2013_INVESTMENT_STRATEGY_REPORT_OF_THE_INTEREST_RATE_PRODUCT_MARKET：SPRING_VOLATILITY_AND_AUTUMN_BEAR-2013-01-04.ppt

,spring volatility and autumn bear,2013 investment strategy report of the interest rate product market,analyst: qu qing a0230511040079,2,highlights spring and autumn are more than just a time concept, as they also indicate the climate of the market; the main thread of movement in the interest rate market in 2012: new normal + new system; the latter stage of the l-shape; is it a recession or a new normal? to understand the upward shift of the interest rate curve; impact of interest rate liberation to understand the flattening of the interest rate curve; “value assessment ” as an important step in the establishment of our strategy is what makes the bond strategy different from macro research; the new benchmark of economic growth (potential level) still requires a process of repeated validation, which will be the focus of financial markets in 1h. the inflation issue will become a key concern of the bond market in 2h, given the dynamics of supply and demand cycle of key food constituents; the recovery of economic growth will not be a smooth process in 1h due to the base effect, and downtrend data at some stage will boost expectations of a secondary downturn in economic growth; pork prices will enter a rising cycle from 3q , which will cause ultra-seasonal price movement in food constituents of the cpi, leading to intensified expectations of inflation hikes; focus of liquidity: prospects of wealth management products uncertain regardless of development prospects among wealth management products, fluctuations of monetary interest rates can not be eliminated in the short term (depending on the average duration of underlying assets) because of the constraints of long-term attributes in underlying assets, and thus only having a limited positive effect on interest rate products; yearly movement of interest rate products; 2012: we emphasized the concept of “transition from a harvest year to a barren year” in the interest rate product market; 2013: we emphasize the concept of “departure of the bull and emergence of the bear” in the interest rate product market, and the “bear will emerge” at the end of 3q and beginning of 4q. expected interest rate target of benchmark products in 2013: 10y government bonds: (3.40%，3.60%) 3.80%; 10y financial bonds of china development bank (cdb) (4.20%，4.50%) 4.70%;,申万研究,1.,2.,3.,4.,5.,3,key contents 2012: a barren year for interest rate products! growth: the bottom to be validated amid volatility inflation: wait for another round of hikes the gap between supply and demand will be chiefly seen in 3q investment and trading strategy of interest rate products,申万研究,4,1.1 interest rate products in 2012: moving higher amid volatility but concluding as a barren year,three results of movement in the interest rate product market: harvest year: index return 5%; capital gains + coupon yield,index returns show clear feature of a “barren year” rate of return on,interest rate products barren year: 0 capital loss, resulting in a positive holding period return; bear year: index return 0%; coupon yield capital loss, resulting in a negative holding period return; may 14: the interest rate products should further probe and validate the bottom,jul 14, qingdao strategy meeting: the consensus and differences, setting the target for 10y governments bonds at 3.50%-3.60%, and the target for 10y cdb financial bonds at 4.20%-4.30%;,none of the indices have outperformed funding cost,mar 30, xiamen strategy meeting: no directional performance but with opportunities in volatility feb 7: the risks overweighing opportunities 10y t-bond,sep 20, beijing strategy meeting: the value is evident waiting for the recovery of allocation, setting the upper target for 10y governments bonds at 3.60%, and the upper target for 10y cdb financial bonds at 4.40%-4.50%; while clearly stating the market to revive in november; 10y financial bond (state development bank),申万研究,5,1.2 a retrospective view of the main thread of interest rate market movement in 2012: new normal + new system the latter stage of the l-shape; is it a recession or a new normal? to understand the upward shift of the interest rate curve; in a traditional sense, economic growth in 2012 was indeed in a recession; that can be deemed as a new normal given economic transformation and stabilization under non-unemployment status; stabilization on the policy front can be explained by the equilibrium of the new normal; impact of interest rate liberation to understand the flattening of the interest rate curve; the process of interest rate liberation was pushed forward in 2011 and officially started in 2012; the rigid rise in the cost of banks indebtedness has caused changes in asset allocation typically reflected in credit and high yield products in 2012;,economic growth weaker than expected, but a new equilibrium might be reached (real growth-neutral) real growth of industrial value added industrial value added (neutral expectation),rigid upward movement of funding cost against the backdrop of interest rate liberation,source: sws research,申万研究,6,1.3 post new normal return of the traditional analysis framework validation of the new normal has provided a new benchmark platform, ushering in the return of the traditional analysis framework for the bond market; “value assessment” as an important step in the establishment of our strategy is what makes the bond strategy different from macro research; an overview of the traditional analysis framework for the bond market assess the high, middle and low,formation of strategy,assessment of value factors,ranges of the interest rates; are they corresponding to the prevailing fundamentals? growth,a new benchmark platform is created by the new