Source | Office of the CIO
Key takeaways:
4.15-4.21
Suppressed by multiple factors such as geopolitical conflicts, the decline in risk appetite of global stock markets, the continuous tightening of overseas liquidity, and the pre-holiday risk aversion effect, the sentiment of the A-share market is likely to continue to weaken. Combined with the pressure of downward revision of EPS in the annual report and the first quarterly report, the still weak economic data and the declining fundamentals, it is recommended to remain cautious on A-shares in the short term. Under the support of the full clearance of risks in February + the expected protection of the national team, the downside is expected to be limited, but the appropriate timing of the medium-term layout remains to be seen after May. In terms of style, small caps outperform large caps, and value outperforms growth. In terms of industry allocation, automobiles, light manufacturing, beauty care, public utilities, social services, iron and steel, non-bank finance, household appliances, environmental protection, and transportation scored highly.
Figure: Quantitative score of various influencing factors of the general trend of A-shares: downgraded to neutral bearish
Source: Wind, Gopher Assets, the overall rating is not included in the odds indicator for the time being, focusing on various winning rate indicators (driving factors) that help determine the future direction of the market. And in addition to the odds (refers to the distance between ERP and the historical mean under different calibers, the unit is a multiple of the standard deviation), the value of each score is unified to about -1~1 range
PART/1
Internal and external factors:
The total amount of domestic Q1 economic data is strong, but the structure is weaker
Growth pressures in the United States are emerging
The Fed's hawkish rhetoric continues to weigh on expectations of interest rate cuts
In terms of internal factors, the total domestic Q1 GDP exceeded expectations, but most of the structure was weak, and only manufacturing investment was more resilient. On the external side, U.S. economic data diverged and growth pressures were slighter, but Fed officials were hawkish amid inflationary pressures, further lowering the probability of a September rate cut to less than 50%.
Internal factors: Last Tuesday, the domestic disclosure of Q1 economic data: (1) GDP in the first quarter of 2024 was 5.3% year-on-year, expected 4.9%, previous value 5.2% ;(2) Industrial added value in March was 4.5% year-on-year in the month, expected to be 5.3%, and the previous value was 7% ;(3) The cumulative investment in fixed assets was 4.5% year-on-year, expected to be 4.4%, and the previous value was 4.2% ;(4) Social zero was 3.1% year-on-year in the current month, expected to be 4.8%, and the previous value was 5.5%;(5) The national surveyed urban unemployment rate was 5.2% , expected 5.3%, previous value 5.3%. Overall, although the total economic data in the first quarter exceeded market expectations, other sub-data except for manufacturing investment were not eye-catching, reflecting the current situation of strong supply and weak demand, resulting in the market not buying the total data that exceeded expectations, and whether reflation and the real estate cycle can pick up is still the core contradiction that the current market is concerned about. In terms of policy, in response to the collapse of small-cap stocks caused by the "National Nine Articles" on Monday and Tuesday, the China Securities Regulatory Commission responded urgently on Tuesday night, emphasizing that the adjustment of the delisting indicators is aimed at increasing efforts to clear out the "zombie shell" and "black sheep", not for "small-cap stocks". Steady arrangements have been made in terms of standard setting and transition period arrangements, which will not have an impact on the market in the short term. After the response, small-cap sentiment temporarily recovered significantly.
External factors: Last week, the US retail sales data for March was released, up 0.7% month-on-month, with an expectation of 0.3%, and the previous value was revised upward to 0.9% from 0.6%. Demand resilience is still strong, but the inhibitory effect of sticky inflation and high interest rates on demand is also beginning to appear. On the consumer side, the one-year inflation rate forecast from the University of Michigan survey rose by 0.2pct to 3.1% in April, and the preliminary consumer confidence index fell from 79.4 to 77.9. After a slight decline in new home sales in March, new housing starts and existing home sales also fell more than expected in March, falling from 1.521 million to 1.321 million, 162,000 fewer than expected. Existing home sales in March were 4.19 million units on an annualized basis, lower than the expected 4.2 million units and the previous value of 4.38 million units. The Federal Reserve's Beige Book, released during the week of last week, showed that it was significantly more difficult for companies to pass on costs, leading to lower profit margins. Most jurisdictions mentioned an increase in labour supply, which bodes well for easing wage pressures. There are signs that demand may not continue to strengthen. However, industrial production has improved steadily. U.S. industrial production rose 0.4% month-on-month in March, with an expected increase of 0.4% and a previous increase of 0.1%, and the capacity utilization rate was 78.4% versus 78.5% and a previous value of 78.3%. Among them, the manufacturing output rose by 0.5% month-on-month, with an expected increase of 0.3% and a previous increase of 0.8%, and the capacity utilization rate was 77.4% and the previous value was 77.0%. In terms of monetary stance, Fed officials spoke hawkish last week, most of which expressed expectations that there may be no rate cuts this year. The presidents of the Atlanta Fed and the New York Fed even mentioned the possibility of further rate hikes. Powell, who has always been optimistic about falling inflation, also changed his speech, suggesting that stubborn inflation will cause the central bank to delay interest rate cuts. The current market expects two rate cuts this year, starting as early as September, but the probability is only 45.7%.
