Global Market Turmoil: 2 Types of QDII Funds Surge

In the past month, the global capital market has entered a "vibration mode".

After a two-year rally, overseas markets represented by the US and Japanese stocks have experienced an "emergency braking". Since mid-to-late July, the US technology "seven giants" have collectively declined, triggering a continuous correction in the US stock market. Subsequently, the Japanese stock market has experienced a "roller coaster" trend, with the Nikkei 225 index falling more than 12% on August 5, the largest drop in the past 40 years. Other major overseas markets have also been impacted to varying degrees.

The recent sharp decline has been fierce. However, most global markets have quickly reversed their downward trend, with significant rebounds. However, judging from the recent performance of QDII funds, the high-yielding areas of overseas markets have shifted from US technology stocks to Hong Kong innovation drugs and US dollar bonds.

Hong Kong innovation drugs have led the way against the trend.

QDII funds investing in overseas markets can verify this. According to statistics, as of August 19, in the past month, there are only 7 QDII funds with a gain of more than 5%, all of which are Hong Kong pharmaceutical-related index funds. Among them, the Guangfa China Securities Hong Kong Innovation Drug ETF led with a 6.27% increase.

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Regarding the recent strength of Hong Kong innovation drugs, Liu Jie, the fund manager of the Guangfa China Securities Hong Kong Innovation Drug ETF, pointed out that this is based on favorable factors from various aspects such as capital, policy, and demand.

Firstly, as a high interest rate-sensitive sector, the innovation drug sector will directly benefit from the Federal Reserve's interest rate cuts. The development of innovation drug companies requires venture capital and financing, making it an industry highly sensitive to interest rates. Currently, the market predicts that the Federal Reserve may start the first round of interest rate cuts in September, which will improve the financing environment for Hong Kong innovation drug companies and is conducive to the development of the sector. Recently, some funds have started trading on the interest rate cut logic.

Secondly, the policy level is also increasing its support for the innovation drug sector. In the current pharmaceutical sector, the largest positive policy increment is the "Whole Chain Support Plan for the Development of Innovation Drugs" recently reviewed and passed by the State Council, which emphasizes R&D subsidies and accelerated access policies, all of which are beneficial to the innovation drug sector.

In addition, the global demand for innovation drugs is also rapidly expanding. Looking at the sales data of existing ADC (antibody-drug conjugate) drugs, the global sales of ADC drugs listed have grown from $1.6 billion in 2017 to nearly $8 billion in 2022, and for the first time in 2023, they have exceeded $10 billion, showing a rapid growth trend. Compared to the A-share innovation drug sector, there are more ADC companies in the Hong Kong stock market.U.S. Dollar Bond QDII Funds Impose Collective Purchase Limits

In addition to innovative drugs in Hong Kong stocks, U.S. dollar bonds have recently become leading assets in terms of price increases.

Wind data shows that QDII funds such as ICBC Global U.S. Dollar Bonds, Dacheng Global U.S. Dollar Bonds, and Yinhua Selected U.S. Dollar Bonds have seen increases of over 2% in the past month.

Due to the surge in subscriptions, all 25 U.S. dollar bond QDII funds have currently imposed restrictions on large purchases, with 20 of them having a daily purchase limit of no more than 10,000 yuan, and several others only accepting daily purchases of less than 100 yuan.

Jiashi Wealth's Global Asset Allocation Director, Wang Zhiqiang, believes that U.S. bonds currently have the multifaceted advantages of "heavenly timing, geographical advantage, and harmonious people."

"At present, we are on the verge of the start of a Federal Reserve interest rate cut cycle, which is the fundamental reason why we are optimistic about U.S. bonds," Wang Zhiqiang analyzed. U.S. bond yields are prone to fall and difficult to rise in the medium to long term. In the process of yield decline, investors are likely to be able to take into account both coupon income and capital gains (duration gains).

"From a cross-asset perspective, U.S. bonds are more attractive than stock assets," Wang Zhiqiang pointed out. The valuation of U.S. stocks is still relatively expensive, with the S&P 500 index's PE at the 79th percentile over the past 5 years and the 84th percentile over the past 10 years, while the current bond yields are still at a relatively high level.

He also analyzed from the perspective of investor behavior: during the past few years of the Federal Reserve's interest rate hike cycle, global investors' funds mainly flowed into U.S. bond money market funds and short-term bond funds. According to ICI data, the scale of U.S. money market funds has reached a huge scale of about 6 trillion U.S. dollars.

"This is equivalent to a reservoir. When interest rates enter a downward cycle, as the federal benchmark interest rate declines, the returns of money market funds will eventually decline as well. Investors will eventually flow out of the money fund reservoir. Considering different risk preferences, some funds will flow into the medium and long-term U.S. bond sectors," Wang Zhiqiang said.

Has the most intense stage passed?Despite the turbulence in this round being a false alarm, as the leader of the global market, the "US economic recession trade" has sparked heated discussions.

The latest views from Morgan Stanley Fund mentioned that, as of last Friday, US stocks and Japanese stocks have completely recovered from the impact of recession concerns and the unwinding of carry trades. However, further upward movement requires fundamental drivers. "Although the US retail data for July performed better than expected, we believe that the overall trend of US economic data may be a slow decline. Interest rate cut expectations are swinging back and forth, and the possibility of a preemptive rate cut is relatively high. Employment data is expected to show a seasonal downward trend in the coming months, creating favorable conditions for the Federal Reserve to cut interest rates."

"The most 'intense' phase of overseas asset price fluctuations may have passed, and there may still be some aftershocks, but it is expected that there will be no further significant declines." A top public fund manager believes that, from a macro perspective, there are mainly three risk factors to follow:

First, the market's pricing for a US recession is already quite sufficient, even aggressive, but its expectations may not be realized. If subsequent inflation data strengthens or economic growth data shows strength, the Federal Reserve may not act as aggressively as expected, and US Treasury yields may continue to fluctuate significantly.

Second, if subsequent corporate earnings do not meet expectations, the market may be hit again. For now, many companies' earnings are still acceptable.

Third, if the monetary policy of the Bank of Japan or the European Central Bank differs significantly from expectations, such as the Bank of Japan's unexpected interest rate hike, or the European Central Bank's interest rate cut is less than expected, it may also impact the market.

Some fund managers also clearly look down on US stocks. Chu Tianshu, the Chief Index Quantitative Officer of PuYin AnSheng Fund, said that the risk of overseas asset markets represented by the United States is already higher than that of the A-share market. "Especially in the last two or three years, if you remove the 'technology seven sons,' the performance of the US stock market is actually not very good."

She suggests that in the global asset allocation, it is time to start turning to A-shares. "A-shares may not make you money in the short term, but at least they will not let you lose a lot of money."