Li Bei: China's stock market will usher in a bull market similar to the 50s in the United States and the 80s in Japan

Key takeaways:

1. Do you want to exchange RMB for US dollars? I firmly believe that there is no need to exchange US dollars.

2. Bullish on RMB risk assets, mainly the stock market. As a renminbi investor, holding dollar-denominated assets may not yield much and will take a short time on the domestic rally.

3. CSI 300, my personal judgment is that it will rise by more than 15%.

4. It does not mean that high growth will necessarily bring about a bull market in the stock market, but it may be that after the economic transition and downturn, the cost of capital will fall, the interest rate will fall, and the entire capital market will face a revaluation. For example, the United States ushered in a big bull market in the 50s, and Japan ushered in a big bull market in the 80s.

5. Looking at China's stock market now, it is facing economic transformation and a downward step in growth rate, but we also have a sharp decline in interest rates, and the follow-up will face a pattern similar to that of the United States around 50 years and Japan around 80 years.

On December 12, Li Bei of Banxia Investment gave an in-depth analysis and interpretation of China's capital market in a roundtable dialogue at the summit.

Li Bei, the founder of Banxia Investment, is a macro hedge private equity fund manager, known as the "private equity witch".

In this conversation, Li Bei pointed out that the consensus expectations of the market are often wrong. Last year, there was a recession in the U.S. and a recovery in China, but the opposite is true, and now the market is expecting to go long the U.S. and short China, but this may be reversed.

Li Bei believes that the most critical factor in the error of everyone's consensus expectations this year is fiscal policy. This year, the US fiscal policy has expanded markedly, while China has contracted; and next year the United States will face a fiscal contraction scenario, and next year China will be a year of fiscal strength, and China has adopted a proactive fiscal policy and introduced long-term construction treasury bonds and policy-oriented financial instruments.

Generally speaking, Li Bei believes that the A-share market is facing a big opportunity once in 20 years, and the next ten years will be a major process of asset revaluation, facing the pattern of the United States around 50 years and Japan around 80 years.

The following is the essence of the investment homework lesson representative (WeChat ID: touzizuoyeben) to share with you:

There is no need to exchange the yuan for dollars

You may think that it is a tricky question: should you exchange RMB for US dollars?

I am very adamant that there is no need to exchange dollars. It was right to do this a year ago, but I think it's probably wrong now.

The consensus expectations were all wrong

As a market person, I am directly involved in market transactions, and I can tell you a law that has always been universally true, that is, the consensus expectations of the market are basically wrong.

For example, what was the consensus expectation of global investors last year? At that time, the consensus expectation was a recession in the United States and a recovery in China.

Funds around the world are very excited to do something called multi-China reopen trading, which is the trading opened up by the epidemic in China. Because they have seen very good market performance in the reopen cases in many countries. One year has gone on the exact opposite, and it's all wrong.

This is a tried-and-true prediction, and basically the consensus expectation is wrong every year.

What is the consensus expectation of the market now?

For example, the Bank of America in the United States conducts investor questionnaires every month, and the most crowded transaction now is to long large American technology stocks, and the shortest transaction is to short China.

So let's think about the tried and tested law. Now everyone is completely opposite to last year is to long the United States and short China.

Market expectations will all reverse next year

Now to review why the consensus expectations for 2023 were wrong, I think the most important point is fiscal policy.

This year, especially before August, the U.S. fiscal expansion was significant, and the rolling fiscal deficit in the 12-month period rose by about 4 percent, which can be considered to be a 4 percentage point boost to the economy.

China's real fiscal deficit in the broad sense is not only based on the central government, but also on local governments, and then on some policy-related financial instruments, which have shrunk significantly.

Therefore, the fiscal situation has caused a very large difference in everyone's expectations this year, and looking at it now, this thing has completely reversed.

First of all, the 12-month rolling fiscal deficit in the United States until July should be greater than 8%, but the budget for 2024 is only about 6 points.