PART/2
Last week in review
(1) Market review
A-shares edged down 0.33% last week, led by the Shanghai 50 and CSI 300 by 2.38% and 1.89%, respectively. At the beginning of the week, benefiting from the release of the new "National Nine Measures", the incentive dividend measures led to a significant rise in core assets represented by the large-cap value style, and with the significant relaxation of delisting standards, small and micro-cap stocks with relatively high delisting risk fell panic. On Wednesday, the market recovered losses led by small and micro cap stocks as regulators shouted new rules on delisting to calm market sentiment in small-cap stocks. However, with the lower-than-expected economic data and the approaching quarterly reporting period, the market weakened again in the next two days, and high dividends once again prevailed.
- The top 5 industries were household appliances (5.57%), banking (4.48%), coal (3.29%), non-bank finance (3.04%), and building decoration (2.94%), while the bottom 5 industries were social services (-6.09%), commerce and retail (-6.01%), media (-4.48%), light manufacturing (-4.23%), and textiles and apparel (-4.14%).
- In terms of sub-sectors, finance (3.32%)> stable (1.42%)> cyclical (0.17%)> consumption (-0.29%)> growth (-2.33%) in the past 1 week.
- Stylistically, the value of the large cap (4.41%)> the value of the small cap (2.87%)> the growth of the large cap (0.18%)> the growth of the small cap (-0.73%) in the last 1 week.
Chart: Overview of global market conditions
Chart: Relative returns of A-share sectors in the past 10 years
Chart: Relative returns of A-share styles in the past 10 years
Source: Wind, Gopher Assets
(2) Market sentiment
After maintaining a short period of longs, on Thursday, March 21, the sentiment model issued a significant short signal, mainly due to the decline in transaction concentration, indicating that the market trading hotspots have subsided, the sentiment may weaken in the short term, and the marginal bearish signal is further strengthened. Among them, the attention of rising stocks indicated by EMSI has declined marginally, and the transaction concentration has remained sluggish, indicating a lack of hot spots.
Chart: Historical trend of the market sentiment cycle
Figure: Significant long and short signals in the market sentiment model in the past 1 year
Source: Wind, Gopher Assets
(3) Valuation level
A-share valuations remain historically low. Among them, the ERP with dividend yield is at the extreme value of 2.39 times the standard deviation in history, exceeding the extreme value of 2 times, while the ERP of PE caliber is affected by the poor profit cycle of A-shares, and the adjustment range is relatively small, but the latest value is also close to the extreme value of 2 times standard deviation, which is at the level of 1.87 times. The number of average quantiles and low valuation ranges at the secondary industry level is still at a low level in the past 10 years.
Chart: Changes in risk appetite of all A non-financial petroleum and petrochemical companies (based on dividend yield and PE reciprocal caliber respectively)
Source: Wind, Gopher Assets
Figure: The proportion distribution and average valuation quantile of the secondary industry in the range of historical undervaluation, reasonable and overvaluation
Source: Wind, Gopher Assets, 15 years of some extreme data eliminated
(4) Corporate profits
The earnings cycle has performed poorly, and the earnings per share of All A have maintained negative growth for more than 1 year, which is close to the lowest level in the last 10 years. On the margin, earnings expectations are in a correction trend, flat after a marginal rebound, and actual earnings growth fluctuates at an all-time low. In terms of industry drives, in the past three months, a few industries such as steel, social services, textiles, computers, automobiles, public utilities, food, petroleum and petrochemicals, and household appliances have seen positive profit growth, while real estate, nonferrous metals, non-bank, environmental protection, construction, power equipment, coal and other industries have constituted the main profit drag.
