Riders on the Charts: Weekly Major Asset Allocation Chart Highlights Issue 303

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Life resembles a novel more often than novels resemble life.

－Amantine Lucile Auro Dupin de Francueil “George Sand”

Report Summary

I. Investment Summary

1: The valuation premium of the technology sector versus the S&P 500 index has fallen to a 6-year low.

2: The forward price-to-earnings ratio of the S&P 500 index has reached its lowest level since April 2025.

3: Market expectations for U.S. stocks are not strongly focused on high oil prices hurting U.S. consumer demand.

4: High oil prices are more likely to cause real wages in European economies to turn from positive to negative year over year.

5: High oil prices lead to a clear divergence in the trade conditions of overseas developed economies.

6: Weekly update of the equity risk premium (ERP) for the CSI 300 index.

7: Weekly update of the 10-year China government bond forward-utility arbitrage return.

8: Weekly update of the Japan yen/dollar swap basis and the dollar funding premium.

9: Weekly update of the copper-to-gold price ratio and the offshore RMB exchange rate trend.

10: Weekly update of the relative performance of total returns of onshore stocks and bonds.

II. Risk Disclosure

A price war erupts in the crude oil market, and systemic financial risks emerge in emerging markets

Main Text

Weakness in technology stock rallies coupled with favorable earnings prospects has led to a sharp decline in the valuation premium of technology stocks, and by March the premium had essentially disappeared. As of March 30, the ratio of the forward price-to-earnings ratio of the information technology sector of the S&P 500 index to the forward price-to-earnings ratio of the S&P 500 index fell to 1.1, clearly lower than 1.5 in September last year, reaching the lowest level in more than six years. This may indicate that technology stocks have renewed momentum to outperform the overall U.S. equity market.

After the market’s downward volatility through last Q4 and this Q1, together with continued upgrades to earnings-growth expectations, as of March 30 the forward price-to-earnings ratio of the S&P 500 index fell to 19.7x, slightly higher than 18.6x in April 2025. This shows that the forward P/E ratio of the S&P 500 index is approaching the average level of the past 15 years; the risk of its high valuation has been fully priced, which is also why the rise in the 10-year U.S. Treasury yields did not trigger a sharp drop in U.S. stocks.

Are investors currently pricing in an economic recession caused by high oil prices? Judging from the relative performance of ETFs across different industries, this kind of pricing is not evident. The CRACK/XOP ratio has fallen sharply, indicating that it is relatively certain that oil & gas industry profits will concentrate toward upstream segments, but household consumption expenditure expectations have not deteriorated due to high oil prices. Because the XLY/XLP ratio and the XRT/XLP ratio have not hit new lows, it suggests that discretionary consumption has not further underperformed necessary consumption.

As of March 30, Brent crude oil rose to $109, the 1-year U.S. CPI swap rate rose to 3.2%, reaching a 7-month high; the 1-year euro area CPI swap rate rose to 3.4%, and the 1-year U.K. CPI swap rate rose to 4.3%, with all of them reaching the highest levels since 3 years ago. Given that U.S. nominal wages are 3.8%-4% year over year, while nominal wages in the euro area and the U.K. are around 3% year over year, the pressure of negative real wage growth in these two economies exceeds that in the U.S., and the pressure for a further decline in total demand in the future will be even greater.

The rise in crude oil prices has caused a divergence in the trade conditions of different economies. The trade conditions indices in the euro area, the U.K., and Japan have fallen—business sectors suffer cost shocks and find it difficult to pass costs on to final consumers, compressing profitability and leading to slower output growth. As of March 30, the Goldman Sachs U.S. trade conditions index was unchanged, the Goldman Sachs euro area trade conditions index fell to 99.2, the Goldman Sachs U.K. trade conditions index fell to 99.7, and the Goldman Sachs Japan trade conditions index fell to 98.5.

The equity risk premium (ERP) is used to measure the excess return of stocks relative to the benchmark government bond yield. As of March 30, the equity risk premium (ERP) of the CSI 300 index is 4.2%, which is more than one standard deviation below the 16-year average and has moved away from the relatively historical high. Using domestic 10-year government bond yields as the benchmark, the CSI 300 index offers comparatively clear excess returns, and there is room for valuation levels to rise.

The 1-year (7-day repo) interest rate swap represents expectations for short-term rates, determining investors’ repo funding costs. The 10-year government bond yield represents the return on the target asset that investors seek through term-mismatch arbitrage. The difference between the two equals the forward return of debt markets levered arbitrage. As of March 30, China’s 10-year government bond forward arbitrage return is 30 basis points, which is 60 basis points higher than the level in December 2016.

The 3-month dollar/yen swap basis (Basis Swap) represents the cost of offshore financial institutions’ dollar funding; the lower the basis, the higher the dollar funding cost. The Libor-OIS spread represents the dollar funding premium of offshore commercial banks relative to onshore commercial banks. As of March 30, the 3-month dollar/yen swap basis is -22.1 basis points, the Libor-OIS spread is 120.1 basis points, indicating that increased usage of the Federal Reserve’s standing repo facility has eased offshore dollar funding pressure.

The copper-to-gold price ratio is used to measure the momentum of global total demand upward, and it also represents the upside space for global nominal prices. The offshore RMB exchange rate is driven by both external demand and overseas capital inflows. Therefore, the copper-to-gold price ratio can serve as a leading indicator for the offshore RMB. As of March 30, the copper-to-gold price ratio rose to 2.7 and the offshore RMB exchange rate rose to 6.9; the divergence between the two has been amplified, and the signals sent by the RMB and the copper-to-gold ratio are clearly diverging.

Using the CSI 300 total return index to represent domestic stock market returns, and the Barclays China interest-rate bond index to represent domestic bond market returns, the ratio of the two represents the relative performance of domestic stocks versus bonds. As of March 30, the ratio of total returns of domestic stocks to domestic bonds is 27.7, higher than the level of the past 16 years on average. The relative excess returns of stock assets and fixed-income assets are reverting to their mean; over the medium to long term, the attractiveness of stock assets relative to fixed-income assets has increased.

Weekly large-asset allocation chart series — Selected series

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