Interview with Zhang Yusheng, Chief Strategy Analyst of Everbright Securities: With the superposition of dual factors, the A-share market is expected to usher in a peak and turn around in 2024

Every reporter: Wang Haimin Every editor: Xiao Ruidong

Looking back on the past 2023, the performance of A-shares is lower than many investors' expectations at the beginning of the year, after a year of ups and downs, will the market "no pole Tailai" next year? Since August, various active capital market policies have been frequently released, what are the good things to look forward to in the future "policy toolbox"? The strength of the market is inseparable from the support of fundamentals, when will the earnings of A-share companies improve after facing downward pressure? When will the Fed's aggressive interest rate hike be nearing the end, and when will overseas liquidity usher in an inflection point? What kind of trend does the contrarian expansion of ETF scale reflect this year?

With this series of issues that the market is most concerned about, a reporter from "National Business Daily" recently conducted an exclusive interview with Zhang Yusheng, chief analyst of Everbright Securities Strategy.

In Zhang Yusheng's view, despite the sluggish market performance in 2023, many factors that caused market volatility are expected to be repaired in the future. Looking ahead to 2024, A-shares are expected to usher in a peak and turn around with the dual improvement of fundamentals and liquidity.

Zhang Yusheng, Chief Strategy Analyst of Everbright Securities

Image source: Courtesy of the interviewee

It is expected that A-shares will have good investment opportunities next year

National Business Daily (hereinafter referred to as NBD): The overall performance of the A-share market in 2023 is lower than expected, what is your overall outlook for the market next year?

Zhang Yusheng: For the market in 2023, I think it can be described as "ups and downs", and the economy and earnings recovery below expectations is the core reason for the sluggish market performance. However, for the market in 2024, I think there is hope for a peak and a turnaround.

First of all, from a fundamental point of view, the economy and earnings will be steadily repaired, and it is expected that the nominal GDP growth rate is expected to rebound rapidly next year to help corporate earnings repair, and all A-share earnings are expected to return to double-digit growth levels, which will consolidate the foundation for the market to rise. In terms of liquidity, since the beginning of this year, the Federal Reserve has continued to raise interest rates to suppress the overall liquidity and valuation of the A-share market to a certain extent. As inflation in the United States continues to fall, the Fed's interest rate hike cycle may come to an end, and it is expected to gradually start the interest rate cut cycle, while domestic liquidity may remain stable and loose, which will help the overall improvement of the domestic liquidity environment, and the valuation of A-shares is expected to rise significantly. Under the superposition of the two, it is expected that the A-share market will turn around and have good investment opportunities.

NBD: Since August this year, various favorable policies in the capital market have been released frequently, what other related policy benefits do you expect to look forward to in the future?

Zhang Yusheng: After the high-level meeting in July emphasized the need to "activate the capital market and boost investor confidence", various policies to activate the capital market have been introduced one after another, including halving the stamp duty on securities transactions and regulating the reduction of shareholdings. Looking forward to 2024, in the context of building a "financial power", activating the capital market is one of the indispensable links. We expect that more incremental policies related to the active capital market will be gradually introduced in terms of financing, investment, and trading.

On the investment side, the core should continue to guide social security, insurance, enterprise annuity and other medium and long-term funds to increase their efforts to enter the market, further expand financial opening-up, and guide more foreign capital to flow into the market. On the financing side, it is expected to be further optimized in terms of IPO and refinancing. On the trading side, there is a high probability that the market transaction costs will be further reduced, and more tools and mechanisms will be introduced to help the market perform more actively. In addition, with the implementation of a new round of three-year action plan to improve the quality of listed companies, it is expected that more detailed rules will be introduced in optimizing mergers and acquisitions, equity incentives, dividends, etc. On the whole, the policy framework of the modern capital market with Chinese characteristics will continue to improve, and more favorable policies are worth looking forward to.

In addition to market-level policies, macro-related policies are also worth paying attention to. Historically, the improvement of the economy is often inseparable from policy support, and it is expected that there will still be a large space for force next year, both on the fiscal side and the monetary side, which will jointly promote the improvement of market fundamentals next year.

The net profit of all A is expected to return to double-digit growth

NBD: In the 2024 strategy report, it is stated that "the macroeconomic environment in 2024 may be similar to that in 2016".

Zhang Yusheng: We made our judgment mainly from the perspective of economic recovery momentum and price factors. One of the major features of the macro economy in 2016 is that nominal growth has been repaired significantly faster than real growth, and corporate fundamentals essentially reflect nominal changes, which may be repeated in 2024.

