Market Enters Phase 2: Opportunities Amidst Market Rotation?
The week that has just passed has seen investors' emotions swing wildly. On Friday, the market opened low and continued to adjust throughout the day, with the Shanghai Composite Index breaking below 3,200 points at one point, and the ChiNext Index falling nearly 20% over three days. A-share trading volume for the day reached 1.59 trillion yuan, shrinking for the third consecutive day on a sequential basis.
After the initial phase of widespread gains and repairs, the market is likely to enter a stage of "prolonged warfare" with fluctuations, also known as "divergent main lines."
In this wave of the market, ETFs have become the focus of market attention. Capital has poured into the market through ETFs, with Wind data showing that in just six trading days from September 24 to October 8, the net asset value of stock ETFs increased by about 1 trillion yuan. The total scale of stock ETFs has thus broken through the 3 trillion yuan mark, setting a historical record.
Why are ETFs "money magnets"?
Compared to traditional investment methods, ETFs have clear advantages:
1. ETFs have low fees, with management fees generally ranging from 0.15% to 0.5%, compared to the 1.2% management fees often seen in actively managed equity funds;
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2. ETFs are conducive to risk diversification. For retail investors participating in A-shares through ETFs, it is equivalent to quickly holding a basket of stocks, with transparent and clear positions, no style drift issues, and effectively avoiding individual stock "black swan" risks, as well as the corresponding challenges of stock selection;
3. ETFs are actively traded with good liquidity, which is beneficial for large funds to quickly deploy and exit, and for overseas and commodity products, T+0 transactions are possible;
4. Additionally, participating in the market through ETFs can lower the barriers for a large number of retail investors, such as the 500,000 yuan threshold for the Stock Connect and the 100,000 yuan plus 2-year threshold for the ChiNext board.
During market downturns, long-term capital such as the national team uses ETFs to position at low levels, and during market rallies, active funds also use ETFs to quickly get on board. ETFs have rapidly risen in the market, with their total scale expanding from 2 trillion yuan at the end of last year to the current 3 trillion yuan in just nine months, becoming an important channel for incremental capital to enter the market.Fiscal Policy Takes the Baton, Trillions in Funds May Be on the Way
The State Council's Press Office has announced that a press conference will be held at 10 a.m. on Saturday, October 12, 2024, where the Minister of Finance, Lan Fo'an, will introduce the situation related to "increasing the counter-cyclical adjustment of fiscal policy and promoting high-quality economic development," and answer questions from journalists.
CICC (China International Capital Corporation) released a research report pointing out that in the second half of the financial cycle, the contradiction of insufficient demand is prominent. At the end of September this year, the State Council's Press Office issued several policies, and high-level meetings further released positive policy signals, which were positively received by the market. There is still room for monetary policy to be relaxed, but against the backdrop of deleveraging in the private sector, the necessity for fiscal policy to step up is significantly increased.
While strictly regulating new debt, accelerating the replacement of local existing debt, and addressing corporate debt arrears are conducive to reducing the burden on related entities and stimulating economic vitality. The "Decision" of the Third Plenary Session of the 20th Central Committee of the Party pointed out that "ensuring and improving people's livelihoods in development is a major task of Chinese-style modernization."
CICC believes that in the context of the reduction of traditional infrastructure space, the shift of fiscal expenditure focus from infrastructure investment (hard infrastructure) to people's livelihoods (soft infrastructure) helps to improve the quality and efficiency of fiscal policy. The scope of people's livelihoods is relatively broad, mainly considering education, health, and social security. One scenario is to refer to the situation of other countries (such as the United States and South Korea) during the period of reaching medium-developed countries and the so-called "Wagner acceleration period." Another scenario is to refer to the fitting situation of about 30 economies with existing data, and the results of the two scenarios have some differences, but overall, there is still a relatively large space for "soft infrastructure." The multipliers of livelihood expenditures in different fields on economic growth vary greatly. In the short term, the overall multiplier of the three major livelihoods may be 0.7-0.9, but the long-term multiplier is greater than 1. In detail, the short-term multiplier of education is greater than 1, while the short-term multipliers of health and social security are less than 1, which may be due to the more significant rigidity of the former's expenditures.
Xingye Research believes that since late September, incremental monetary policy and real estate policies have been issued densely. As the key to expanding total demand in the counter-cyclical direction, incremental fiscal policy has become the focus of market attention. In the first eight months, the cumulative year-on-year growth of local fiscal revenue and expenditure was less than 0.5%. If the scale of government bonds is increased, it can be used for transfer payments to localities or to support livelihood and social security expenditures, alleviating the pressure of tight balance in local finances. Assuming the budget execution rate of general budget revenue is 96%, if the expenditure side is to reach the budget level at the beginning of the year, an additional fund of about 828.6 billion yuan is needed; assuming the budget execution rate of government fund revenue is about 80%, if the expenditure reaches the budget level at the beginning of the year, an additional fund of about 1.4 trillion yuan is needed; if the fiscal expenditure strength is to reach the pre-epidemic level, the required fund scale will be higher. The scale and direction of incremental fiscal policy will become the key to affecting market expectations in October.