In addition, taking into account the increase in interest payments due to rising interest rates, the United States will face a fiscal contraction scenario next year. In the past quarter, the United States has begun to enter a recession with half a foot, and we can see that the fiscal deficit of the United States has been shrinking rapidly in August, September, and October.

Let me explain, for example, you will know how much the impact of fiscal deficits on the real economy is.

This year, the growth rate of hourly wages in the United States - the growth rate of wages is about 4%, but the growth rate of residents' disposable income is as high as 8%, 8% income growth, of course, everything is very positive, consumption is also very positive, buying a house is also very positive, and confidence is also very high.

But next year this will be reversed, and next year the wage growth rate may fall to 2 to 3 percent, but there is a possibility that the fiscal situation will become negative, so I think this is the situation in the United States.

China is a different story. Since the Politburo meeting in July, China's policy has shifted in an all-round way.

First, a month ago, a long-term construction bond of 1 trillion yuan was launched this year, and after this money was issued, it has not yet been used, and it is theoretically reserved for 2024, because there is a process of transmission.

And with the policy layout that everyone knows now, there will be about 1 trillion special national bonds in 2024.

And we have already started planning to use the policy-based financial instrument PSL to renovate urban villages, which is a very efficient policy. Although there is no official announcement, for example, if you go to the grassroots level to conduct research and go to various local urban investment companies, they will say that the money is expected to arrive by the end of December.

So, I think this should be a semi-public information, and it has basically been uploaded to the grassroots, and the grassroots are waiting for this money.

And this policy tool, because it has a strong multiplier effect and leverage effect, so next year will be a year of fiscal strength in China.

Don't look at the narrow deficit rate, the narrow deficit rate may still be 3%, but the broad deficit rate will increase significantly, this is the change.

So at this point in time, let's take a look, first of all, the strength of fiscal policy, which disappointed everyone this year, will be completely reversed next year.

Long RMB risk assets, short USD

The second is to look at everyone's expectations and sentiment at this moment, and you will find that the domestic risk premium is very high, and stocks are very cheap, relative to interest rates. The U.S. risk premium is basically zero, meaning that equities are more expensive than bonds.

The United States is more certain to enter a mild recession next year, interest rates are going to face a downturn, and the interest rate on Treasury bonds has been implied, such as 3 to 4 interest rate cuts next year, in the process, the depreciation of the dollar is highly probable.

As interest rate differentials narrow and interest rates fall, in this case, U.S. Treasury bonds can certainly provide a yield of 4 to 5 percent, for example, but they will not be able to offset the depreciation of the currency.

For example, in the past month or so, the 10-year U.S. bond has risen by about 5%, and the interest rate has fallen from 5% to 4.2%, but the RMB has risen so much against the US dollar, from 3% to 4%, so the RMB is not profitable.

Bullish on RMB risk assets, mainly the stock market.

Bearish on the dollar, but I don't think U.S. bonds will fall, U.S. stocks will fall, but it is very likely that you, as a RMB investor, may not have any income from holding dollar-denominated assets, and will take short of this wave of domestic rise.

China's stock market will be followed by the great bull market of the 50s in the United States and the 80s in Japan

Q: Do you think the A-share market is facing a big opportunity that comes once in 20 years, can you share more details about this strategy?

Li Bei: As you all know, first, we are facing some structural pressures and problems right now; second, we have experienced high growth in the past 10 years, and we all know that the growth rate will definitely decline in the next 10 years, and this growth will have to go down the ladder.

This kind of thing is not uncommon in the development of the entire global economic cycle and capital markets, and there have been many cases before.

For example, the United States in the 40s experienced very high growth. As a neutral country, it sold arms and materials, so the economy developed rapidly, and then after the end of World War II, everyone realized that the good days of selling arms were gone, and the economic growth rate would decline in the next ten years, and at that time, the Soviet Union was confronted by the Soviet Union in the world. So at that time, the interest rate on the US Treasury was about 3%, but its stock market was only eight times higher. The PE risk premium is very high.

