At this moment, rethink A-shares

Economic Observer reporter Ouyang Xiaohong

One

On the eve of the Spring Festival, the ups and downs of A-shares reached a critical moment. The market sentiment that has fallen to the freezing point is waiting for the spring breeze to warm up.

On February 2, 2024, A-shares came under pressure again, with the Shanghai Composite Index falling 1.46%, the Shenzhen Component Index falling 2.24%, and the ChiNext Index falling 2.43%. On the same day, the cumulative turnover of the Shanghai and Shenzhen stock markets reached 805.7 billion yuan, with more than 4,900 stocks falling, while the northbound funds concerned by the market bought a net of 2.36 billion yuan.

From the perspective of market dynamics, the three major A-share indexes fell significantly in the afternoon, and the Shanghai Composite Index once fell by more than 3%, falling below the 2,700-point mark. Subsequently, the large financial sector rose in the late stage, helping the market to partially recover, and the market returned to 2,700 points.

In the previous trading day, A-shares were mixed. The Shanghai Composite Index closed at 2,770.74 points (-0.64%), while the Shenzhen Component Index and ChiNext Index closed at 8,240.48 points (+0.34%) and 1,589.04 points (+1.0%), respectively.

If we look at the capital flow of equity ETFs (exchange-traded funds) in Shanghai and Shenzhen on that day, it can be seen that investors are actively "buying the bottom" and buying along with the decline of the market. On the day, equity ETFs attracted a net inflow of $13.5 billion. According to Wind Information data, as of February 1, the total size of 840 stock ETFs in the whole market, including cross-border ETFs, exceeded 1.7 trillion yuan.

On the same day, the products of some well-known large fund companies obviously "attracted gold". For example, ChinaAMC CSI 300 ETF had a net inflow of RMB3.232 billion, ranking first among all products, and a number of E Fund products were also among the best.

On the one hand, funds continue to pour into stock ETFs, and on the other hand, stock indices fluctuate dramatically, what happened to A-shares?

Back in early trading on January 31, the Shanghai Composite Index once again fell below the 2,800-point mark, and the Shenzhen Component Index fell below the 8,300-point mark. The day's market performance was also a microcosm of the recent volatility of A-shares. This past January was a painful month for even seasoned investors.

On 31 January, the Fed concluded its two-day monetary policy meeting and left interest rates unchanged for the fourth consecutive time, announcing a target range for the federal funds rate of 5.25% to 5.5%, in line with market expectations. Affected by Federal Reserve Chairman Jerome Powell's hint that there will be no interest rate cut in March, the financial market has adjusted: the Dow closed at 38,150.3 points (-0.82%), the S&P 500 index and the Nasdaq index closed at 4,845.65 points (-1.61%) and 15,164.01 points (-2.23%) respectively.

Cheng Shi, chief economist of ICBC International, believes that when the fiscal effect of expansion substantially fades, inflation may further accelerate the fall, which will be the prelude to the Fed's interest rate cut. The Fed is expected to cut interest rates as early as May this year (April 30 to May 1). ICBC International raised the probability of a "soft landing" for the U.S. economy (i.e., no recession), corresponding to a full-year rate cut of 75 to 125 basis points (3 to 5 rate cuts throughout the year).

Wen Bin, chief economist of Minsheng Bank, analyzed that the annual interest rate cut or the current market expectations and the Fed's December dot plot expectations (3 times) were compromised, a total of 3 to 5 times, with a cumulative decline of 0.75% to 1.25%, which is also roughly consistent with the Fed's forecast for the decline in core inflation in December last year, so as to still keep real interest rates at the current restrictive level. The first rate cut will be in May at the earliest, or even later, as the market expects.

