Although the past performance of A-shares is unsatisfactory, especially in 2023, when the global stock market is soaring, under the background of marginal improvement in the internal and external environment and the continuous release of favorable policies, it is incomprehensible that A-shares are absent from the feast of the global bull market. However, when pessimism seems to have reached its peak level, there is no reason for us to continue to lose ourselves pessimistically in the herd effect, but to learn to think independently, manage our emotions, and rationally judge the risk-reward ratio at the current point level. As former British Prime Minister Winston Churchill said, "Don't waste a good crisis", believing that no matter how long the tunnel is, there will be an end, and no matter how long the bear market is, there will be an end one day. With the continuous accumulation, fermentation and repeated verification of many positive factors, there is reason to believe that A-shares are currently in an important bottom area, and we may be standing at the starting point of a big market.
First, the Fed's interest rate cut cycle is expected to begin, and RMB assets are expected to usher in a good opportunity for allocation.
The end of the Fed's interest rate hike cycle and the start of the interest rate cut cycle are a major positive for A-shares, and the major external factors that have plagued A-shares for more than a year have undergone fundamental changes. At the end of the Fed's interest rate hike cycle, the interest rate differential between China and the United States will further narrow, and the 10-year U.S. Treasury yield may eventually fall back to 3%, and the interest rate differential between China and the United States may be flat, and it is natural for the RMB exchange rate to break 7 against the US dollar, and we have the opportunity to witness the trend of the RMB exchange rate from depreciation to appreciation.
Looking back at the first quarter of 2023, the A-share market is full of confidence, but it continued to weaken in the second and third quarters, and an important external driver is the continued net outflow of northbound funds.
The market value of A-shares held by northbound funds cannot be underestimated, reaching 2.3 trillion yuan at the peak. Despite the continuous net outflow, the scale of northbound funds may still be 1.6 trillion to 1.7 trillion yuan, so it is self-evident that the outflow of northbound funds is actually a drag on A-shares. But now that this unfavorable factor has basically been resolved, it may also turn into a favorable factor - with the RMB exchange rate reversing below 7, the US dollar index may fall below 100, and the US Treasury yield may return to the normal level of 3%, the allocation value of RMB assets will be highlighted.
If the Fed starts cutting interest rates, it will have a profound impact on the monetary policy of central banks around the world. Since the beginning of this year, the RRR and interest rate cuts have been more cautious, and the monetary policy has reservations, and there is no full firepower, because the Federal Reserve has been in the interest rate hike cycle, and we are in a trend of interest rate cuts, and the interest rate gap between China and the United States is getting wider and wider, so that the pressure on foreign capital outflow is difficult to reduce, and the most obvious result is that the offshore RMB exchange rate against the US dollar has depreciated all the way, and even fell to 7.36 after breaking 7, hitting a new low in recent years.
The Fed's interest rate hike cycle has constrained the use of the monetary policy of the mainland central bank, and if the Fed's interest rate cut cycle starts, it will be able to open up the operating space of the mainland central bank's monetary policy.
Second, the domestic policy firepower is in full swing to fight the economy, and liquidity is expected to exceed expectations.
Looking at 2023, market expectations for the economy are more pessimistic than at the end of 2022, but the underlying policy targets are higher. Looking at 2023 at the end of 2022, investors' expectations for economic recovery are extremely high, but the result is the opposite, and since the second quarter of 2023, there have been continuous downward revisions in expectations, and there is a typical "expectation gap". However, looking at 2024 at the end of 2023, investors' expectations are very low, but in fact, the policy objectives are more positive, and there is reason to believe that in 2024, investors' pessimistic economic expectations will gradually be revised upward, forming another "expectation gap".
The Central Economic Work Conference at the end of 2023 put forward higher requirements for economic work in 2024, especially mentioning that it is necessary to maintain reasonable and abundant liquidity, and the scale of social financing and money supply should match the expected targets of economic growth and price levels. This is a statement that has not been expressed in the past, and it means that policymakers have realized the role of stimulating inflation expectations in improving economic expectations and confidence. More active fiscal and monetary policies and more abundant liquidity are worth looking forward to.
The tone of the 2023 Central Economic Work Conference is more positive, and it is necessary to adhere to the principle of seeking progress while maintaining stability, promoting stability through progress, establishing first and then breaking down, strengthening the counter-cyclical and cross-cyclical adjustment of macro policies, and strengthening the innovation and coordination of policy tools, which is to make amendments to the problems in the process of policy implementation in the past two years.