Chart: Changes in the earnings growth rate of all A-shares in the past 10 years and the expected growth rate of dynamic 2 years
来源:Wind、Datayes、歌斐资产
Chart: Historical changes in earnings per share by tier-1 industry
Source: Wind, Gopher Assets, using industry index points and industry index PE inverted, can reflect the latest performance disclosure in a timely manner, among them, the past 3 months do not cover the financial report disclosure season, the change in the past 3 months may be small.
(5) The flow of funds
From the perspective of funds, the micro liquidity index continued to fall in the negative range last week, and the bearish signal was significant. Structurally lackluster, despite the increase in corporate repurchases, the net outflow of financing began again, and the rest of the sub-items did not change much. In terms of domestic capital, 3.1 billion new shares of equity-biased funds were issued, reaching the 19% quantile of the past three years, an increase of 2 billion shares month-on-month, the stock position of stock-biased funds increased by 0.81% to 76.33%, which was at the 7.2% quantile of the past three years, and the net outflow of foreign capital was 6.7 billion, and the inflow was at the 20.5% quantile of the past three years, an increase of 4.78 billion from the previous quarter.
Chart: Total micro liquidity and the inflow trend of each source of funds (4-period smoothed value of weekly net inflow, 100 million yuan)
Source: Wind, Gopher Assets
Chart: Recent weekly net inflows by sub-item of micro liquidity (100 million yuan)
Source: Wind, Gopher Assets, some of the values have been smoothed out by quantity
(6) Macro factors
China's growth factor has continued to decline since the beginning of this year, and the inflation factor has generally fluctuated sideways, with a marginal rise that is stronger than growth. Monetary stance and credit premium fluctuated to the downside at low levels, and liquidity conditions were accommodative. Among them, the prosperity margins of the real estate market, consumption and production continue to weaken; the employment market continues to fluctuate after the recession, and the margins improve slightly; and the export prosperity is relatively strong and continues to rise.
Chart: The trend of China's major macro factors in the past 10 years
Chart: Trend of China's Macro Prosperity Factor by Sector in the Past Five Years
Source: Wind, Gopher Assets
PART/3
Market outlook
(1) Timing: The driving force of the bulls is still insufficient, and we should be wary of the risk of short-term market adjustment
The bullish driving force is still insufficient, and we are wary of the risk of short-term market adjustment. In terms of quantitative ratings, sentiment and funding remain the main drags. Among them, the capital side continues to be constrained by the continuous tightening of overseas liquidity under the expectation of interest rate cuts in the United States. The fragility of sentiment has further increased, and the domestic market sentiment is unlikely to improve in the short term due to the recent intensification of overseas geopolitical conflict risks and the downturn in global risk appetite. Although the CSRC's call has temporarily calmed the panic in small and micro cap stocks, objectively speaking, the relaxation of delisting criteria will inevitably weigh on the valuation premium of small cap stocks in the long run, and its worries may be difficult to completely suppress. From a fundamental point of view, the overall year-on-year growth rate of domestic high-frequency data is still declining, while the economic data in March are mostly weaker than expected, which also leads to the delay in the realization of economic recovery expectations. According to the calculation of the A-share earnings forecast model, the disclosure of the annual report and the first quarterly report will further reduce the EPS growth of about 1% for all A, and about 2% for all A excluding finance and petroleum and petrochemicals. As the financial report disclosure is about to enter an intensive period, coupled with the cautious sentiment caused by the approaching holiday, there is a certain risk of adjustment in the short-term A-shares.
Current recommended position: -30% (100% short to 100% long corresponds to -100%~+100%)
(2) Style: small cap > large cap, growth < value
The small cap is still adapted to the current macro environment and is better than the broader market, but there is still some uncertainty under the new delisting rules. Loose residual liquidity, weak credit cycles, and relatively optimistic earnings expectations are positive for small-cap styles, while weak economic growth expectations, a slight recovery in credit spreads, and a deterioration in micro-liquidity and sentiment are negative for small-cap stocks. The overall small-cap style score is still dominant.
Under the pressure of overseas liquidity + domestic micro liquidity, the value style prevails. Marginally tightened overseas liquidity environment + deteriorating micro liquidity and sentiment are not conducive to the growth style, but abundant residual liquidity and relatively optimistic earnings expectations are conducive to the growth style. The overall growth style advantage marginally turned negative.