In addition to geopolitics, U.S. macro policy trends are generally regarded by the market as the biggest factor affecting the global economic development. At the same time, issues such as the sustainability of China's economic recovery and the hidden concerns of inflation and deflation should not be underestimated, including the potential risks such as real estate and local government bonds that China's economy is currently facing, which may be a haze hovering over A-shares. In addition, it was the end of the year, and liquidity was tight. In addition, approaching the Spring Festival holiday, the market is in the bottom shock or pre-holiday normal. Therefore, the warm wind of favorable policies has been blowing frequently, but funds still tend to wait and see and avoid risks. A-shares, which once counterattacked, are back in the doldrums.

CICC believes that since the fourth quarter of 2023, the overall performance of the A-share market has been weak due to the lack of effective demand and weak social expectations in China, the volatility of overseas monetary policy expectations and repeated geopolitical risk events, and the influence of internal and external factors.

It seems that the market is overshooting. The A-share market fell from around 3,000 points to around 2,700 points. In the first month of 2024, the A-share market experienced violent shocks, with the Shanghai Composite Index falling by more than 6% in January, the Shenzhen Component Index and the ChiNext Index falling by more than 13.7% and 16.8%, respectively, the largest monthly decline since the stock market circuit breaker in 2015. In particular, the Shenzhen Component Index fell by 13.54% in January compared to the whole of 2023.

However, in the view of Zhu Liang, deputy general manager and investment director of AllianceBernstein Fund, China's capital market is a good place to benefit as the largest import and export trading country, and global investors are still silently paying attention to the A-share market, just to "wait for the wind to come".

Where does the wind come from? How to overcome the A-share downturn? Confined to the current double spiral vortex constraints such as "lack of confidence + lack of liquidity", in addition to the trillion-level equalization fund recommended by experts, from the perspective of valuation, Zhu Liang believes that China's stock market has become one of the most attractive markets in the world. The current valuation of A-shares is extremely attractive, equivalent to half the valuation level of US stocks.

From a profit perspective, China's listed companies are expected to maintain earnings growth in 2024. China A-share earnings per share (EPS) growth is expected to be around 17% in 2024, and if the valuation multiplier remains unchanged and earnings grow, Chinese equities should perform more respectably.

From the perspective of listed companies, the stock market correction in 2023 is mainly due to the problems encountered by corporate earnings, which are constantly revising, which in turn affects the mentality of market investors. Corporate earnings revisions over the next 12 months have already begun to show a V-shaped correction, suggesting that equities may be almost bottoming out and fundamentals are gradually improving. Sectors with better earnings expectations in the future are expected to see more investment opportunities.

In addition, historical data shows that inflows into the Chinese stock market are inversely linked to US interest rates, which is also conducive to the repatriation of funds into the Chinese stock market, given that AllianceBernstein expects the Federal Reserve to start cutting interest rates this year.

According to CICC's analysis, there will be a tight balance in terms of funds, and the incremental capital inflow of ETFs and the improvement of industrial capital flow will be the key changes. Since the fourth quarter of last year, the market has fluctuated greatly, and the bright spot of the market capital side comes from the net inflow of funds from broad-based ETFs, the net reduction intensity of industrial funds has continued to fall, and the enthusiasm for repurchasing shares has risen.

Economist Liu Yuhui believes that the key to lifting the liquidity crisis (stock market) is only to activate Riskon (chasing risk), and the Riskon of the stock market can only come from scientific and technological innovation, the trend and law of the world capital market. U.S. stocks, Indian stocks, and even Japanese stocks are all part of this structure. Moreover, the two stock market shocks in 2016 and 2018 finally relied on the stability of technological sentiment...... and there was a logical contradiction between the "special valuation" (the contradiction between two opposing but seemingly reasonable theories or doctrines), resulting in "blood drawing" or the inevitable result.