normal,forward and reverse,assessment of fundamentals,factors inflation factors forward feedback,1. the criteria for “good” and “poor”; 2. what is the focus; 3. the transition of the focus;,feedback liquidity dynamics at the level of monetary base,assessment of policy factors monetary fiscal policy policy,forward feedback,assessment of liquidity factors,dynamics of the supply and demand of bonds,source: sws research,申万研究,1.,2.,3.,4.,5.,7,key contents 2012: a barren year for interest rate products! growth: the bottom to be validated amid volatility inflation: wait for another round of hikes the gap between supply and demand will be chiefly seen in 3q investment and trading strategy of interest rate products,申万研究,8,2.0 expected focus on the fundamental front in 2013: a transition of focus to a “two-wheel driving” pattern the new benchmark of economic growth (potential level) still requires a process of repeated validation, which will be the focus of the financial market in 1h; the inflation issue will become a key concern of the bond market in 2h, given the dynamics of supply and demand cycle of key food constituents; the focus issue of bond investors is expected to shift in 2013,inflation growth 1q and 2q2013,growth 2q and 3q2013,inflation,growth 3q and 4q2013,inflation,source: sws research,申万研究,9,2.1 switchover of transformation and cyclical factors,different policy stances during the two rounds of crises: the subprime crisis: late action, powerful strength, quick recovery; european debt crisis: early action, limited strength, slow,timing of the bottom was in line with expectations, but the strength of recoveries was different gdp mom (sa),recovery; note: early or late action is judged by whether action was taken before or after exports were affected by the crisis (the negative impact is deemed as having taken place when exports are lower for three consecutive months); 2012: transformation factors were the key objects in analysis 2013: cyclical factors become the key objects in analysis following establishment of the new normal; compared to 2008, policy response was earlier in,emergence of negative impact the peak of subprime policy easing in,2012 but with lesser strength,the subprime started to inflict oncrisis: lehman going china: rate cut crisis: northern exports of china bankrupt rock bank the us subprime crisis the emergence of policy easing in negative impact the peak of european european debt crisis: china: reserve started to inflict on debt crisis: the danger,export fell in aug 2008,export fell in dec 2011,downgrading of greece,requirement ratio cut,exports of china,of greeces exit,source: sws research,the european debt crisis,export mom (sa) ,historical average mom growth 申万研究,10,2.2 momentum of economic growth credit interest rates are forward-looking,momentum of economic growth = actual growth - neutral forecast (seasonal) growth,the decline of credit interest rates is predicative of the growth momentum in the following year,forward-looking indicators of growth momentum: the credit interest rate in year t is correlated to the growth momentum in year t+1; (relevant to re- pricing rules of credit interest rates personal loans, current asset loans and fixed asset loans) both m2 and fiscal effect index are coincident indicators that are not predicative; the decline of credit interest rates in 2012 indicates that growth momentum will be stronger in 2013 than in 2012; money supply and fiscal tools are more of a coincident indicator,source: sws research,申万研究,11,2.3 production perspective: the bottom to be validated amid volatility in 1h,based on the historical relevance between industrial added value and gdp: chinas yoy gdp growth will hover around the bottom (7.5-8%) in the next 2 or 3 quarters (including 4q12) in the base case; gdp growth is likely to trend up from 2q13; the rebound might come earlier (by about one quarter) with stronger policy support; yoy gdp growth expected to be on a rebound track from 2q13 onwards,growth in industrial added value will be still on a bumpy road in 1h expectation of industrial value added yoy high positive correlation between industrial added value and gdp 资料来源：申万债券研究,industrial value,gdp yoy,industrial value added, gdp,source: sws research,申万研究,12,2.4 expenditure perspective: europe is key to exports while industry is key to investment stabilization in exports can be anticipated with the bottoming-out of gdp in the euro zone the growth dynamics of two major demands will be the market focus in 2013: europe is key to exports (exports to europe): gdp growth in europe will start to rebound from 2q13 according to consensus forecast of bloomberg; industry is key to investment (investment in manufacturing sector):, roe;,export to europe yoy,gpd growth(euro zone, bloomberg consensus), earnings forecast;,investment in the manufacturing sector is generally positively correlated with roe; bottoming-out of roe can be anticipated manufacturing investment : cumulative yoy a share listos roe (manufacturing, quarterly),source: sws research,申万研究,1.,2.,3.,4.,5.,key contents 2012: a barren year for interest rate products! growth: the bottom to be validated amid volatility inflation: wait for another round of hikes the gap between supply and demand will be chiefly seen in 3q investment and trading strategy of interest rate products,申万研究,13,14,3.1 the direction of price inflation similar conclusions the dynamics of quasi-money and m1 growth predict a cpi hike on a yoy basis from a money supply perspective:,quasi-money as a negative leading indicator of cpi has started to decline;,quasi-money yoy cpi m1 growth,m1 as a positive leading indicator of cpi has started to bottom out; the output gap is expected to enter positive territory, corresponding to a pickup in cpi growth from a perspective of supply and demand