Daiwa: The strength of the US dollar is key, expected to provide support for Chinese stocks before the end of the year

According to Zhitong Finance APP, Daiwa released a research report stating that the weakening of the US dollar has a more significant impact on emerging markets, A-shares, and Hong Kong stocks than the Federal Reserve's interest rate cuts. If the US economy can achieve a soft landing, it will be beneficial for emerging market stocks. If US economic data is weak, the weakness of the dollar may continue, and the demand for currency hedging will increase, which will boost liquidity and provide support for emerging markets and the Chinese market (including Hong Kong) before the end of 2025.

The firm believes that the Asian market is currently in a "risk-on" atmosphere, with the MSCI Asia-Pacific (excluding Japan) index rising about 10% since July. The easing of geopolitical risks, favorable regional policies, and market expectations for the Federal Reserve to restart the interest rate cut cycle are the main driving forces. It is worth noting that since the 1990s, the Federal Reserve's interest rate cut cycles have typically occurred during US economic crises, when the dollar is often strong, thus limiting the stimulative effect of rate cuts on the stock market (especially emerging markets, A-shares, and Hong Kong stocks); the strength of the dollar is the key indicator.

Daiwa noted that the Federal Reserve's 25 basis point rate cut on September 17 was a risk management cut, not due to an economic recession, but to prevent the risk of a soft landing. In this context, Daiwa believes that the trend of the US economy in the second half of this year will have a crucial impact on the direction of monetary policy, the dollar exchange rate, and the relative returns of emerging markets versus developed countries. Although the Federal Reserve does not have significant short-term concerns about a recession, in the long term, US tariff policies will become a drag on economic growth, expected to reduce real GDP growth by about 0.4% annually starting in 2029.

Despite recent market volatility, Daiwa believes that the Federal Reserve's rate cuts and the weak dollar will continue to provide liquidity support for emerging markets and A-shares and Hong Kong stocks before the end of 2025. Compared to A-shares, the firm still prefers Hong Kong stocks, believing that they will benefit more from foreign capital inflows. However, the firm remains cautious about a market correction in the fourth quarter of 2025, which may be triggered by a cooling of sentiment leading to profit-taking, a slowdown in economic activity, or a resurgence of geopolitical risks