Figure: Scoring and comprehensive scoring of various influencing factors of style
Source: Wind, Datayes, Gopher Assets, the positive or negative of the direction & weight column represents the positive or negative correlation between the corresponding factor and the corresponding style, and the numerical value represents the importance grade of qualitative division
(3) Industries: automobiles, light manufacturing, beauty care, public utilities, social services, iron and steel, non-bank finance, household appliances, environmental protection, transportation, etc
Figure: Scoring and allocation ranking of primary industries based on the full dimensions of fundamentals, capital and market
来源:Wind、Datayes、歌斐资产
PART/4
Appendix: Performance Retrospective
(1) Choosing the right time
This report synthesizes the output of various deep model results, recent data, event reviews, quantitative tracking of various dimensions of the equity market, and combines qualitative analysis to sort out the market operation logic, and gives the latest A-share market outlook every week after comprehensive consideration.
Since the release of the weekly report in April 2022, the macro timing of the equity market has been significant. The report not only provides short-term research and judgment, but also provides medium and long-term market outlook from time to time, so as to achieve panoramic coverage of the A-share market.
Chart: A-share strategy weekly report historical macro timing view display (the dots marked in red are bullish views, and the green dots are bearish views)
Source: Wind, Gopher Assets, some views that have not changed much are not shown
Figure: The net value performance of the all-A long-short timing strategy simulated based on the historical macro timing view
Source: Wind, Gopher Assets
(2) Style
This report comprehensively evaluates the various factors that drive style rotation, and fully combines qualitative logic to design quantitative tracking indicators to achieve daily frequency style scoring with significant historical returns.
In investment, the dominant style can be selected based on the normalized score (-100% to +100% range change) of the two key styles, such as the small-cap/large-cap score of >0, which means that the model expects the future dominant style to be small-cap.
The absolute level of the score (signal strength) represents the certainty of the opinion, and the higher the signal strength, the stronger the stability of the opinion, and the lower the probability of change in the short term. After testing, it is recommended to ignore style signals with a strength of less than 30%. And the dominant style corresponding to 30% signal strength has been able to last for at least 1-2 months on average, which has strong practical value.
If there is no strong and accurate reversal expectation for the specific macro variables involved in the model in Part 3 (2), it is recommended to refer to the model point of view for style configuration.
Chart: Recent earnings performance of the style rotation model
Figure: Stylistic Comparison Views Persistence Increases with Signal Strength
Source: Wind, Gopher Assets
Chart: Over/Small-cap style rotation model retrospectively traces historical views and net worth performance since 2016
Chart: The historical view of the Growth Value Style Rotation Model since 2016 is retrospective to net worth performance
Source: Wind, Gopher Assets, assuming trading at the opening price and deducting 0.05% commission
(3) Industry
This report comprehensively evaluates the various factors that drive the rise and fall of the industry, and fully combines qualitative logic analysis and quantitative backtesting effect to screen the industry scoring indicators, which can achieve the daily frequency of Shenwan first-level industry ranking, and can provide long-term significant and stable excess returns in history.
Based on the industry allocation recommendations given by the model, weekly or monthly rebalancing is carried out, which ignores the intermediate ranking fluctuations, but has little impact on returns. The model contains high-frequency indicators, and the daily industry ranking results may fluctuate, and reducing the frequency of rebalancing will bring a certain amount of information loss. However, in actual investment, appropriately reducing the frequency of rebalancing can also greatly reduce the turnover rate and reduce transaction costs. Overall, the test shows that even if the monthly rebalancing is based on the model, the final long-term return is still significant, and the decrease is small compared to the daily rebalancing. Specifically, the annual turnover rate of the long positions of weekly rebalancing is about 7.8 times, the annual turnover rate of the longs of monthly rebalancing is about 3.5 times, and the average turnover cycle of the top 10 industries is 1-2 months and 3-4 months respectively, and the higher the industry ranking, the better the sustainability, and has strong practical value.
In practice, you can flexibly choose the rebalancing cycle according to your specific capital volume and transaction cost differences.
Chart: Recent earnings performance of the industry rotation model
Source: Wind, Gopher Assets
Chart: Historical alpha performance of the industry rotation model since 2010
Source: Wind, Gopher Assets, assuming trading at the opening price and deducting 0.05% commission
Figure: The effectiveness of the industry rotation model decays slowly over time
Source: Wind, Gopher Assets, statistics of long and short net value since 2017
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