in production: the transition between positive and negative output gap of industrial added value is closely correlated to yoy cpi growth; based on simulation forecast of industrial added value in 2013, the output gap will turn positive from negative, corresponding to a pickup in cpi growth; industrial,output gap,cpi,source: sws research,申万研究,15,3.2 looking for beyond expectation factors in the price inflation of food constituents pork price cycles the magnitude of price inflation can not be explained by either the output gap or money supply, but it is closely related to pork price cycles; ultra-seasonal factor in cpi food price = actual sequential growth in cpi food price - historical average sequential growth in the same period (seasonal); pork price cycles have strong regularity, which can provide a good explanation for ultra-seasonal price movement of cpi food constituents;,the “big” and “small” years of pork prices correspond to ultra- seasonal price cycles of cpi food constituents,the characteristics of price movement of food items on sequential basis can be explained by the “big” and “small” years of pork prices,ultra- seasonal factor0 pork price fell for 21,ultra- seasonal factor0 pork price rose for 21 months,ultra- seasonal factor0 pork price fell for 21 months,ultra- seasonal factor0 pork price rose for 21 months,months,ultra-seasonal factor for cpi food constitutes(real growth-seasonal growth),pork price,source: sws research,申万研究,rigid upward movements in prices of,16,3.3 price inflation of non-food constituents rigid upward movement rigid upward movement in prices of non-food constituents over a long period non-food constituents of cpi have witnessed rigid upward movement in price over a long period,driven by rising labor cost;,cpi-non-food constitutes mom,exception: during the financial crisis in 2008; 资料来源：申万债券研究 转型后通胀上行约2-3个百分点 non-food constitutes over recent several years except for,non-food constituents in 2013: higher carryover effect and flat new inflation,the period of financial crisis from 2008-2009 inflation hikes about 2-3 ppts after the transformation non-food constituents are expected to rise in 2013 on a yoy basis: the carryover effect will be higher than in 2012; new inflation portion is expected to be on par with that in 2012;,source: sws research,申万研究,17,3.4 cpi to rise to a high of 3% following a period of stabilization,the most positive condition for cpi stabilization in 2013 tapering-off of the carryover effect: the carryover factor was 1.2% in 2012; the carryover factor will be 0.7-0.8% in 2013; dynamics of the new inflation factor will become a highlight, with the impact continuing into 2014; the new inflation factor was 1.4-1.5% in 2012; the new inflation factor is expected to be 2% in 2013; 2013: relatively lower carryover effect,summary of expected cpi movement in 2013: jan-may: yoy growth of cpi will not exceed 2.5%, while sequential price inflation of food constituents can be well explained by the seasonal factor. inflation expectations will be modest; jun-aug: yoy growth of cpi will remain in the range of 2.5-3.0%. inflation expectations will be boosted when it exceeds 2.5%; sep and beyond: cpi will rise at an accelerated pace to a high of 3%; yoy growth of cpi will average at 2.7-2.8% throughout the year; cpi is expected to rise to a high of 3% at the end of 3q and beginning of 4q,cpi tail raising factor from 2012-2013,cpi (2013) cpi (2012),inflation poised from june-aug,inflation accelerated from sep-dec (3.0%inflation4%),(2.5%,3.0%) inflation worry- free from jan- may,source: sws research,申万研究,18,3.5 impact of factors on the fundamental front: expectations will have a greater influence than actual changes the potential risk in 1h volatility in economic growth; the recovery of economic growth will not be a smooth process in 1h due to the base effect, and the downtrend of data at some stage will boost expectations of a secondary downturn in economic growth; the potential risk in 2h rising cpi pork prices will enter a rising cycle from 3q, which will cause an ultra-seasonal price change in the food constituents of cpi, leading to intensified expectations of inflation hikes; in general, the fundamentals in 2013 will be relatively stable and a secondary recession or severe inflation is unlikely to take place. however, the dynamics of the two concerns will become the focus of trading accounts in the market.,source: sws research,申万研究,1.,2.,3.,4.,5.,key contents 2012: a barren year for interest rate products! growth: the bottom to be validated amid volatility inflation: wait for another round of hikes the gap between supply and demand will be chiefly seen in 3q investment and trading strategy of interest rate products,申万研究,19,20,4.1 the gap between supply and demand of interest rate products: gradually widening maturity of interest rate products and expected size of issues in 2013 the scale of the interest rate products due in 2013 will constitute rigid investment demand: there will be a total of rmb 2.67 trillion worth of four major products due in 2013; a large amount of 3y central bank notes will mature in may-jul; the gap between supply and demand will become more salient in 2h it is expected that total issue of four major products will amount to rmb 3.9 trillion in 2013, while strong,historical pattern will be followed in terms of monthly issues; the gap between supply and demand = total issue bonds due. the gap needs to be filled by additional liquidity for which excessive reserve amount at the time being can be referred to; in general , the gap will fluctuate significantly in size in 1h, whereas the gap pressure will persist,rmb 100 mn from the perspective of gap between supply and demand, supply and demand pressure remained lower in jan, feb, april, may, july and aug. supply-demand gap=ma