In the context of the lack of an obvious main line in the market, since the beginning of 2024, the market has continued the structural characteristics of continuous industry rotation in 2023. In January, banks and coal high-dividend assets led the rise, and since February, communications, computers, electronics, media and other industries have performed better in the general market. After entering March, the investment enthusiasm in high-dividend sectors and AI concepts seems to continue.
How do you view the market situation since the beginning of the year?What investment strategy should be adopted in 2024?What are the investment opportunities in the ETF market?With these questions, we invited Chen Long, deputy general manager and fund manager of the quantitative and derivatives investment department of Penghua Fund, to give you guidance and grasp the investment opportunities in the ETF market in 2024.
Long Chen
Penghua Quantitative and Derivatives Investment Department
Deputy General Manager/Fund Manager
The liquidity shock led to market volatility at the beginning of the year, and the market operation gradually returned to fundamental logic
Since the beginning of the year, there has been a lot of volatility in the market, which we believe is more due to liquidity shocks than fundamentals. At present, the liquidity shock has been greatly mitigated, as can be seen from three publicly available observable data:
First of all, ETFs became the main source of incremental funds in the market at the beginning of the year, and Huijin injected liquidity by buying a large number of broad-based index ETFs such as CSI 300, and after expanding the scope of ETF investment again in early February, the market stabilized and rebounded.
Secondly, the balance of the two financial institutions has declined significantly since February. The balance and balance of securities lending and borrowing decreased rapidly after the regulatory notice, and the short-covering behavior was released; Correspondingly, the financing balance also fell rapidly in early February, indicating that some leveraged funds were liquidated and risks were released, similar to the situation in April 2020.
Third, some algorithmic trading private placements face risk exposure and mismatch, and need to reduce risk exposure by closing short positions in stock index futures, resulting in a significant discount on the basis of stock index futures at the beginning of the period. With the easing of the snowball effect in mid-January and early February, the futures basis discount has also begun to converge, which means that this type of risk has basically been cleared.
In general, the market volatility at the beginning of the year caused by the liquidity shock has been basically alleviated, the release of large risks is relatively sufficient, and the future market operation will gradually return to the fundamental logic.
The fiscal policy in 2024 is expected to be more active, or focus on the direction of "new quality productivity", focusing on national key strategic projects and national security capacity building
According to the government work report of the two sessions, although China's economic growth target for 2024 is set at about 5%, our economic growth target this year will be more challenging than last year. Last year's 5% growth was largely a one-off boost from the post-pandemic economic recovery, and this year's real 5% growth will need to be achieved from a high base. However, it is believed that the government will provide strong support for the operation of the economy through a more active fiscal policy. On the one hand, 800 billion yuan of the 1 trillion yuan of treasury bonds issued last year will be carried forward to this year; on the other hand, 1 trillion yuan of special treasury bonds will be issued this year, which will be mainly invested in major strategic projects and national security capacity building.
At the same time, the fiscal policy will also focus on equipment renewal and trade-in of consumer goods, so as to promote the optimization and adjustment of the economic structure and bring investment opportunities to the equity market. While there are certainly challenges to achieving the 5% growth target, we remain cautiously optimistic that it will eventually be achieved, supported by proactive fiscal policy.
Factors such as the downward cycle of real estate, sluggish consumer demand and overcapacity in high-end manufacturing may continue to affect the earnings of listed companies
Overall, I don't think it's appropriate to be too pessimistic about the market this year. The intensity of policy support has been significantly enhanced, especially the direction of fiscal policy is worth paying attention to. However, the equity market has been mainly structurally disrupted in the past two years, and the core variable is still the state of the real estate market.
We believe that the real estate market basically peaked in 2021, and if we look at it from the perspective of house prices, sales area and sales, house prices peaked from June to August 2021, while the sales amount of commercial housing in 2021 reached a record high of nearly 180 million square meters. However, since 2021, there has been a precipitous decline in the number of commercial housing sales, falling by 24% in 2022 and continuing to decline by 18% in 2023. Since the beginning of this year, the situation is still not very optimistic, especially in the first two months. According to third-party statistics, the sales of the top 100 real estate companies fell by more than 50% this year. Although the decline for the whole year may not be as large as the previous two months, overall, the real estate market is still in a downward channel.
Specifically, the downturn in the real estate market has a greater impact on A-share listed companies, especially the real estate chain, high-end manufacturing, and consumption upgrading industry chains, resulting in the loss of corporate profits in these fields. At the same time, the impact of the decline in housing prices, the negative impact of the epidemic on income expectations, and the fact that policies are more biased towards the corporate side than the consumer side have all contributed to the sluggish overall consumer demand. Overcapacity in the high-end manufacturing sector has also exacerbated the pressure on the profitability of listed companies.
Overall, the current challenges stem from factors such as the downturn in real estate, sluggish consumer demand and overcapacity in the high-end manufacturing sector, which are expected to continue to weigh on the earnings of listed companies.
In the context of the increasing scarcity of high-prosperity tracks, the market prefers stable value assets
In addition to macroeconomic cycles, market trends also need to consider the life cycle of the industry. In recent years, investors have been keen to pursue so-called "tracks" – sub-sectors that are booming. However, with the slowdown in macroeconomic growth and changes in the industrial life cycle, some areas that were originally optimistic, such as new energy, have now entered the elimination stage of the industrial cycle due to overcapacity.
