Valuation of value for money and trading opportunities across major asset classes in the third week of January:
Equity - The bottom price of growth stocks deviates significantly, and a stable rebound can be expected
Bonds – Liquidity premiums are close to late-stage levels
Commodities – Crude oil supply and demand balance improved more slowly, oil prices returned to their previous highs
Exchange rate – The interest rate differential between China and the United States continues to narrow, and the value for money of the renminbi has fallen to neutrality
Overseas – The pace of rate hikes is still under observation
Text: Tianfeng Macro Song Xuetao / Contact Lin Yan
Figure 1: Return on various assets in the second week of January (%)
Source: WIND, Tianfeng Securities Research Institute
Figure 2: Risk premium for various types of domestic assets/strategies in the third week of January
Figure 3: Risk premium for various types of assets/strategies overseas in the third week of January
Note: The equity risk premium indicates the risk-reward ratio of the stock, and the higher the risk premium, the higher the risk-reward ratio;
The liquidity premium is the price mapping of the market for the current degree of liquidity tightness;
Liquidity expectations are market expectations for the degree of liquidity tightness in the future.
1. Equity: The bottom price of growth stocks deviates significantly, and stabilization and rebound can be expected
In the second week of January, the A-share market continued to pull back, Wind all A week fell 1.12%, the average daily turnover of 1.075 trillion yuan, has not yet reached the threshold of 90 million yuan since last year's contraction to stop falling and stabilize, technically it is still difficult to call safe.
In the second week of January, the growth and decline rate slowed down (-0.36%), the average daily turnover was 432.517 billion yuan, the volume could be reduced, the price correlation coefficient had reached a historical low of -0.63 (1% quantile), the probability of technical retracement was larger, and the short-term stop-loss rebound could be expected. Short-term congestion in growth stocks fell to a historically low level (24% quantile), showing some signs of oversold, but not extreme.
High-frequency data related to infrastructure real estate is average. High-frequency industrial data from the first two weeks of January and the last two weeks of December showed that upstream production gradually improved (coke oven operating rate, capacity utilization rate and coking plant capacity utilization rate rebounded from the previous month), the middle and lower reaches of the production performance differentiation (PTA operating rate increased by 1.2% week-on-week, semi-steel tire operating rate decreased by 0.7% week-on-week), and the downstream steel consumption performance was still weak but the decline was converged.
In the second week of January, finance, consumption and cyclical closed down 2.13%, 1.54% and 0.98% respectively. Short-term congestion in financial stocks was essentially unchanged from last week (52% quantile); short-term congestion in consumer and cyclical stocks fell below the median (48%, 40%quant;; and growth congestion has fallen to its lowest point since April last year (24% quantile), further closer to the extremely oversold level (10% quantile). The order of congestion from high to low is: financial > consumption> cycle > growth.
In terms of market capitalization factors, large-cap stocks (SSE 50 and CSI 300) and mid-cap stocks (CSI 500) closed down 2.61%, 1.98% and 1.32% respectively (see Figure 1). Short-term trading congestion in large-cap stocks (SSE 50 and CSI 300) has fallen sharply, reaching below the median (43% and 35% quantiles), and short-term congestion in mid-cap stocks (CSI 500) has loosened from the previous period, falling to the low-mid position of the 42% quantile. The crowding of the broad-based index is sorted from high to low: SSE 50> CSI 500> CSI 300.
The A-share sentiment index, benchmarked by the CSI 300, fell slightly (77% quantile), and the sentiment of the blue chips in the broader market cooled. Optimism among investors in the derivatives market remained high, but the basis for stock index futures retreated from all-time highs.
Wind's all-A valuation level remains neutral and cheap (see Figure 2). The risk premiums of the Shanghai 50 and CSI 300 have rebounded for the first time after more than a month of continuous decline, and are currently in the [neutral] range, and the valuation of the CSI 500 remains [cheap]. Financial valuations remain [very cheap] (89% quantile), cyclical valuations are [cheaper] (79% quantiles), growth valuations are [cheaper] (75% quantiles), and consumer valuations are neutral and expensive (47% quantiles). The order of risk premiums from high to low is: financial > cycle> growth > consumption.
In the second week of January, the weekly net inflow of northbound funds was 7.445 billion, and the net inflow of Guodian NARI, WuXi AppTec and LONGi shares was in the front. Southbound net inflows of HK$15.336 billion picked up sentiment. The risk premium of the Hang Seng Index was flat with last week and the price/performance ratio was high.
2. Bonds: The liquidity premium is close to the late level of the epidemic
In the second week of January, the central bank's open market operations net investment of 10 billion yuan, the capital level remained stable, and the liquidity premium remained at the 15% quantile, close to the easing level in the late epidemic. Judging from the recent policy statements and the central bank's measures to protect the liquidity of the New Year, the capital before the Spring Festival should not need to worry. Medium- and long-term liquidity expectations remain at the 31% quantile, and the market has remained optimistic about the future liquidity environment in the latest month.
In the second week of January, the term spread continued to recover to the 43% quantile, and the duration strategy was neutral and low. Credit premiums were essentially flat (53% quantile) from last week, with internal differentiation continuing, with low- and medium-rated credit debt valuations being neutrally cheap (risk premiums remaining at the 69% quantile) and high-rated credit bonds being neutrally expensive (risk premiums in the 37% quantile).
