Behind the policy shift expectations: unreliable "Strong US dollar funds" for GDP growth?

Hello everyone, I am Dolphin Analyst.

Last week was a tough week in the stock market: A-share market was still struggling, and American stock market was experiencing internal conflicts, with Dow Jones and Nasdaq going in different directions, and large-cap and small-cap stocks in Nasdaq diverging.

The logic behind A-share's struggles last week is basically the same as the previous week, with different stands between the general fund forces represented by "northbound" and "southbound" after the critical political activities in China.

On the other hand, the division between the American Dow Jones and Nasdaq is more likely related to factors such as the inflection point of gambling interest rate, the disappointment of the performance of giants, especially the overall poor guidance in the fourth quarter. The question is whether the fourth quarter will really be that bad? Let's first take a look at the U.S. third-quarter GDP released last week.

I. Is the robust U.S. third-quarter economy really supported by changes in exports?

The U.S. GDP data for the third quarter was released on October 27, and it looks very good: after two quarters of decline from a quarter-over-quarter annualized perspective, the third quarter turned to a positive growth of 2.6%, which is basically the same as the previous quarter-over-quarter increase of 1.8%.

At the same time, even if we don't look at the upgraded quarter-over-quarter annualized figure, the simple quarter-over-quarter growth rate of actual GDP after seasonal adjustment - 0.64%, also looks very positive.

However, if we look closely at the driving factors of GDP, we will find a quite big problem: the quarter-over-quarter growth of GDP was mainly achieved by the shrinking of net exports. Judging from the marginal changes in the past three quarters, the growth rate of American exports is significantly higher than that of imports. The main reason for this is believed to be the appreciation of the U.S. dollar (with an increase of 6.5% during that period).

If we exclude the quarter-over-quarter boost of 0.79 percentage points from net exports in the third quarter, the positive growth rate of 0.64% of U.S. third-quarter GDP would turn directly into negative growth.

As for the endogenous growth indicators, personal commodity consumption (which contributes 28% of GDP) is still in negative growth, but personal service consumption (which accounts for 44% of GDP) is still in the positive growth range.

Of the three drivers of GDP, in terms of investment items, which include private investment and government investment / consumption, we can vaguely see the signs of financial tightening and private investment contraction while the government is coming in to hedge: the contribution of government investment / consumption starts to turn from negative to positive, while the impact of financial tightening on private investment (which accounts for 18% of GDP) is relatively large.

And if you take a closer look at private investment, you'll see that residential investment has continued to cool, mainly supported by equipment investment and intellectual property investment. In terms of government investment, both federal and local government consumption investment is increasing.

II. Post-Pandemic Era: Service Returns, Goods Are Left Behind

As personal consumption accounts for a large proportion of GDP, Dolphin Analyst has pulled out the consumption part separately for a closer look.

In the third quarter, the proportion of service consumption in personal consumption expenditures continued to slowly recover, reaching 61.8%, still below the pre-pandemic level of 63%+.

Looking at individual items: personal goods consumption growth is still marginally deteriorating, failing to outpace inflation. In terms of durable goods consumption, automobiles are relatively weak, and non-durable goods consumption has continued to decline after the fall in gasoline prices.

Overall, service consumption remains relatively strong, with transportation being the most prominent, followed by Uber, accommodations like Airbnb, and healthcare.

II. Turning Point for Interest Rate Hikes: How Far Along Are We?

In fact, without considering the additional contribution of the US dollar premium to exports, the US GDP in the third quarter is not as good as it seems. With private investment continuing to cool, government investment/consumption in the third quarter has begun to restart and partially drive GDP growth.

If you look at the price trends of the two major categories of interest rate-sensitive large items: the prices of second-hand cars are starting to fall rapidly, and the US house price index has also shown a trend of hitting a peak and falling back.

To a certain extent, the current endogenous driving force of the US GDP is only supported by service consumption, and GDP growth is not as good as it seems. Considering the lag of housing costs in the CPI, and the fact that actual GDP growth is only supported by service consumption alone, the Federal Reserve may enter a slow-moving state after raising interest rates by 75 basis points in November.

III. The Two Sides of the Coin

Therefore, last week, as the expectation of a rate hike peaked globally, the stock indices of developed markets such as the United States performed relatively well, while Hong Kong and A shares continued to suffer heavy losses.

In the S&P 500, except for the communication sector where Internet giants are located, all other sectors have risen across the board, while Hong Kong and A shares are in a state of overall decline.

The capital flows between the two places are the same as what Dolphin Analyst said last week, when tested for determination: buying accelerated southward, while selling accelerated northward.

Among the individual stocks that Dolphin Analyst focuses on, stocks with relatively high proportion of foreign investment, such as Moutai, Midea, Gree, and even Focus Media, have been continuously sold off.

The purchases by southward funds are mainly in low-valued stocks, such as Xiaomi, Tencent, Meituan and Kuaishou, while the purchase of BOE is mainly based on the advance deployment of the turnaround.

IV. Alpha Dolphin Combination Returns

Currently, although the Dolphin's portfolio has a relatively high weight of cash to avoid risks and a small amount of US stock holdings, the consumption weight is higher in equity, coupled with the poor performance guidance of US Internet leaders, resulting in poor performance overall. As of this week on October 28th, the Alpha Dolphin Combination fell by -4.9%, performing slightly better than the Shanghai and Shenzhen 300 (-5.4%), but significantly worse than the S&P 500 (+4%).

From the start of the combination's testing to last weekend, the absolute return of the combination was -9%, with excess returns compared to the benchmark S&P 500 index at 1.3%, and the excess returns relative to the S&P 500 are almost exhausted.

V. Combination Adjustment

Last week, based on peer financial reports and macroeconomic conditions, Dolphin Analyst made a relatively concentrated adjustment to further increase the proportion of cash positions, hoping to minimize losses in bear markets, mainly based on changes in consumption expectations, lowering some high-valued consumption and poor fundamental Internet companies.

Six. Individual stock performance: Chinese assets bleeding across the board, US tech giants hit by the dollar

Last week, the Dolphin portfolio was almost entirely lost, with particularly large declines in consumption, Internet, and new electricity. Only Apple remained as a pillar among the giants.

For Companies with large changes, the reasons behind the drives that Dolphin Analyst collated are as follows, for reference:

Seven. Portfolio asset distribution

From the start of testing on March 1 to last week, Longbridge Alpha Dolphin's overall return was -3.9% (including dividend income), and the return on stock assets was -5.3%.

Currently, the Alpha Dolphin portfolio has a total of 28 stocks, of which only 3 are standard equipment, while 25 are low-configured stocks.

As of the end of last week, the allocation and weight of equity assets in the Alpha Dolphin portfolio are as follows:

Eight. Key focus this week

This week, both US stocks and A-shares are entering the intensive reporting season, with many companies announcing their results. The companies that Dolphin Analyst is paying attention to, their results announcement time and Dolphin Analyst's key focus are as follows: