Regarding A-shares, there are some important signals worth looking forward to

Author | Outside the frontier

At present, the atmosphere of the A-share market is very pessimistic, quite like the darkest moment at the end of 2018.

The CSI 300 Index hit a new low for the year during the week, and the current price has returned to February 2019, retraced more than 40% from its all-time peak. The Shanghai Composite 50 Index is approaching 2,249 points at the end of 2018, a 43% retracement from its all-time peak.

There is a very simple and straightforward truth in the financial market: if it falls too much, it will rise, and if it rises too much, it will fall. Valuation MA reversion is bound to happen, but sooner or later.

In my opinion, although it is entirely possible that the market will continue to fall due to the continuation of pessimism, in the long run, the winning rate and odds of betting in this position are actually very good.

The market has a big rebound or even a reversal, and some opportunities are needed. Previously, the market expected the retreat of US bonds and the US dollar to inject upward momentum into the market, but in the short term, it backfired. Recently, the market is looking forward to the Politburo meeting and the Central Economic Work Conference at the end of the year, which will bring some new trading signals and clues.

01

On December 8, the Political Bureau of the Central Committee of the Communist Party of China held a meeting to analyze and study the economic work in 2024.

The judgment of this year's economic situation is summarized as withstanding external pressure, overcoming internal difficulties, focusing on expanding domestic demand, optimizing the structure, boosting confidence, preventing and resolving risks, and the economy is rebounding. The judgment in July is also that the overall recovery is good, but it emphasizes that the economic operation is facing new difficulties and challenges.

The general tone of the policy in 2024 is "next year, we must adhere to the principle of seeking progress while maintaining stability, promoting stability through progress, establishing first and then breaking down, strengthening counter-cyclical and cross-cyclical adjustment of macro policies, and continuing to implement active fiscal policies and prudent monetary policies" and "intensifying macroeconomic regulation and control".

The term "establish first and then break" has aroused widespread discussion and attention. Some institutions believe that the first to establish and then break, rather than not to build and break first, mainly refers to real estate, to save first and then talk about other things. From another point of view, after standing up, economic growth is not so important in the future.

However, this is not the first time that the phrase "first build and then break" has been mentioned in important meetings. The 2021 Central Economic Work Conference expressed that it is necessary to grasp the timeliness and effectiveness of adjusting policies and promoting reforms, and insist on establishing first and then breaking down, and making steady progress.

In terms of fiscal policy, the formulation is that a proactive fiscal policy should be moderately strengthened to improve quality and efficiency. In July, it was proposed to continue to implement a proactive fiscal policy, and in December last year, it was proposed that a proactive fiscal policy should be strengthened to improve efficiency.

In the statement of fiscal afterburner and efficiency, a "moderation" has been added. It can be seen that the fiscal policy will be more active next year, but it will not excessively magnify its fiscal deficit ratio.

In November this year, the state issued 1 trillion yuan of government bonds, and the fiscal deficit rate is expected to increase from 3% to about 3.8% in 2023. This move actually raised market expectations for the fiscal deficit ratio in 2024. Some institutions believe that the fiscal deficit ratio could go to a high of 4% in 2024.

However, judging from the statements made at this meeting, the main tone of active fiscal policy remains unchanged, and the deficit rate may exceed 3% in 2024, but the probability of reaching 4% should be extremely small.

In terms of monetary policy, it is proposed that a prudent monetary policy should be flexible, moderate, precise and effective. In order to continue to implement a prudent monetary policy in July, it was necessary to be precise and effective in December last year.

It can be seen that the monetary policy as a whole should continue the current loose state, and it is actually unrealistic to want to "flood the water".

In terms of industrial policy, it is proposed to lead the construction of a modern industrial system with scientific and technological innovation, and improve the resilience and security of industrial and supply chains. This is much the same as the previous tone.

With regard to expanding domestic demand, it is proposed that efforts should be made to expand domestic demand and form a virtuous circle in which consumption and investment promote each other.

This statement is still relatively new. Consumption and investment are the two major carriages of economic growth, both are demand, but consumption is the final demand. But the problem is that domestic demand is insufficient and consumption power is insufficient.

In order to make consumption good, in addition to expanding employment and raising the level of wage income, in fact, another very important point is to promote the capital market to go up and increase residents' property income. This year, both the property market and the stock market are relatively sluggish, and residents' property income has been generally affected, which is very unfavorable for consumption-driven economic recovery.

Although there was no explicit reference to activating the capital market at this meeting, the reference to the virtuous circle of mutual promotion between consumption and investment implicitly supports the signal of the capital market.

In terms of risk prevention, it is proposed to continue to effectively prevent and resolve risks in key areas, and adhere to the bottom line of no systemic risks. The key word is continuous effectiveness.