In the second week of January, the sentiment in the bond market was neutral and optimistic. Short-term congestion of interest rate bonds remained in a neutral crowded position (63% quantile). Convertible bond trading sentiment continues to cool, and the short-term trading congestion of the China Securities Convertible Bond Index has fallen from its high (83% quantile) in early December to above the median (58% quantile), further alleviating the overheating of convertible bond trading. Short-term congestion on credit bonds was flat from last week (45% quantile).
3, commodities: crude oil supply and demand balance improved slowly, oil prices returned to the previous high
In the second week of January, the global fourth wave of COVID-19 peak continued, but some countries began to fall back from the peak. The number of new weekly confirmed cases in the United States, France and Germany continued to hit a record high, but the number of new confirmed cases in the United Kingdom fell faster, from January 9 to January 15, from 1.24 million to 840,000. Mortality and severe illness rates in all countries are currently at low levels, and the stress on the healthcare system is not significantly higher than it was at the time of the Delta outbreak. South Africa and the United Kingdom are the first countries to erupt in this round of Omicron outbreaks, and both countries reached the peak of the number of new confirmed cases in about a month.
In the second week of January, Brent oil prices rose 5.77% to $86.47 a barrel. Recently, OPEC and EIA have successively released monthly reports, both of which have judged that global crude oil inventories have been replenished this year, and there are differences in the range. The improvement in the balance between supply and demand of crude oil is more tortuous. U.S. crude oil capacity utilization fell slightly, with production down 100,000 barrels (11.7 million barrels/day) from last week and crude inventories (excluding strategic reserves) falling slightly. The premium of the main cloth oil contract relative to the 6-month far-month contract rose to more than 5%, and the expectation of bullish forward crude oil supply and bearish forward crude oil prices strengthened.
In the second week of January, the risk premiums for agricultural products, chemicals and industrial products were all at historically low levels, and the valuation was extremely expensive.
4. Exchange rate: The interest rate differential between China and the United States continues to narrow, and the value of the renminbi has fallen to neutral
In the second week of January, us Treasury real interest rate rose 6bp, recording -0.66%, the highest position since April last year, and London spot gold prices stopped falling and stabilized, up 1.23%, closing at $1817.93. The dollar index, which had been tightening for a long time in the previous period, closed down 0.60% to 95.16 in the second week of January.
In the second week of January, the dollar closed down 0.33% against the yuan (onshore) at 6.3531. The renminbi's short-term trading congestion continued to decline to the 41% quantile, with a neutral and pessimistic mood. The rapid rise in US Treasury interest rates has made the interest rate differential between China and the United States continue to narrow, and the value of the renminbi has fallen to the middle and low positions. The net inflow of offshore funds into the Chinese market (stocks and bonds) continued to soar, and the impact of financial market capital flows on the value of the RENMINBI was neutral and positive.
5. Overseas: The pace of interest rate hikes is still in the observation period
Overseas markets have already priced signals of tighter liquidity, but there is still disagreement about whether the pace will be continuously tight or first tightened and then relaxed, and it will be necessary to see whether the FOMC in January will release signals of an early rate hike in March. At present, the delivery time of global suppliers has begun to shorten, production efficiency has improved, global shipping and US land transportation have not appeared more serious blockages and blocks, the maximum pressure on the supply chain may have passed, the future inflation pressure has gradually eased, and interest rate hikes are expected to gradually move closer to reality. Whether the follow-up Omicron and oral drugs can establish the trend of influenzaization of the epidemic, whether the INFLATION in the United States can fall, and whether the recovery of the UNITED States economy will slow down, will affect the rhythm and amplitude of interest rate hikes. (For details, see "Excessive Expectations of Interest Rate Hikes, TightenIng First and Loosening Later")
In the second week of January, the 10-year nominal interest rate on the US Treasury was basically flattened at 1.78%, the US Treasury maturity premium fell slightly back to the 33% quantile, the 10-year break-even inflation expectation (BEI) fell 4bp to 2.44% during the week, and the 10-year real interest rate rose 6bp, recording -0.66%. The dollar liquidity premium was essentially flat with last week (27% quantile), the liquidity environment was more relaxed, and the credit premium remained at an all-time low (11% quantile).
In the second week of January, the S&P 500, Dow Jones Industries and NASDAQ closed lower, and as U.S. Treasury rates recovered, the risk premium for U.S. stocks fell back from the previous period, the risk premiums of the S&P 500 and Dow Jones continued to fall (30% and 15% quantiles), and the risk premium of nasdaq fell to a neutral position (see Figure 3).
Risk Warning
Risk warning: Omicron's fatality rate exceeded expectations; economic growth fell faster than expected; monetary policy tightened more than expected
Team Introduction
Song Xuetao | Macro team leader
Ph.D. in Economics, North Carolina State University, 2018-2020 Golden Bull Award For Most Valuable Analyst, 2019 Golden Kirin Emerging Analyst, 2020 Shortlisted New Fortune and Crystal Ball Best Analyst, Golden Kirin Best Analyst, published central bank working papers, CF40 financial books and a number of academic papers.
Xiang Jingshu
Master of London Business School, mainly responsible for overseas macro and large-scale asset research. Worked for AHL, a core quantitative hedge fund owned by Inceman Investments.
Zhao Honghe
Master of Finance from Central University of Finance and Economics, mainly responsible for domestic macroeconomic and policy research. He worked in the Development Strategy Department of China Export and Credit Insurance Corporation.
Lin Yan
Master of Financial Engineering from Wuhan University, mainly responsible for large-scale asset allocation research. He worked in the quantitative investment department of Hongshang Asset Management.
Guo Weiwei
Master of Finance from Wuhan University, mainly responsible for industry comparison and industry trend research.