Last week, the blue-chip sector moved significantly stronger than the growth track sector under multiple catalysts such as the reduction in deposit rates, the fermentation of favorable real estate expectations, and the cooling of new fund issuance, with the Shanghai Composite Index rising 0.04% and the ChiNext Index falling 4.04% last week. However, the average daily turnover of Shanghai and Shenzhen was 894.99 billion, down 5.19% from the previous week, under the game of stock funds, the style rotation speed is faster, the sector is difficult to get out of the general rise market, and the structural differentiation of the market continues to intensify. Since April, the marginal weakening of domestic high-frequency economic data has been the core reason for the recent pressure on the trend of A-shares. We believe that the market will maintain a weak trend from June to July, and the opportunity at the index level may not be large, but the overall valuation of the current A-share market is not expensive, and the medium and long-term funds have ushered in a better allocation position.
Under the cold issuance of public funds, new energy, medicine and other track sectors have passively cut positions, driving the ChiNext Board to hit new lows recently. In terms of issuance deadlines, public equity and hybrid fund issuance was only 22.913 billion in May, a record low in recent years, and equity and hybrid fund issuance has continued to decline so far in June. Under the lack of incremental capital inflow of public institutions, the position adjustment and stock exchange behavior of some public funds has intensified the adjustment pressure of the high-position sectors (new energy, CXO, liquor) in the early stage, and the recent white horse stocks with heavy institutional positions have also seen flash crashes. Considering that the issuance of public funds is usually a lagging indicator of market recovery, it is expected that it is difficult for public fund issuance to improve significantly in the short term, and the downturn in track stocks may continue, and it is necessary to be vigilant against the adjustment pressure of white horse stocks with high institutional positions. On the other hand, since the beginning of this year, under the weak macroeconomic recovery and the market style dominated by floating capital, the popular theme speculation style of the A-share market, artificial intelligence and China Special Valuation have become the two main lines of the A-share market in 2023, and the relevant sectors have come out of a strong independent market. The subsequent market style switch needs to meet two conditions: first, there is a signal of macroeconomic stabilization and strengthening or economic stimulus policies, and relevant pro-cyclical sectors will usher in a re-inflow of funds; Second, the Fed's interest rate hike is suspended or the issuance of domestic public funds is picking up, and foreign capital or public funds replace floating capital as the leading force in the market. Considering the Politburo meeting at the end of July and the pace of Fed rate hikes, we believe that the market style switch will most likely occur in July.
The recent reduction in the risk-free yield is an important driver for the renewed strength of the special valuation sector. Bank deposits, savings pension insurance, and government bonds, as important benchmarks for domestic risk-free yields, have recently ushered in different degrees of downward adjustment. (1) A number of state-owned banks will officially adjust the RMB deposit interest rate from June 8. For the time deposit lump sum product, the 2-year listing rate was reduced by 10 basis points to 2.05%, and the 3-year and 5-year listing rates were both reduced by 15 basis points to 2.45% and 2.5% respectively. (2) According to CaiLian News, the assessment rate of liability reserves is about to be reduced, and some insurance companies' 3.5% predetermined interest rate life insurance products may be removed before the end of June, and some insurance companies are already planning new product sales strategies. (3) Recently, the yield on 10-year treasury bonds has also continued to decline below 2.7%. The reduction in the risk-free yield has improved the cost performance of the stock market relative to the bond market on the one hand, and on the other hand, it has intensified the recent trend of RMB depreciation. As of June 11, 2023, the dividend yields of the SSE 50, CSI 300 and Wande All A Index were 3.81%, 2.75% and 2.00%, respectively, and the risk premium ratios of 2.67% relative to the 2.67% yield of China's 10-year government bonds (CSI) were 1.14%, 0.08% and -0.66%, respectively, which were in the 99.14%, 98.71% and 99.22% fractions of the past 10 years, respectively, and A-shares had obvious allocation value relative to the domestic bond market. On the other hand, the spread between the United States and China bonds continues to widen, which has intensified the recent depreciation pressure on the RMB, and the current offshore RMB exchange rate has depreciated to 7.14%, which is still some distance from the low of the previous round of 7.37%, and it is difficult for the short-term RMB, A-share and Hong Kong stock markets to stabilize and reverse. Looking forward to the future market, we believe that A-shares have not yet reached the moment of reversal in the short term, but as the relative returns of stocks and bonds converge, the possibility of the bond market taking the lead in adjusting cannot be ruled out.
