Foreword: See the report for details. Since late May, the market has been volatile. So far, where has this round of adjustment been? How to "win in chaos" in turmoil? See the report for details.
First, the three major indicators look at the position of this round of adjustment
Regarding the nature of this round of adjustment, we believe that it is not dominated by fundamentals, policies and other factors, but more by sentiment and risk appetite. Therefore, we can use several dimensional indicators to help us determine the position of the current adjustment.
1.1. Congestion: After the recent shock adjustment, the pressure of market trading congestion has been significantly digested
Congestion is an important indicator that we exclusively construct to measure the trading sentiment of various industries and tracks, and it has a strong indicative effect in terms of short-term timing. By mid-May, the congestion of most industries had reached the "moderately high" or "high" level. After the recent shock adjustment, the congestion of many industries has fallen to [medium to low] or even [low] level, and the pressure of trading congestion in the market has been significantly digested.
1.2. Rotation intensity: the upward trend has slowed down
From the perspective of rotation intensity, the current indicator has reached a high position, and the upward slope has slowed down significantly, and the market may have reached a window for the gradual cohesion of a new consensus and the formation of the main line. We construct the industry rotation intensity index by adding up the absolute value of the changes in the ranking of the primary industry in the past five days to show the industry rotation speed of the market. Since May, as the market has risen and spread, the plate rotation has accelerated, and it has entered a relatively chaotic time with a lack of a clear main line, and we have also observed a rapid rise in this indicator. At present, the rotation strength indicator has reached a higher position, and the upward slope has slowed down significantly, or pointing to the follow-up market or gradually ushering in a new window of consensus cohesion and the formation of the main line.
And, referring to historical experience, in the process of extreme rotation of the industry, the market often experiences shocks. Since then, with the convergence of rotation and the formation of a new main line, the market will gradually usher in a recovery. With the Shanghai Composite Index as a reference, we have counted the market performance before and after the industry rotation intensity index reached the extreme. It can be seen that in the process of extreme rotation of the industry, the market as a whole shows a trend of shock adjustment. Behind it lies in the process of extreme rotation of the industry, which is usually a process of market rise and diffusion and congestion increase, so the process of its end is mostly accompanied by the market stage shock adjustment. On the other hand, we also see that, except for a few sharp declines, with the convergence of the rotation and the formation of the main line, the market has gradually ushered in a recovery.
1.3. Turnover: fell back to the lowest level since the beginning of the year
In addition, the recent A-share turnover has fallen rapidly, and it is now close to the low level since the beginning of the year, and the market is gradually accumulating momentum in the adjustment. In the turmoil at the beginning of the year, the market turnover fell to a historically low level of less than 700 billion. In the recent adjustment, the market turnover has fallen rapidly, and as of Friday, it has fallen to less than 720 billion, and the market has gradually accumulated momentum in the adjustment.
Therefore, as the congestion pressure eases and the window of extreme rotation gradually passes, the space for further market adjustment is likely to be limited.
Subsequently, it is still advisable to maintain a bullish mindset. In the context of the direction of policy easing has been clear and the fundamental expectations are also improving, the overall tone of 2024 is "bullish thinking", especially when there is a phased adjustment or contraction of risk appetite, it should be actively responded.
2. Similar to April and May 19, the real main line was gradually established in the cleansing
Referring to April and May 19, the main line of core assets was gradually established and became a consensus in the adjustment. Looking back at the core asset market that started in 2019, if we look at it in stages, the main line of core assets in 2019 was gradually established and consensus was formed in the market adjustment in April and May. Since then, with the acceleration of the establishment of a united front of various funds, a round of core asset bull market has finally been deduced:
Stage 1: At the beginning of 2019, the market ushered in a beta market with a deep rebound, and the main line was not clear. From January to April 8, 2019, the market in the first quarter was stimulated by factors such as the relaxation of monetary and credit policies, the implementation of tax and fee reduction policies, the dove turn of the Federal Reserve, the easing of Sino-US relations, the improvement of domestic economic data beyond expectations, and the net inflow of foreign capital from January to February exceeded 120 billion yuan. The broad-based index rose by about 40% on average, while the Shanghai Composite lagged behind but still gained 32%. The market bottomed out and rebounded, investment opportunities blossomed in many places, and there was no clear main line, and the Mao index began to lead but the advantage was not significant.
