fed’s interest rate hike cycle, while the performance of A-share market was relatively independent.
Since the 20th century, the Federal Reserve has experienced three interest rate increase cycles. The first interest rate hike cycle was from June 1996 to May 2000. The background of interest rate hike was mainly to curb the Internet bubble, and the benchmark interest rate was raised from 4.75% to 6.5%. The second interest rate hike cycle was from June 2004 to June 2006, and the benchmark interest rate was raised from 1% to 5.25%. The interest rate hike was mainly aimed at the real estate bubble at that time. The third interest rate hike cycle is from December 2015 to December 2018, and the benchmark interest rate is raised from 0.25% to 2.5%. The background of interest rate hike is mainly the normalization of monetary policy.
In the third interest rate hike cycle, active table shrinkage was also implemented, which was discussed in March 2017, the table shrinkage plan was given in June, announced in September, and implemented in October. That is to say, table shrinkage and interest rate hike were carried out at the same time in the last interest rate hike cycle. The specific time point and rhythm were: guiding Taper (reducing asset purchase) in May 2013, Taper in 2014, and raising interest rates for the first time in December 2015. In December 2016, it raised interest rates for the second time. After raising interest rates twice in March and June 2017, in September 2017, it was announced that it would shrink from October of that year. In December 2017, it continued to raise interest rates. In 2018, it raised interest rates four times to shrink the table synchronously, and ended the tightening in 2019.
It is only a matter of time before the Fed raises interest rates.
There is a lot of evidence that the Fed’s interest rate hike is imminent. The minutes of the December meeting of the Federal Reserve released on January 5, 2022 indicated that the job market was "very tense" and the current inflation was serious. The decision makers of the central bank may ask the Federal Reserve Board to raise interest rates in advance and start to reduce its total assets.
In addition, since December 2021, the yield of US bonds has risen rapidly. The data shows that the yield of 10-year US Treasury bonds has increased by nearly 30 basis points since the end of last year, reflecting the expectation of market participants to start raising interest rates earlier and digest them at a faster speed.
Bank of Communications predicts that quantitative easing will end by March 2022. After the end of Taper, the Fed may start the process of raising interest rates in due course, and may raise interest rates three times in 2022.
It may be just a matter of time before the Fed raises interest rates. On the whole, the Fed is indeed facing inflationary pressure at present, but the data of consumption, employment and production in the same period reflect that the economic recovery is not sufficient and the conditions for raising interest rates are not fully met. Bank of Communications believes that whether and when to raise interest rates will depend on the inflation and employment situation in the United States.
Short-term obvious impact on global stock markets
How does the Fed’s interest rate hike affect global asset pricing? Theoretically, most central banks will have to follow the Fed’s interest rate hike to protect the exchange rate, which will have a short-term impact on the stock market. With the continuous promotion of the interest rate hike cycle, the market’s sensitivity to interest rates has decreased, and the stock market has also begun to bottom out. The above conduction mechanism is also confirmed to some extent by the resumption of the disk.
According to statistics, the 16 major stock indexes in the world rose by 13.71% on average one month before the first interest rate hike cycle of the Federal Reserve. One month before the second interest rate hike cycle, the world’s major stock indexes fell by an average of 1.18%; One month before the third interest rate hike cycle, the world’s major stock indexes fell by an average of 0.82%.
Immediately after the start of the first interest rate hike cycle, the Federal Reserve reversed the upward trend of global stock markets, and the major global stock indexes fell by more than 3% on average the following month. The short-term negative impact of the second interest rate hike cycle is more obvious. The major global stock indexes fell by nearly 10% on average in the second month of interest rate hike. In the third rate hike cycle, the average rate hike in the next month fell by more than 2%.
It can be seen that before the Fed raised interest rates, it had little impact on the market, and after the interest rate hike, it obviously impacted the global stock market in the short term.
The probability of full-cycle rise is high.
From the perspective of the whole cycle, during the first three interest rate hike cycles of the Federal Reserve, US stocks, European stocks, Hong Kong stocks and emerging market stocks rose to varying degrees, indicating that interest rate hikes have obviously impacted the stock market in the short term, but it is difficult to change the long-term upward trend of assets.
According to statistics, the first Fed rate hike cycle, that is, from June 1996 to May 2000, the average increase of major global stock indexes was close to 15%. During the second interest rate hike cycle, the average increase of major global stock indexes was close to 43%; During the third interest rate hike cycle, the average increase of major global stock indexes was close to 17%.