In the second case, around 1980, the valuation of the Japanese stock market was also very low, and in the 70s, Japan experienced the highest growth in history. By the 80s, the industrial upgrading was almost there, and it was very close to the United States.

Second, there is a perception that there are some leverage issues, structural issues, and that the next decade will definitely see a downward spiral in economic growth.

Therefore, in the decade of rapid development in Japan in the 70s, the stock market did not rise much. Later, with this fear, the United States ushered in a big bull market in the 50s, and Japan ushered in a big bull market in the 80s.

There is a general law for the stock market, which does not mean that high growth necessarily leads to a bull market in the stock market. On the contrary, after the economic transition and downturn, the cost of funds will fall, interest rates will fall, and the entire capital market will face a revaluation.

Second, as I just mentioned, at those important times, when everyone is facing a very strong worry about long-term growth, a lot of worries about structural problems, and even a lot of worries about current political issues, they will give very cheap prices.

When these concerns gradually subside, there is a repeating process.

Now looking at China's stock market, my understanding is very similar, facing economic transformation, the growth rate of the next step. But we have also seen a sharp decline in interest rates.

The sharp decline in interest rates is not only reflected in the risk-free interest rate, that is, the interest rate on treasury bonds, but also in the shadow banking system, for example, I may have been able to buy more than 8% non-standard in this wealth management market a year ago, but now basically I can't find a relatively safe non-standard, and a bunch of companies have exploded.

Investors face a real opportunity cost, which can go down from 8% to 3%, so the risk premium is very high in the process.

As the concerns gradually eased, as everyone realized that the government could still do something to move the economy, structural reforms.

For example, in the credit market, inequality in the private economy. Now there is a very precise policy, for example, in the first two years, we all know that the three arrows for real estate financing are three red lines, and now it has been changed to three "not less than", and there is a very clear one in the middle of these three "not less than", which is called the credit growth rate for non-state-owned enterprises is not lower than the average (level).

So I understand that it is an opportunity for the short-term economic recovery. The larger theme is that a revaluation of an asset and a gradual return to confidence in the long term will drive the market upwards.

I understand that it is not so much about whether the policy will be good in the next few months, but because we have gone through a process like this for a decade, and then we will face a pattern similar to that of the United States around 50 years ago and Japan around 80 years ago. The next decade will be a major process of asset revaluation.

Two ways to avoid risks

Q: You are very bullish on A-shares, but you must also take some measures to avoid risks, how do you do this?

Li Bei: Now you can use some option tools first, and now the volatility in China is very low, and the implied volatility is within 15%.

For comparison, Hong Kong should be above 30% and the United States at more than 20%. This means that the price of the option is cheaper, so we can express a part of the long position in the form of a call option.

Second, it is necessary to control the total position. After all, the market is still on the left side, and as an asset manager, there are also requirements for drawdown control.

So on the one hand, we express a part of the position in terms of options and a part of derivatives. On the other hand, it is to control the position and add it to the right side.

For example, if you go directly to buy a call option on the CSI 300 index, the implied volatility is now only 14%, which is historically very low.

The CSI 300 will rise by more than 15%.

Q: For the CSI 300, and the yield of this 10-year treasury bond to give a forecast, what does Mr. Li say?

Li Bei: Treasury bonds are expected to be within 2.5% to 3%, with little fluctuation.

Index, I participated in another forum some time ago, and I made a questionnaire for more than a dozen chief macro analysts and strategic analysts, and the answers they gave were within plus or minus 15%.

At the beginning, I told you a rule, this consensus expectation is generally wrong, so my personal judgment is to rise by more than 15%.

Source: Investment Workbook Pro Author: Fan Zilong Wang Li

"Alpha Summit"| December 17 Shanghai · Signing up