Phase 2: In the second quarter of 2019, the market experienced a correction. In the midst of volatility, the market gradually found consensus and focused on core assets. The policy margin tightened after the Politburo meeting in April, and at the same time, the economic recovery expectations were falsified, and the Sino-US trade friction escalated again in May, and the global market resonance retreated. In the process of risk appetite contraction, the broad-based index has been sharply adjusted, and the small and medium-sized stocks with higher gains in the early stage have adjusted deeply, but the Mao index, which has risen higher in the early stage, still shows a strong anti-decline attribute, falling by less than 10%. The reason for this is that after experiencing shocks and fluctuations, funds began to focus on finding safer, stable long-term returns, better performance, and larger high-quality assets, superimposed on the three major international indexes in the expansion, as "smart money" and "value" of foreign capital concentrated layout of white horses, with food and beverage, banking, home appliances and other return certainty direction gradually become a "safe haven" for funds, and the core asset market has emerged.
Stage 3: After June 2019, the market fluctuated, the united front of core assets was established, and the consensus was accelerated. After a rapid decline in April and May, the market remained volatile throughout the year, but the structural main line has been very clear, and the consensus on core assets has been formed. The influx of foreign capital has changed the market aesthetics, domestic capital has also accelerated the layout, the establishment of a united front of domestic and foreign capital in core assets, the focus of market consensus, and the joint efforts of incremental funds and stock funds to change positions have given birth to a vigorous core asset bull market.
3. Stick to the real main line: leading white horse, core assets
In our annual strategy (10 December 2023 report, "Return and Disruption: Advanced Core Assets – 2024 A-share Strategic Outlook"), we predict the return of the main line of core assets in 2024.
Since the beginning of the year, we have witnessed that leading style and core assets have become an important source of excess returns. Moreover, in the recent adjustment, most industry leaders still maintain relative returns. Since the beginning of this year, large-market indices such as the Shanghai Stock Exchange 50 and the CSI 300 have achieved significant excess returns. Furthermore, we counted the median rise and fall of Shenwan's 31 primary industries since the beginning of the year, and found that the top 5 leading stocks in each industry by market capitalization, except for banks, showed significant excess returns compared with the industry as a whole. Even in the strong sectors such as nonferrous metals and household appliances, the leading companies have significantly outperformed, but the median increase in the industry is close to -10%, which further verifies the characteristics of this year's [strong style beta, weak industry beta, and leading victory].
Behind the outperformance of the leader, on the one hand, is the reshaping of the united front of core assets on the capital side; On the other hand, the current macro background of the leading profit advantage highlighted.
3.1. The united front of core assets is being reshaped
At present, we have seen some positive signals, pointing to the fact that all kinds of funds in the market have begun to focus on the leading white horse, and the united front is gradually being established: 1) Active fund holdings "must be combined for a long time" and refocus on the leader. 2) ETFs and insurance funds are important marginal incremental funds this year, which also drives the market to further focus on leading white horses and core assets. 3) Recently, foreign investment has entered the market significantly, and it still focuses on the leader, resonating with various domestic institutions.
3.2. The profit advantage of the leader has been highlighted
From the perspective of the leading company as a whole, its profit advantage compared with all A is gradually highlighted. On the one hand, as of 2024Q1, the overall net profit growth rate of the leading enterprises is -0.91%, which is 3.35 percentage points higher than that of all A-shares, and the leading margin is significantly larger than the 0.10 percentage points in 2023, on the other hand, the number of industries with the best performance growth rate in 2024Q1 has significantly increased from 61.29% in 2023 to 70.97%.