However, we should also note that this Fed rate hike is likely to start raising interest rates and shrinking the table at the same time as from 2015 to 2018, which may lead to greater fluctuations in asset prices. The data shows that in the last interest rate hike cycle, the Dow Jones Industrial Average experienced large fluctuations in 2015 and 2018, which were different from those in ordinary years. The history in the stock market will repeat itself, but it is by no means a simple repetition. The impact of the Fed’s three interest rate hike cycles on the global stock market cannot be simply copied to the new era. In order to make a more comprehensive analysis and comparison, we may wish to compare the valuation of the latest interest rate hike cycle with the current time.
According to statistics, the rolling P/E ratio of the Dow Jones Industrial Average was 18.36 times on the first day of the third interest rate hike cycle, ranking 74% of the P/E ratio quantile since 2000. Nasdaq’s rolling P/E ratio is 31.84 times, accounting for 41.46% of the P/E ratio quantile since 2000. The latest data shows that the Dow’s P/E ratio is 24.87 times, accounting for 92.92% of the P/E ratio quantile since 2000. Nasdaq’s P/E ratio is 36.01 times, accounting for 56.74% of the P/E ratio since 2000.
From this point of view, the current valuation of US stocks is at a relatively high historical level.
The performance of A-share market is relatively independent.
On the whole, the previous three Fed interest rate hike cycles had no significant impact on the major stock indexes of global stock markets before the interest rate hike, but had a significant impact on global stock markets after the interest rate hike. Then, what is the impact of the Fed’s interest rate hike cycle on the A-share market?
The data shows that the Shanghai Composite Index and Shenzhen Component Index led the gains one month before the first rate hike cycle of the Federal Reserve, and led the declines one month after the first rate hike. In addition, the performance of the Shanghai and Shenzhen stock indexes in the second interest rate hike cycle and the third interest rate hike cycle is not synchronized with the global stock market. Looking at the whole cycle, the Federal Reserve raised interest rates for the first time and the third time, and both the Shanghai and Shenzhen indices fell.
It can be seen that the performance of the A-share market has followed its own laws in the previous three Fed interest rate hike cycles. The market generally believes that the root of the more independent performance of A-shares lies in the fact that China is still a country with foreign exchange control, and there is no condition for large-scale import and export of assets, which fundamentally determines that the Fed’s interest rate hike will not have a great impact on the stock market.
The current relatively high valuation of the US stock market is also different from the previous interest rate hike cycle, and in the face of the upcoming interest rate hike cycle, it may also increase the volatility of US stocks. The policy orientation of the Federal Reserve affects the monetary policy of global central banks. With the gradual integration of the A-share market into the world, it is bound to be more or less affected by this. At the same time, however, it should be noted that A-shares are more influenced by the domestic market and relatively more independent, whether in terms of capital or fundamentals.
The trend of monetary policy also determines that A shares are expected to be more independent of the global market. On January 17th, the one-year MLF interest rate and the seven-day OMO interest rate were all lowered by 10BP. On January 20th, the central bank announced that the quoted interest rate (LPR) of China’s one-year loan market in January was 3.7%, compared with 3.80% last month. The quoted market interest rate (LPR) of 5-year loans was 4.6%, compared with 4.65% last month. Bank of China Securities believes that the trend of wide credit is further clarified.
The relative valuation of the A-share market also helps to maintain stability in possible global market fluctuations. According to statistics, the rolling P/E ratio of the Shanghai Composite Index is 13.61 times, which is relatively low in the global stock market, accounting for 25.41% of the P/E ratio quantile since 2000.
The probability of A-share trend independence is high, but the performance of each sector may be divided. Taking history as a mirror, the impact of the Fed’s interest rate hike cycle on the growth sector with high valuation is more obvious. The data shows that one month after the first rate hike in the second rate hike cycle, the Nasdaq fell by more than 11%, exceeding the Dow; One month after the first interest rate hike in the second interest rate hike cycle, the Nasdaq fell by more than 4 percentage points.
Under the background that the valuation of A shares is at a relatively low historical level, the value sector of A shares may also be stronger than the growth sector. Since January this year, the Shanghai Composite Index has fallen by more than 2%, and the Growth Enterprise Market Index has fallen by more than 7%.
In the third interest rate hike cycle, the value sector of A shares also performed significantly better. Among them, one month after the first interest rate hike in the third cycle, the value sectors such as banks, steel and coal were the most resistant. In the whole interest rate hike cycle, the two major consumer sectors, food, beverage and household appliances, rose against the market, with banks, steel, coal and other sectors showing the most resilience. The growth sector performed poorly, with media, environmental protection, computers and other sectors leading the decline.
(The thematic data of this edition is provided by the database of Securities Times Center.)
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