In the first quarter, the domestic real estate market showed a small spring, but the real estate fundamentals weakened after April. According to the China Index Research Institute, in the first three weeks of May, the average weekly transaction of commercial housing in key 50 cities was 4.34 million square meters, down 17.7% from the weekly average in April and up 17.9% from the same period last year. Compared with April, the transaction volume of all tier cities was falling weekly, with first-tier cities falling by 15%, and second-tier and third- and fourth-tier cities falling by about 18%. According to Shanghai E-House Real Estate Research Institute, from May 1 to 22, the transaction area of new commercial housing in 50 key cities across the country was 11.99 million square meters, down 13% from the previous month. Among them, 18 cities saw month-on-month growth in trading prices, while the remaining 32 cities showed month-on-month declines. The marginal weakening of real estate fundamentals has heightened concerns about real estate liquidity risks and marginal economic weakness. Last week, China Economic Times released an article "First-tier cities real estate purchase restrictions should be optimized and adjusted in a timely manner" article said that in the future, first-tier cities may gradually adjust policies such as purchase restrictions according to changes in the real estate transaction market, for some areas with cold residential markets and weak purchasing power, policies such as purchase restrictions may be relaxed first, and for some places where the purchasing power of the residential market is stronger, policies such as purchase restrictions may continue to be implemented to maintain the stable and healthy development of the real estate market in first-tier cities with wind vane significance. Similar to November 2022, if there are more favorable policies than expected in the real estate sector in the later period, the bond market may take the opportunity to adjust, but the boost to the A-share market may be limited.
In terms of high-frequency economic data, consumption and exports are currently under varying degrees of pressure. According to the National Bureau of Statistics, in May, national consumer prices rose 0.2% year-on-year and fell 0.2% month-on-month. Affected by the overall decline in international commodity prices and the high comparison base in the same period of the previous year, the ex-factory prices of industrial producers in China fell by 4.6% year-on-year and 0.9% month-on-month in May. In addition, in renminbi terms, China's exports fell 0.8% year-on-year in May, imports increased by 2.3% year-on-year in May, and the trade surplus in May was 452.33 billion yuan. In dollar terms, China's exports fell 7.5% year-on-year in May, imports fell 4.5% year-on-year in May, and its trade surplus in May was $65.81 billion. Price and export data continued to weaken in May, adding to recent market correction pressures. From historical experience, the market bottom usually lags behind the policy bottom, and the subsequent market trend reversal may still need to wait for a clear signal from the policy side, and the current policy signal has not yet appeared. However, at present, the valuation of A-shares is cheap, and it is expected that the downside of the follow-up index is not large, and the market is more likely to be dominated by shock grinding bottoms from June to July.
Overseas, the Bank of Canada unexpectedly raised interest rates by 25 basis points to 4.75% in June, while the consensus expectation remained unchanged after four consecutive months of stagnation. Historically, both the Bank of Canada and the Federal Reserve have started a cycle of interest rate hikes to control inflation, and the interest rate level has reached a record high, and the Bank of Canada is widely regarded by the market as the "outpost" of the Fed's monetary policy. As a result, the market raised expectations of the Fed's interest rate hike. As a result, the Fed rate swap shows that traders tentatively expect a 25 basis point rate hike in July, and expect the Fed to make only one 25 basis point cut from the peak rate in 2023. In addition, Fed Governor Philip Jefferson, who was recently nominated as Fed Vice Chairman, previously hinted that the June meeting favored keeping interest rates unchanged to give policymakers more time to assess the economic outlook. But not adjusting interest rates does not mean that the rate hike cycle is over. Based on the above data and comments, we tend to believe that the Fed may pause interest rate hikes in June, but if the US economic data and labor market data continue to be strong, it is not ruled out that the dot plot of the June interest rate meeting will turn hawkish to some extent, and there is still the possibility of a re-hike in July-December. The impact of the Fed's rate hikes on global markets may not be over yet.
In the second quarter, it is expected that the A-share index will remain dominated by weak volatility. At the style level, from the perspective of historical rules, the thematic investment market from January to March is obvious, and after May, the A-share market tends to focus more on performance, and the second quarter focuses on grasping structural opportunities:
(1) Medium special valuation plate. Pay attention to high-quality state-owned enterprises and central enterprise companies with low valuation, high dividends, high dividends and stable performance and operation in the banking, insurance, real estate and construction sectors;
(2) Growth sectors with low valuations. Biomedicine and new energy sectors with significantly lower valuations, temporary trough fundamentals, and easing overseas liquidity;
(3) Precious metal plate. The real yield of the subsequent 10-year U.S. Treasury is likely to fall, and the price of gold and silver may continue to rise, you can pay attention to the precious metal sector stocks;
(4) Performance-driven consumer segments. Focus on performance-driven consumer sectors with low valuations, such as liquor and pig farming.
The author of this article is Huang Hongwei, an analyst at Caixin Securities Research and Development Center (practice certificate number: S0530519010001). The above views come from the June 11 research report of Caixin Securities Research and Development Center, "Market Volatility Grinds the Bottom, Medium and Long-term Long Term Long Term Bullish A-shares". Risk warning: The stock market is risky, and investment needs to be cautious.
Note: This article does not constitute investment advice, the stock market is risky, investment needs to be cautious.