In terms of industries, the year-on-year growth rate and ROE of leading companies in most industries are higher than those of the industry as a whole. As of 2024Q1, a total of 22 of the 31 primary industries have a net profit growth rate higher than that of the industry as a whole, and the leading ROE_TTM of all industries except agriculture, forestry, animal husbandry and fishery and comprehensive are higher than the overall level of the industry.
4. "15+3": the core asset of the new era, adjustment is an opportunity, and "chaos is a ladder"
This year, the strategy team of China Industrial Securities first proposed "15+3" (at or close to 15% growth rate and 3% dividend yield) as the screening criteria for core assets in the new era. Compared with traditional core assets, "15+3" has both high prosperity, high ROE and high dividends, making it easier to build market consensus and form a united front.
In addition, we see that "15+3" can often win in chaos, and the excess return has increased significantly during the previous market volatility stage. Since the beginning of this year, the two most significant stages of the "15+3" excess return increase have been since January and late March, and the typical characteristics of the market in these two stages are increased volatility. In January, the market adjusted sharply, and the absolute return of "15+3" was flat, with a relative return of 6.3%; From February to March 20, the market bottomed out and rebounded, and the "15+3" rose together with the market, and the excess did not converge; Since March 20, the market has fluctuated sideways and increased volatility, and "15+3" has once again risen against the trend in fluctuations, and the absolute and relative returns are still significant.
"15+3" assets are more in line with this era and are expected to continue to be the key to winning in the market chaos, and the recent correction will provide opportunities to accelerate embrace:
First of all, "15+3" is an investment philosophy that conforms to the era of high-probability investment, and it is the secret of winning in chaos. In essence, what 15+3 pursues is to have a certain growth rate as a guarantee of long-term space and sustainability, and to have appropriate dividends as a confirmation of short-term stability and security; Pursue both the "future" and the "foot"; Both "dreams" and "realities". We have always emphasized that high-probability investment is the consensus after large fluctuations, and we should focus on "certainty" in chaos, "15+3" assets have a certain growth, high dividend guarantee, and at the same time imply a high ROE, which is a natural high-win rate asset.
Secondly, in the context of weak economic recovery and no systemic risk, "15+3" is a better solution under the dumbbell rebalancing configuration. The market allocation over the past two years has been dumbbell-shaped, with the core being that there are few "good things" in the earnings downcycle, resulting in investors being forced to choose defensive high dividends on one end and small-cap growth stocks that benefit from liquidity on the other. However, in our annual strategic outlook at the end of last year, we clearly stated that this year's dumbbell allocation may usher in a rebalancing, and the "waist assets" and high-quality leading assets in the dumbbells will be repaired, and the core is that this year will be a stage of profit stabilization. This year, we have also seen that economic expectations have continued to be revised upwards from the excessive pessimism at the beginning of the year, and the repair of economic expectations has led to the convergence of excess returns at both ends of the dumbbell shape, but the upward elasticity of the economy still needs to be observed. Therefore, in the context of weak economic recovery but no systemic risk, "15+3" is a better solution for high dividends to find flexibility and high growth to find stability.
Thirdly, in the new regulatory context, the market will be more focused on certainty. The new "National Nine Articles" require "strict access to issuance and listing", "strict continuous supervision of listed companies", "intensification of delisting supervision", "strengthening supervision of securities and fund institutions", and "strengthening transaction supervision", which is expected to drive the market to further focus on high-quality leading assets. "15+3" has stable growth, high dividend rate, and a definite long-term rate of return, making it a good asset to adapt to the new regulatory environment.