From the perspective of market style, AllianceBernstein still insists on being optimistic about the value style, and the stock market reflects fundamentals, long-term capital and social psychology in the long run. Judgment: The valuation spread of A-shares is reverting to the mean. At present, China's manufacturing purchasing managers' index (PMI) is below the boom and bust line, and it is expected that the government will also push it back above the boom and bust line, which belongs to the recovery stage. During the recovery phase, value stocks (low valuations) tend to perform better. To some extent, the volatility of the A-share market also reflects the shadow of economic challenges, reflecting the deep-seated changes in China and the global economy. On January 9, the World Bank released its latest Global Economic Prospects report and expects global economic growth to slow from 3.0% in 2022 to 2.6% in 2023 and 2.4% in 2024, slowing for three consecutive years. From the uncertainty of the real estate market to the tension of the global trade environment, to the adjustment of the internal economic structure, these factors may together constitute the current market downturn. The real estate sector, in particular, has long been seen as an important engine of economic growth, but now faces major challenges, the impact of which will inevitably ripple through the capital markets.

For example, despite the frequent blowing of policy warm winds and the continuous purification of the market ecology, A-shares, which have recovered most of the "lost ground", have not stabilized. The Shanghai Composite Index fell below 2,800 points, and the ChiNext Index hit its lowest level since October 2019.

A senior private equity person said that the stock market also has its own rules, and once it technically falls below, it must fall into place. Rebounds and reversals can't change the trend, they only affect the rhythm and speed. "Property sales and construction activity continue to show sharp contractions. Lu Ting, chief economist of Nomura Securities China, said. He analyzed that compared to the same period in 2019, as of January 28, 2024, the growth of the 7-day moving average of new home sales in 21 major cities fell significantly to -51.6%, a further decline from -42.8% a week ago, which is based on the data of the lunar calendar. Growth in first-tier, second-tier and lower-tier cities fell to -6.7%, -44.2% and -86.1%, respectively, compared to 18.8%, -38.6% and -80.4% a week earlier. In terms of real estate construction, the annual growth rate of cement transportation fell to -34.4% from -32.6% a week earlier, from January 17 to 23.

However, the negative feedback from the real estate market to A-shares is not the whole story, and international investors are still paying attention to A-shares.

Two

Looking back at 2023, against the backdrop of the general rise in the global stock market, A-shares and Hong Kong stocks bucked the trend and closed down, which inevitably makes people worry about whether China's stock market has been forgotten by global investors.

Not really, as pointed out by Senwei Wong, senior market strategist at AllianceBernstein, global investors are still focused on China's stock market.

Huang Senwei stressed that global investors are still quite concerned about investment opportunities in China's stock market. BofA Securities conducts a monthly survey of fund managers/investment managers around the world, and one of the questions is: "What do you think is the most crowded trade right now?" According to the latest survey report released in mid-January, "ShortChinaequities" is currently the second most crowded trade among global fund managers, after "Long MagnificentSeven".

In other words, Huang Senwei believes that for more and more international institutional investors, selling Chinese stocks is already the market consensus, but it may be difficult to generate expectations if such an investment strategy continues, let alone make a profit. Therefore, this is the time to think backwards and look back for investment opportunities in A-shares.

From the perspective of international investors and global monetary policy, AllianceBernstein believes that 2024 will be a favorable year for A-shares. When the US interest rate rises, capital tends to flow out of the Chinese stock market, and conversely, when the US interest rate falls, it tends to flow back into the Chinese stock market.

Huang Senwei explained that it is not difficult to understand this reason, when the US dollar interest rate is higher than the RMB interest rate, the US dollar is usually relatively strong, and the US dollar-denominated assets (US stocks, US bonds, etc.) are more attractive, so funds usually tend to redeem Chinese assets and buy US dollar assets, and vice versa.

In fact, judging from historical experience, this is not the first time that foreign capital has sold Chinese stocks, and the inflow and outflow of foreign capital in China's stock market has been up and down like the boom cycle.

The Fed is now widely expected to cut interest rates in 2024, and US Treasury yields have reached a high level in October 2023 and reversed their decline, which means that the probability of capital flowing back to the Chinese stock market is higher, and incremental funds will be beneficial to the trend of A-shares.

Of course, there are also concerns that geopolitical factors will affect foreign investment intentions, especially China's degree of uncertainty in the global supply chain.