Looking ahead to 2024, we believe that real economic growth will recover steadily, while the recovery in prices due to better demand and restocking will bring additional elasticity to nominal growth, and the upward elasticity of nominal GDP growth may be higher than that of real GDP, similar to 2016. Short-term nominal growth tends to be more important for corporate revenues and earnings, so the elasticity of nominal GDP will also directly become the driving force for corporate earnings, leading to a positive market fundamentals in 2024.

NBD: Although the "policy bottom" has been repeatedly confirmed, the market's mentality does not seem to have turned to optimism yet. There is a view that the recent market is still relatively sluggish because the support of fundamentals is not strong. Where do you expect the main drivers of economic growth in 2024 to come from?

Zhang Yusheng: I agree that the recent downturn is related to weak fundamental support, but looking ahead to 2024, this situation will gradually ease. Next year's economic growth may be driven by the gradual recovery of exports, real estate and consumption.

In terms of exports, as inflation falls, the focus of overseas policies may gradually shift from anti-inflation to stable economic growth, and the superposition of overseas destocking is gradually coming to an end.

In terms of real estate, the current round of real estate regulation and control policies has been gradually relaxed, and the construction of the "three major projects" has promoted the construction of a new model of real estate development, and real estate may continue to repair to stimulate the economy.

In terms of consumption, with the stabilization of residents' income expectations, residents' consumption tendency is expected to further improve and promote recovery. Therefore, on the whole, exports, real estate and consumption are expected to improve next year, driving economic growth.

NBD: How do you expect A-share earnings growth to perform in 2024?

Zhang Yusheng: It is expected that the earnings of all A-share enterprises will return to the double-digit growth level next year, excluding A-share companies outside the financial and petrochemical sectors, the profit growth may be higher, and a new round of profit repair cycle will gradually be opened. Since the beginning of this year, due to sluggish demand and price factors, corporate profitability has faced certain pressure. Looking forward to 2024, under the background of active policies, demand is expected to continue to pick up, enterprises' willingness to expand production may be enhanced, superimposed price factors continue to improve, and corporate profitability is expected to continue to recover. In addition, since 2022, mainland industrial enterprises have gradually started the process of destocking, and the current inventory growth rate of enterprises has been at a relatively low level in history, and it is expected that the process of active replenishment is expected to gradually start in 2024, which may provide additional impetus for the recovery of corporate profits.

We expect that the earnings growth center of A-share enterprises will rise quarter by quarter, and the cumulative year-on-year growth rate of net profit attributable to the parent company of all A-shares will reach 10%, returning to double-digit growth. In the first three quarters of this year, the profit growth rate of all A enterprises was slightly lower than 0, so the marginal change in the recovery of corporate earnings growth next year is worth looking forward to.

An inflection point in overseas liquidity may have emerged

NBD: The continuous rise in US Treasury yields has caused a lot of disruption to the market, but US Treasury yields have also started to decline recently. Looking ahead to 2024, do you expect an inflection point in overseas liquidity to have occurred?

Zhang Yusheng: We believe that an inflection point in overseas liquidity may have appeared, but the specific timing of the Fed's interest rate cut still needs to wait. Since the beginning of this year, the Federal Reserve's continued interest rate hikes have led to a rise in U.S. Treasury yields, and the 10-year U.S. Treasury yield once broke through the important 5% mark intraday, which also caused disruption to the equity market.

Looking back on 2023, there are three main factors pushing up U.S. Treasury yields: first, the resilience of the U.S. economy, second, the resilience of U.S. inflation, and third, the U.S. federal government's short-term intensive bond issuance. These three factors were concentrated from August to October this year, and they also caused the US Treasury yield to climb rapidly from 4% to about 5%.

Looking ahead to 2024, the pressures on all three will be reduced. First, judging from the expectations of all parties, the US economic growth rate will decline marginally next year; second, the inflationary pressure in the US will gradually decline; in addition, the US Treasury bond issuance is expected to shrink marginally in the US election year. Under the combined effect of these factors, U.S. bond yields lack upward momentum, and the downward trend of U.S. bond yields is the general direction in the future.