At present, the risks are mainly concentrated in local government debt and the real estate market. Since the Politburo meeting on July 24 put forward the "package of debt reduction plan", various localities have actively promoted it through fiscal and financial debts, and there has been some progress so far. In the real estate market, the early policy has given sufficient support on the sales side and the financing side, but the actual transaction sales are still relatively sluggish.

Continued effectiveness means that there will be no less support for mitigating risks. This is important in terms of stabilizing the economy and market expectations.

Overall, the signal conveyed by this Politburo meeting was relatively neutral, and there was not much beyond market expectations.

Therefore, we see that after the full text of the Politburo meeting was disclosed, the reaction of the stock futures market and the exchange rate market was relatively flat.

It is also worth noting that the Central Economic Work Conference will be held soon to see if there are any new statements and formulations. This could have important implications for the current financial markets and for a long time to come.

02

Since the end of October, the external Federal Reserve's monetary policy has not had a positive driving force on the A-share market. But this is only temporary. In the medium to long term, its impact on the pricing of A-shares is persistent.

In the early stage, many macro data such as non-farm payrolls and inflation in October showed or hinted that the U.S. economy will weaken significantly, and the market is also actively pricing in the expectation that the Fed will end its interest rate hike and cut interest rates sharply next year.

However, November's non-farm payrolls data was unexpectedly strong, causing a lot of turmoil in major financial markets.

On December 8, the U.S. Labor Department disclosed data showing that nonfarm payrolls rose by 199,000 in November, higher than expectations of 185,000 and 150,000 in October.

Among them, the manufacturing sector increased by 28,000, slightly below the market expectation of 30,000, indicating that the market is also slightly overestimating the number of workers who will return from the auto strike. In addition, the private sector grew by 15,000, slightly below expectations of 15,800. However, the increase of 49,000 in the government sector is also one of the important factors supporting the strong non-farm payrolls.

In addition, the number of new jobs in September was revised down by 35,000 to 262,000, and remained unchanged at 150,000 in October. After the adjustment, the total number of new arrivals in September and October decreased by 35,000, which is the ninth consecutive month of downward revision.

Hourly wages rose by an average of 0.35% in November, beating market expectations of 0.3%, up from 0.2% in October and the highest pace of growth this year. However, year-on-year growth slowed to 4%, in line with expectations and down from 4.1% in the previous month. Under the increase in working hours, weekly wages increased by 3.66% year-on-year, which is not conducive to the decline in inflation in the service sector.

As for the unemployment rate, it came in at 3.7% in November, lower than the forecast of 3.9% and the previous reading of 3.9%. The number of unemployed workers fell sharply by 215,000 to 6.3 million. The decline in the unemployment rate was due to an increase in the number of people in the labor force, whose labor force participation rate rebounded to 62.8 percent, higher than expectations and 62.7 percent in October.

Overall, the November non-farm payrolls data exceeded expectations and performed relatively strongly, and there will be some corrections and swings in the expectations of major markets. Swap contracts show that the market has lowered the Fed's expectations and magnitude of interest rate cuts in 2024.

In the exchange rate market, the dollar index appreciated slightly to around 104. The U.S. Treasury market reacted violently, with the 2-year Treasury rate surging 12.4BP to 4.72% and the 10-year Treasury note surging 8.2BP to 4.23%. U.S. stocks opened sharply lower and finally closed up collectively, with a more exuberant performance, and the U.S. economy is expected to have a soft landing.

Next week, the United States will also release key data such as inflation. If it exceeds market expectations, there may be a lot of adjustment pressure on U.S. stocks, and U.S. Treasury interest rates and the U.S. dollar index will be revised upward. This may be negative for the current weak A-shares.

03

In recent months, the A-share market has been heavily manipulated by northbound funds, which has seriously affected its market sentiment. As long as the outflow of foreign capital continues, it will be difficult for the market to get better, even if there are domestic institutions such as Huijin and state-owned capital companies to buy ETFs to release a strong signal, there is nothing to make up for it.

Perhaps the real estate market will stabilize, perhaps the growth rate of M1 will bottom out, or perhaps the tone of a blockbuster economic meeting may become an important trigger.

Once it is observed that northbound funds will maintain a continuous inflow for a period of time, or major signals such as exceeding 10 billion yuan in a single day, it may be a better strategy to follow the layout on the right.

Of course, if it is a medium and long-term value investment, many excellent white horse stocks have been relatively undervalued, in fact, now is the time to allocate with good odds and winning rates.

The A-share market has fallen to the first line of 2018, and the overall valuation risk has been fully released.

In addition, the Fed will cut interest rates several times next year, and 2024 should be a year to look forward to. (End of full text)

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