Can the new "National Nine Articles" bring about a bull market?

Rises in the east and falls in the west

At the crossroads of higher inflation in the United States, the market's expectations for the Federal Reserve's interest rate cut have fallen again and again, putting significant pressure on most equity assets in the world. Combined with the tail risks of the Middle East conflict, funds have seen a textbook "flight to safety" last week, with long debt, long USD/JPY, long gold, and short equity assets.

Against this backdrop, global equity markets were clouded last week. The S&P 500 retraced 3% and the Nasdaq retreated 5.5% during the week. Some emerging markets with a high dependence on external demand, such as Vietnam, even fell significantly by nearly 8% during the week.

Chart: Equity market performance under U.S. inflation + Iran-Israel conflict

But in the midst of this gloom, the mainland stock market came out on top, with the Shanghai Composite Index rising 1.51% against the trend.

To be sure, this is not due to strong fundamentals. Last Tuesday, the Continental Bureau of Statistics released the first quarter data, after the release of GDP data that exceeded expectations, the market seemed to be more worried about the performance and marginal changes of the sub-data, and the market ended with a sharp decline on Tuesday, with nearly 1,000 stocks falling to the limit.

A local bull market created by Kokujo

On April 12, 2024, the State Council issued the new "Nine Measures" for the capital market (the full name is the "Several Opinions of the State Council on Strengthening Supervision and Preventing Risks and Promoting the High-quality Development of the Capital Market").

The "Opinions" have a total of nine parts, which is the third "national nine articles" of the capital market, which fully reflects the political and people's nature of the capital market, more effectively protects the legitimate rights and interests of investors, especially small and medium-sized investors, and puts forward stricter regulatory requirements from many aspects such as listing, delisting, dividends, and trading.

Is it a bull market driven by the national nine articles?

Looking at the performance of the market's major indices last week, the answer is obvious, and the phenomenon is extremely interesting.

1. The market is betting on certainty, and high-dividend stocks are popular.

The market index with the highest gains last week was the Dividend Index (000015. SH), up 4.59% for the week. The index is composed of 50 stocks listed on the Shanghai Stock Exchange with high cash dividend yields, relatively stable dividends, and a certain scale and liquidity, reflecting the overall situation and trend of high-dividend stocks in the Shanghai stock market.

In Article 9 of the People's Republic of China, specific requirements have been made for dividends: strengthen the supervision of cash dividends of listed companies. For companies that have not paid dividends for many years or have a low proportion of dividends, major shareholders are restricted from reducing their holdings and risk warnings are implemented. Increase incentives for high-quality companies that pay dividends, and take multiple measures to promote the increase in dividend yields. Enhance the stability, sustainability and predictability of dividends, and promote multiple dividends a year, pre-dividends, and dividends before the Spring Festival.

Among the supporting measures of the "National Nine Articles" of the China Securities Regulatory Commission, it is clear that strong restrictive measures will be taken for non-compliance with dividends, and the cash dividend indicators will be included in the ST risk warning situation: (1) Main board: For stocks that meet the conditions for dividends, if the total cumulative cash dividends in the last three fiscal years are less than 30% of the average annual net profit in the last three fiscal years, and the cumulative dividend amount in the last three fiscal years is less than 50 million yuan, ST will be implemented. (2) Science and Technology Innovation Board and ChiNext Board: The absolute value standard of the dividend amount is adjusted to 30 million.

Is there a sense of déjà vu that the tallest of the short is rising? The compulsory dividend supervision measures are coming, and the "backward students" who have not met the standards before, or who have difficulty reaching the standards, are in danger. Those "top students" who performed well and met the standards did nothing for the time being, but how to look at it, how to look at it, how to look more pleasing to the eye, perfectly in line with the aesthetic preferences of the market.

Weighted indices with high dividends and high market capitalization stocks, such as the SSE 50, CSI 300, CSI 50, CSI 100 Index, etc., all recorded excellent performance.

Between sectors, some sectors with historically high dividend yields, such as the home appliance sector (52%), the banking sector (28%), and the non-bank financial sector (34%), have won the top gainers, and last week was led by the home appliance sector (+5.51%) and the banking sector (+4.48%). The leading sectors such as comprehensive (-8.01%) and consumer services (-7.00%), these sectors with a dividend rate of less than 2%, under the filter of dividends, everyone dislikes these sectors.

High-dividend stocks are popular in the short term, but in fact, under regulatory regulations, the market has given some stocks a new layer of relative certainty.

2. Small-cap stocks and micro-cap stocks kill people, and dogs are suspicious.

Last week, the micro-cap index fell by more than 12%, and the CSI 2000 index fell by 5.5%, and the unilateral sell-off of small and micro-cap stocks was expected to be serious, and there was a serious stampede, especially in the liquidity crisis that was seriously sold off last Monday and Tuesday.

Although on the evening of the 16th, the Department of Listed Company Supervision of the China Securities Regulatory Commission urgently responded to the following points and gave you a psychological massage:

The implementation of other risk warnings (ST) for non-compliance with dividends mainly focuses on improving the stability and predictability of dividends of listed companies, focusing on companies that have the ability to pay dividends but do not pay dividends for a long time or have a low dividend ratio. ST is not a delisting risk warning (*ST) and will not lead to delisting, and you can apply for cancellation of ST after meeting certain conditions;

Enterprises with high R&D intensity (cumulative R&D investment in the last three fiscal years accounting for more than 15% of cumulative operating income) or large R&D investment (cumulative R&D investment of more than 300 million yuan in three years) are not eligible for dividend requirements;

The adjustment of the delisting indicator is aimed at increasing efforts to clear out the "zombie shell" and "black sheep", not for "small cap stocks". According to estimates, the number of companies that will be delisted by the Shanghai and Shenzhen stock exchanges next year is expected to be about 30 companies that will be delisted by the combined financial indicators, and about 100 companies that may touch this indicator and implement delisting risk warnings next year, and these companies will have more than a year and a half to improve their operations and improve their quality, and they will not be delisted until the end of 2025.

Although these interpretations and psychological massage have effectively alleviated the unilateral bearish expectations for small and micro caps, the stock price has pulled back slightly in the second half of the week. However, the sword above the head of small and micro cap stocks still hangs, and under the new regulatory hoop, the stock price of small and micro cap stocks has still been hit hard throughout the week. 

In financial research, the relationship between high dividend actions and the long-term performance of stocks is very complex and not always proportional.

There are some very well-established theories and evidence that supporting a high dividend policy does not necessarily guarantee better performance. Because while temporary high dividends may be seen as a positive sign for current earnings and financial well-being, they also mean that the company's ability to grow, reinvestment opportunities, may be lacking – quite simply, if 100 dollars are invested in a project today, it can bring 200 yuan to shareholders in 1 year. When the company has a net profit of 100 yuan, how to choose?

Option (1): Invest 100 yuan in the project;

Option (2): Give out 100 cash dividends today.

The rational choice should be to choose (1), wait for the cake to become bigger, and then share more shareholder returns.

It's just that when the market is short-sighted and requires short-term certainty, option (2) can now get 100 dividends, and it meets the requirements of the regulator, which has become a more recognized and preferred choice for everyone. Although, this may not be optimal in the long run.

Finally, I conclude with two insights:

1. In the Chinese market, it is indeed important to be able to read documents and understand the spirit of documents. Take the local bull market led by the national nine as an example.

2. A quote from Warren Buffett's teacher, Benjamin Graham, still has a deep meaning: the market is a voting machine in the short term, and a weighing machine in the long run.

"Hold the pen as a sword,

Accompany you through the canyon of wealth"