With the gradual decline of inflation in the United States and the cooling of the U.S. job market, the Fed's interest rate hike cycle may be nearing the end. As a result, the need for the Fed to raise interest rates again is decreasing. Therefore, the inflection point of overseas liquidity may have appeared, but the specific timing of the Fed's interest rate cut still needs to wait. Historically, the time interval between the Fed's last rate hike and its first rate cut has been relatively long, and there have been relatively many conditions for the Fed to start a rate cut cycle.

Institutional heavyweights are expected to regain their advantage

NBD: We are concerned that although the market as a whole is sluggish this year, there is actually no lack of structural market, and there are still opportunities for small and micro cap stocks and thematic investments, which are significantly stronger than institutional heavy stocks. What do you think of this phenomenon, and will there be a switch in this market style in the future?

Zhang Yusheng: Overall, institutions are facing greater pressure this year. This may be related to the style characteristics of the institution, which is good at the stable grasp of the economy, especially the trending economy. Therefore, when the economy as a whole improves, or when certain industrial advantages are formed, institutions usually perform well.

However, the boom investment that institutions have excelled at in previous years has failed to a certain extent this year. Because of the lack of stable economic trends in the overall market, the performance of institutional heavy stocks is also lackluster in such an environment. Correspondingly, investors will naturally pay more attention to opportunities for marginal changes in themes.

Considering factors such as corporate earnings, U.S. Treasury yields, and micro funds, we believe that the market style may switch in the future, and institutional heavy stocks are expected to regain their advantage. Since the beginning of this year, the small-capitalization style is essentially that in the absence of a main line of prosperity in the market, the pursuit of events and themes is more inclined to short-term capital behavior. When the overall profit is restored and a new main line of prosperity gradually emerges, it is expected that the market style will switch again and return to the main line of economic investment.

Looking forward to 2024, corporate earnings are expected to start a new round of upward cycle, the main line of prosperity is expected to reappear, and the pricing power of institutions will also improve marginally, which will be conducive to the performance of institution-related stocks. In addition, in the context of active capital market policies, long-term funds represented by social security and insurance are expected to actively flow into the A-share market in the future, which will also be conducive to large-capitalization white horse stocks.

NBD: Historically, the probability of a "New Year's Eve market" in A-shares is relatively large. Do you expect that there will be a "New Year's Eve market" this year?

Zhang Yusheng: There will be a "New Year's Eve market" this year. Due to the relatively abundant liquidity at the end of the year and the beginning of the year, and the relative lack of economic data, the economic expectations cannot be falsified in the short term. Since 2010, there has been a similar market almost every year. Essentially, the emergence of the New Year's Eve market is an advance of investors' expectations for the coming year, which is also what most investors expect at the end of the year.

In recent years, the learning Xi effect of the market has also made the "New Year's Eve market" have a trend of gradual advancement. From the current point of view, the valuation of the A-share market is at a relatively low level, with a high cost performance, and near the end of the year, the market also has high expectations for economic growth in 2024. In addition, the end of the Fed's interest rate hike is approaching, and overseas liquidity margins are improving. The combination of these two reasons may boost the A-share market to interpret the "New Year's Eve market". Perhaps this round of "New Year's Eve market" will be the beginning of the market peak in 2024.

ETF funds may bring more incremental capital to A-shares

NBD: The performance of active mutual funds has been sluggish this year. In contrast, the size of ETF net asset value rose to $2 trillion as of mid-November this year, up from $1.6 trillion at the start of 2023. What do you think the contrarian expansion of ETFs this year reflects in the market?

Yusheng Zhang: The contrarian expansion of ETFs reflects two trends.

First, the contrarian expansion of ETFs reflects that some medium- and long-term funds continue to dip into the domestic market. Since the beginning of this year, the market has been up and down, some active funds have performed poorly, and the weakening of the money-making effect of active funds has led to a relatively sluggish issuance of related funds. However, the current valuation of the A-share market is at a relatively low level, with a high cost performance and margin of safety, and the policy background of the active capital market is superimposed.

On the other hand, it also reflects the increasing interest in passive investment strategies. From a global perspective, passive investment is also one of the mainstream investment methods, and ETF funds themselves have relatively many advantages, including low purchase threshold, relatively low subscription fees, diversified investment, and strong liquidity. In a market where the trend is not obvious, it can be a highly effective investment tool.

Against this year's market backdrop, these two reasons have combined to promote the expansion of ETF funds against the trend. It is expected that these two factors will continue to promote the continuous upward trend of ETF funds in the future, attract more residents and institutions to allocate funds, and bring incremental funds to the A-share market.

National Business Daily