Huang Senwei said that from a rational perspective and reality, the transfer of the supply chain cannot be completed overnight. China is one of the few emerging markets with excellent infrastructure and a large population base. Compared with other emerging countries with similar populations, China's population group is highly educated and hardworking, and these "nutrients" that have been cultivated for decades are likely to be difficult to replicate in the short term. Therefore, even though geopolitical factors are uncertain, AllianceBernstein believes that most of this is reflected in the current low valuation of A-shares.

Some experts also reminded that it is necessary to guard against the investment logic that the lower the valuation of A-shares, the cheaper the valuation; it is not that the lower the valuation of A-shares, the more investors will buy the bottom; on the contrary, it is necessary to be vigilant against the downside risks of endless declines.

This time and that time. Is this really the case that the stock market is a barometer and a rainometer of the economy? China's economy over the past 20 years can be roughly divided into three stages. According to the analysis of Tianfeng Securities, the first stage is the period of rapid growth from 2000 to 2007, at this time, relying on the dividends of globalization, China's rapid rise to become the "world's factory", the contribution rate of exports to GDP (gross domestic product) once exceeded 50%, and the GDP growth rate once exceeded 10%. The second stage is the medium-to-high-speed growth period from 2009 to 2016, when exports weakened the driving force of the economy, and real estate and infrastructure were the starting point, and investment replaced external demand as the engine of domestic economic growth. GDP growth gradually fell back to around 5%-6%. The third stage is the "L" shaped deceleration and shift period since 2018, as the real estate industry ushers in a long-term cycle inflection point, the traditional investment-driven model gradually fails, and the policy begins to emphasize the promotion of high-quality economic development of China's economy by giving full play to the advantages of the domestic super-large market and manufacturing industry.

In the process, the woes of the real estate sector have almost weighed on A-shares. As an important pillar of China's economy, the instability of the real estate sector has also put additional pressure on the market.

The challenge is that it may take time for the government's measures to stabilise the market, such as speeding up new property financing schemes and adjusting restrictions on home purchases, to become effective. The policy has not yet taken effect, probably because it takes time for the market to absorb and react to the policy changes. In addition, geopolitical tensions, such as the threat of former US President Donald Trump and the Red Sea shipping attack, could increase market uncertainty. In this context, governments and regulators need to maintain transparency in communication to reduce panic and uncertainty in the market.

In this way, how to dispel the haze hovering over A-shares and boost market confidence may not be achieved overnight, and the key is to let A-shares "stop the bleeding" first. Some people have questioned that the major shareholders of listed companies have endless chips, and the company will be at its peak as soon as it is listed, which is the starting point for major shareholders to cash out, and A-shares are like a financing market, not an investment market.

In addition, policy coherence, predictability and long-term stability of economic policies are needed. There is a need to ensure policy coherence and transparency, so that market participants can understand and anticipate government actions, including the implementation of fiscal and monetary policies that are conducive to economic growth. The second is to improve market infrastructure, enhance market transparency and fairness, promote the quality of listed companies, and proactively respond to economic challenges and reduce uncertainty. At this critical juncture, how to take effective measures to stabilize market sentiment and restore investor confidence is an important issue facing all market participants. The establishment of the equalization fund may be one of the directions worth exploring, although there are still different views on the specific form, scale, source of funds and use of the equalization fund.

In any case, building a more stable, healthy and attractive investment environment will require coordination and cooperation among policymakers, regulators and market participants.

Historically, every low point has been temporary. China's economic fundamentals remain solid, and the potential for long-term growth remains undiminished. With the implementation of multi-sectoral and local policies to stabilize growth, the gradual exertion of policy effectiveness, the recovery of market confidence driving the recovery of risk appetite, and the continuous optimization of the economic structure, the A-share market is expected to overcome the current predicament and usher in a recovery pattern.

A-shares are not only a passive wait, but also a deep understanding of market cycles and fundamentals. In the trough of the A-share market, investors need not only confidence and patience, but also deep insight into the market.