Finally, "15+3" is compatible with high prosperity and high dividends, and naturally has high ROE attributes, which makes it easier to gather consensus on various funds and form a united front. For investors with high prosperity, high growth is looking for stability. For high-dividend investors, high dividends look upwards for flexibility. In addition, "15+3" naturally has high ROE attributes, and it is the focus of funds of many types of institutions. Incremental funds determine the style of the market, and the main increments in the market this year come from insurance, ETFs, foreign capital, etc., which will further drive the market to focus on such high-quality assets. Insurance focuses on high dividends, and a dividend yield of more than 3% is very attractive to insurance; ETF expansion, the increment is mainly concentrated in the CSI 300 and other large-market weighting directions, further focusing on leading assets; Foreign investors are naturally investors with a high winning rate. Therefore, the "15+3" is expected to become the consensus and united front of all kinds of major incremental funds.
"15+3" assets provide simple and clear screening criteria, and the screening criteria are as follows (relaxed on the basis of "15+3"):
1) CSI 800 constituent stocks, with a market value of not less than 30 billion;
2) The net profit growth rate of 2024Q1, 2024E and 2025E shall not be less than 10%;
3) The dividend yield in 2023 is not less than 2.5%;
For the specific list of "15+3" asset target pools, please contact the strategy team of China Industrial Securities to obtain them.
5. Industry allocation suggestions for June
5.1. Recommended key industries in June: home appliances, electronics, chemicals, electric new, pig breeding
1. Household appliances: exports continue to be booming, and the real estate policy catalytic repair is expected to be strengthened
The home appliance sector in 24Q1 achieved a good start, demonstrating good business resilience and competitive advantage. In the future, the pattern optimization superimposed on the brand going overseas, the plate is expected to continue the good growth trend in the early stage. Performance certainty + high dividends, the valuation of the home appliance sector is expected to gradually reshape. On the one hand, since 2024, the export of household appliances has continued to boom, and the growth rate in April has accelerated month-on-month. On the other hand, the marginal relaxation of real estate policies and the expected strengthening of the repair of the home appliance real estate chain.
2. Electronics: The global consumer electronics cycle has rebounded, and the construction of AI computing power has accelerated to support the prosperity of core links
The electronics sector is an important direction for TMT to recover with high certainty and benefit from the AI wave. On the one hand, the rebound in terminal demand such as smart phones + laptops is expected to drive the continuous recovery of the industrial chain; On the other hand, the explosion of demand for computing power driven by AI will continue to catalyze infrastructure-related links.
3. Basic chemicals: the marginal improvement is expected in the future, and investment opportunities in price increase categories are concerned
Recently, the market's attention and discussion of "price trading" has continued to heat up. Since the beginning of the year, it can be seen that many varieties including plastics, glass fibers, rubber, and chemical fibers have shown a trend of price increases. The market's expectation of domestic demand has gradually improved, and the varieties with certainty of price increase and upward prosperity in the chemical industry are worth paying attention to.
It is recommended to focus on investment opportunities in upstream materials, lubricants, civil explosives, polyester filament and other categories of consumer electronics: 1) The consumer electronics industry will return to positive growth, and the upstream materials link will benefit. IDC data shows that in 2024Q1, China's smartphone market shipped about 69.26 million units, a year-on-year increase of 6.5%, of which Huawei's shipment recovery trend is obvious; At the same time, the landing and use of AI large models and folding screens are still the key to the differentiated competition between Android phones and iOS in the high-end market. From the perspective of industry trends, it is recommended to pay attention to the upstream materials that benefit from the recovery of consumer electronics and Huawei's return. 2) The domestic substitution of lubricating oil additives is at the right time, and the demand growth rate is improving. 3) The downstream mine boom has driven the demand of the civil explosive industry, and it is recommended to pay attention to the leading domestic civil explosive enterprises. 4) Polyester filament yarn that supply and demand are about to mismatch. The growth rate of new production capacity in the polyester filament industry in 2024 may slow down significantly, and the industry's profitability is expected to be repaired and improved.