From the perspective of macro policies, we will vigorously promote new industrialization, develop the digital economy, and accelerate the development of artificial intelligence. Actively and prudently resolve real estate risks, promote the steady and healthy development of the real estate market, and provide a variety of thematic investment opportunities for the capital market.
It is expected that the GDP growth target for 2024 will be set at about 5%, and in order to achieve this goal, fiscal and monetary policies need to be further strengthened on the current basis, and we must maintain confidence in the future implementation of incremental policies.
Third, the regulatory authorities pay more attention to the balance between the investment side and the financing side, and the policy is clear about the stock market.
Yi Huiman, chairman of the China Securities Regulatory Commission, said at the 2023 Financial Street Forum Annual Meeting: "The reform of the registration system is by no means about deregulating regulations, but about achieving a better combination of an efficient market and a promising government. Subsequently, the regulatory authorities responded to market concerns such as financing, refinancing, DMA (long and short income swaps, mainly referring to quantitative funds in the form of leveraged through brokers' proprietary trading orders), major shareholder reductions, quantitative trading, and securities lending, and introduced a series of optimization measures.
Previously, everyone was skeptical about "promoting the registration system to go deeper and more practical", believing that the registration system means increasing the intensity of financing and refinancing, which will lower the threshold for listing and make the market more mixed. Yi Huiman's speech gave everyone a reassurance.
Creating a market-oriented, law-based and international business environment is an important goal of the reform of the capital market system. "Marketization" emphasizes giving full play to the power of the invisible hand of the market and allowing the market to regulate itself, but the implementation of the registration system is not enough to rely on market forces, and government forces are also needed to intervene. The visible hand of the government intervenes when there is a market failure, such as overfinancing, which leads to a downturn in the market and a loss of investor confidence.
Therefore, it is necessary for us to understand "to achieve a better combination of an efficient market and a promising government", and that giving full play to the role of the market mechanism does not mean that the government should leave it alone, and in the process of promoting the deepening of the reform of the registration system, the government's supervision will become more and more intense.
In the past, attention has always been paid to financing, but now there is attention to the vitality of the capital market, the sense of investment gain, the boost of investor confidence, and the introduction of long-term funds. Judging from a series of recent policy measures, the regulatory authorities have expressed great importance to the investment side, and the visible hand of the government is playing a role, which also shows that the relevant departments are aware of the need to maintain a balance between the financing side and the investment side, and the market can no longer bear more financing and refinancing, the market needs to recuperate, and investor confidence needs time to recover.
These measures are of great significance to invigorating the capital market, boosting investor confidence, and promoting the long-term stable development of the market.
Fourth, dividend yields are approaching all-time highs, and the market is now in an important bottom zone.
Similar to the negative correlation between bond yields and bond prices, the lower the stock price, the higher the dividend yield, with constant earnings.
Statistics show that the latest dividend yield of A-shares has reached a record high of 2.19%, which may not have been high in the past, but at present, the interest rate on one-year bank deposits is only a few percent, and the interest rates on three-year and five-year deposits are only a few percent - which is on par with the medium and long-term bank fixed deposit rates.
From the perspective of subdivisions, the dividend yield of the Shanghai 50 Index is as high as 4.26%, which has exceeded the yield of 10-year treasury bonds and the 5-year bank deposit rate, and has exceeded the dividend yield of the three major US indexes and the major stock indexes of European and American countries; the dividend yield of the CSI 300 Index is as high as 3.21%, far exceeding the cargo base and bond base of many risk-free yields; and the dividend yield of the Shanghai Composite Index is 2.85%, which also exceeds the dividend yield of the three major US indexes. Judging from these data, the dividend yields of the major A-share stock indices have reached more than 95% of the all-time high percentile, close to the all-time high.
Historical data shows that when the overall dividend yield of A-shares exceeds 2%, it often corresponds to a historic bottom. For example, the big bottoms of 2005, 2008 and 2013 were all time periods when dividend yields exceeded 2%. The current market is very similar to the situation in late 2018 and early 2019 – market confidence is low, and the broader market is constantly bottoming out.
History is always strikingly similar, and A-shares may be standing at the starting point of a big market at the moment.
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