Based on the analysis of the macroeconomic cycle and the industrial life cycle, we can divide the major market industries into four major categories: pro-cyclical, stable value, economic growth and main investment. Pro-cyclical assets are highly positively correlated with macroeconomic cycles, such as real estate industry chain and liquor, stable value assets have low correlation with macroeconomic cycles, such as insurance and infrastructure, economic growth assets are investment decisions based on whether there is prosperity or not, such as semiconductors and new energy, and major investments are more focused on long-term investments, such as state-owned enterprises and high-dividend companies.
With the slowdown in macroeconomic growth and changes in the industrial life cycle, the scarcity of high-prosperity tracks has intensified, and the market is more in favor of stable value assets. In the pairing of stable value and pro-cyclical direction, the market will prefer stable value direction. On the other hand, due to the lack of prosperity support, boom growth assets show an impulse swing market, and the market is more inclined to invest in the main force. As a result, the market has shown a dumbbell structure in the past two years, with stable, high dividends or state-owned enterprises at one end and technological growth directions represented by AI and TMT at the other end.
In an uncertain market environment, high-dividend assets continue to be favored due to their increased certainty and potential for reform
In the current macroeconomic context, the market tends to pursue earnings certainty, resulting in high dividends and state-owned enterprises becoming the focus of investors. This trend is due to the fact that in an environment of weak macroeconomic recovery and weakening industrial cycles, these sectors offer stable returns and reform potential, making them an important direction for attracting investment. Core factors include:
1. Pursuit of certainty: In an uncertain macroeconomic environment, assets with stable value are more attractive.
2. Reform of state-owned enterprises: The State-owned Assets Supervision and Administration Commission (SASAC) encourages state-owned enterprises to increase dividends, and proposes a new proposal for the reform of state-owned enterprises with "one profit and five rates", emphasizing the improvement of profitability and cash flow, as well as the increase in market value assessment.
3. Valuation repair potential: SOEs themselves have low valuations and high dividend attributes, and it is expected that there will be marginal room for improvement in the context of SOE reform, which will enhance the possibility of valuation repair.
4. Dividend yield and opportunity cost: High-dividend assets are attractive long-term allocation options due to their attractive dividend yield over traditional low Treasury rates, especially in the current low interest rate environment.
The core of the investment logic of domestic scientific and technological innovation lies in overseas mapping, but there are also obvious differentiations in different sub-industries
At the other end of the dumbbell strategy, scientific and technological innovation, the core logic lies in overseas mapping. Since the Sino-US trade friction in 2018, the decoupling of economy, trade and technology has begun to bring changes to the capital market, especially the technology sector, whose stock price performance has diverged from overseas markets. For example, although there is a strong correlation between the domestic GEM and the NASDAQ in the United States, it has begun to diverge since 2021. This divergence is not influenced by a single factor, but encompasses multiple factors, such as domestic policy changes and shifts in the global macro environment.
Specific to the scientific and technological innovation sector, the computing power sector has performed strongly because it has directly benefited from the breakthrough of AI technology, and has become the focus of investment. Different from the computing power sector, the application side and large model of AI show more theme-driven investment models in China, while the stock price performance of these sectors is relatively differentiated.
From the perspective of upstream computing, the performance of technology sectors such as semiconductors and AI chips is out of touch with the international market. Although the stock prices of some international semiconductor companies have risen sharply, the performance of domestic semiconductor companies has failed to form an obvious linkage, showing great differences. This phenomenon reflects that even in the AI industry chain, there is a clear differentiation between the performance of different sub-industries.
In terms of investment strategy, the technology sector should pay special attention to the interpretation of market sentiment and changes in trading congestion. Overcrowding is often a sign of overheated market sentiment, which can lead to increased investment risk. Taking the four sub-sectors of TMT (communications, computers, electronics, and media) as an example, when the turnover accounts for about 40% of the entire market, it is usually regarded as a signal that the market sentiment is overheated.
In the dumbbell strategy, the stable direction can focus on high dividends and QDII, and the flexible direction can focus on the broad base of science and technology, industrial trends and reversal of difficulties
Overall, we believe that the structure of dumbbells is applicable last year, this year, and even the next year, and it is the main thread that will continue for a period of time in the future.
On the solid end, we give priority to recommending such a direction for high-dividend state-owned enterprises. Specifically benchmarking against our company's ETF, I suggest you pay attention to it, we have an oil and gas ETF, which is the product with the highest proportion of three barrels of oil.
In the direction of elasticity, we recommend three ideas:
Broad-based flexible investment: Represented by small and mid-cap ETFs, the STAR 100 Fund ETF shows greater flexibility among many broad-based ETFs.
Investment with industry trends: including big data ETFs in the direction of AI, media ETFs, and innovative drugs, the latter is particularly noteworthy, and the ETF of Hong Kong pharmaceuticals is recommended, although it is highly volatile, but because of this, it has become a good variety suitable for trading.
Dilemma reversal investment: the focus includes two directions: national defense and military industry and animal husbandry. The national defense industry has been on a downward trend in the past two years, but this year it is likely to usher in a reversal, especially with the implementation of the "14th Five-Year Plan" and the arrival of a new round of orders. Animal husbandry follows the pig cycle, and the current pig price is at a low level, but with the de-production capacity, the pig price has a high probability of reversing, thereby driving the stock price upward.
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