4. Power equipment and new energy: pessimistic expectations are expected to be repaired, and pay attention to the logic of going to sea + dilemma reversal
In the early stage, investors had great differences on the profitability and growth rate of the sector, but the relevant concerns have been gradually eased recently: on the one hand, the power grid has benefited from the high demand at home and abroad, especially the strong external demand has continued to be verified; On the other hand, the contradiction between supply and demand in lithium battery, photovoltaic and other links has been gradually eased, and the profitability of all links in the follow-up industrial chain is also expected to be gradually restored, and the dilemma can be reversed.
5. Pig breeding: optimistic about the right logic after pig prices enter an upward trend
The short-term sector has entered the rising range, and we are optimistic about the right logic after the pig price enters the upward trend. According to the monitoring data of each sample point, in April 2024, the Ministry of Agriculture can multiply -0.10% month-on-month; In April 2024, the scale field of the steel union can be +0.87% month-on-month; In April 2024, Zhuochuang Energy was +3.13% month-on-month; In April 2024, Yongyi Energy was +0.96% MoM. From the production capacity side, Q2 with the early production capacity to bring about the trend of slaughter trend decline has ushered in the supply side inflection point, according to the steel data, April pig feed sales year-on-year decline further expanded. Recently, the pig price has risen under the farmer's pressure sentiment has improved, the weight of the pig slaughter has increased slightly, promoting the short-term pig price to rise rapidly, and then with the early production capacity gap has been realized, the pig price is expected to enter the continuous rise range, but it is still necessary to be vigilant against the short-term supply and price rhythm changes caused by the consensus expectation of the industry and the second breeding.
5.2. Multi-dimensional industry comparison in June
1. Mesoscopic prosperity
The prosperity dimension is mainly based on the [188 Prosperity Tracking Framework] to observe and compare the prosperity levels of various industries. The 188 Prosperity Index is an important indicator that we exclusively construct to depict the subdivided industries, major styles and the overall prosperity level of the market, which is aggregated from 188 industries and a total of 1000+ core mesoscopic indicators to track market trends and changes every month.
Combined with the latest mesoscopic data, at the level of primary industries, the prosperity index of most industries increased month-on-month in May, of which the industries in the high prosperity range mainly include non-ferrous metals, household appliances, trade and retail, light manufacturing, medicine and biology, national defense and military industry, and electronics. At the same time, the power equipment, real estate, building decoration, building materials, agriculture, forestry, animal husbandry and fishery, beauty care and other industries in the outlook from the bottom of the significant improvement, is expected to reverse the dilemma.
2. Transaction congestion
Congestion is an important indicator exclusively constructed by the strategy team of China Industrial Securities to reflect the trading sentiment of the popular track, which is synthesized from four dimensions and seven indicators of volume and energy, price, capital and analyst forecast, and quantitatively tracks changes in market sentiment and has strong indicative significance for the short-term trend of stock prices.
At the level of primary industries, the transaction congestion of most industries has been digested in the past month, among which the industries that have been at a low level of congestion include textiles and garments, media, communications, computers, consumer services, light manufacturing, medicine, home appliances, petroleum and petrochemical, coal, steel, machinery, commerce and retail, etc.
Risk Warning
Pay attention to economic data fluctuations, policy tightening more than expected, and the Federal Reserve raising interest rates more than expected.
Note: The report in this article is excerpted from the research report published by the Industrial Securities Institute of Economics and Finance, and the specific report content and related risk warnings are detailed in the full report. Securities Research Report: "Three Major Indicators Look at the Position of This Round of Adjustment - A-share Strategy Outlook" Release time: June 2, 2024
Report Issued by: Industrial Securities Co., Ltd. (Licensed by the China Securities Regulatory Commission for Securities Investment Consulting Business) Analyst of this report: Zhang Qiyao SAC Practice Certificate Number: S0190521080005 Hu Siyu SAC Practice Certificate Number: S0190521110003 Zhang Xun SAC Practice Certificate Number: S0190520070004 Wu Feng SAC Practice Certificate Number: S0190510120002 Yang Zhenyu SAC Practising Certificate No.: S0190520120002
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