CITIC Securities stated that there has been a significant change in policy signals, and market expectations have undergone a major reversal. Future continuous policy reinforcement for domestic demand may drive price signals to arrive earlier, and the market trend will usher in a major inflection point. After the major reversal of expectations, the market will continue to experience pulse-like increases in the short term, characterized by the concentrated entry of incremental funds dominated by retail investors. Currently, we are in the transition phase from the major reversal of expectations to the major inflection point of the market trend. With low P/B and domestic demand repair as the core, after the price signal is confirmed, the market trend will usher in a major inflection point, leading to an annual-level bull market with the core characteristic of the credit cycle rising again, and investors will usher in a better entry opportunity.
Which directions should be laid out to grasp the market trend?
Direction 1: Chips benefit from the resonance of policy and positive fundamentals
Against the backdrop of very active trading volume, chips, as a representative of both "China's core assets" and "new quality productivity," are expected to become the main line of the market in the next phase.The current domestic economic cycle is in a marginal strengthening phase, and the chip industry has three core logics:
Firstly, the fundamentals are solid, with a resonance of upward cycles both domestically and internationally. Global and Chinese semiconductor sales have achieved year-on-year growth for ten consecutive months, and have maintained double-digit year-on-year increases since the beginning of this year. In August, global semiconductor sales hit a historical high. This is mainly due to the improvement of supply chain inventories in the automotive and industrial control sectors, as well as the increase in AI demand. The semiconductor industry is still in a high prosperity phase.
Secondly, the demand for domestic products is strong, and investment amounts have repeatedly reached new highs. With the development of AI, several new electronic products have been released recently. For instance, Huawei's autumn product launch included the Huawei Smart Screen product V5Max110 and several other products like the Smart Boundary R7, indicating a strong demand for chips.
Lastly, chips have a very high correlation with the economy and continue to benefit from policy efforts. Reviewing past market trends, when policies are implemented, the market's main focus is often on the growth sector that is highly correlated with the economy in the pro-cyclical direction. Chips benefit from policy friendliness, and the market is highly elastic. For example, during the pro-cyclical bull markets of 2016-2017, 2020, and the significant pro-cyclical rebound in November 2022, chips were not absent.
Direction 2: Hong Kong stocks still have high configuration value
After a short-term sharp increase, the Hang Seng Technology Index has accumulated a lot of profit-taking positions, hence the decline this week to digest the profit-taking and complete the turnover. The average holding cost of investors continues to rise, and overall, it is a healthy trend in a bull market.
From a trend perspective, the Hang Seng Technology Index's rapid rise has broken through previous high points, and a pullback is also in line with the trend's evolution process. The current overheated sentiment has been somewhat alleviated, and the index's fluctuation range has gradually narrowed. Regardless of the policy, fundamentals, liquidity, or the market's own cycle perspective, it still has a high configuration value.
Looking at market liquidity, the overseas interest rate reduction cycle is likely to continue, and the external liquidity disturbance to the Hong Kong stock market is gradually decreasing, which is a major trend. From the latest employment data, the expectation of a recession has been disproven, confirming the direction of a soft landing, which is beneficial for risk assets. In addition, the current main pricing factors are the expectation of China's fiscal policy efforts and the expectation of a soft landing in the United States with a broad monetary policy. The risk of a sharp economic downturn overseas is not prominent for the time being, and it can be maintained under observation.
On the policy front, since the end of September, policy shifts have given rise to a "reassessment of confidence in Chinese assets," and the big curtain has just begun. To address the "debt-deflation cycle" trap faced by the Chinese economy, a series of measures have been introduced to boost the prices of equity assets, stabilize the real estate market, stimulate economic growth, and expand domestic consumption. These measures will continue to be implemented in response to subsequent situations.
From a fundamental perspective, in the first half of 2024, the Hang Seng Technology Index's operating income has continued to grow by 8.93% year-on-year, maintaining an improving trend. The cumulative net profit attributable to the parent company has passed the inflection point since 2022, showing signs of recovery, with a significant increase of 100.45% in the first half of 2024. The results of cost reduction and efficiency improvement are remarkable. The Hang Seng Technology Index, representing the technology sector, has significantly outperformed in terms of performance. From a micro perspective, the index component companies have many highlights, and their growth and vitality lay the foundation for subsequent performance improvements.Additionally, the Hang Seng Technology Index (PE: 25.97, PB: 2.79) remains undervalued compared to global tech stocks, suggesting a significant potential for valuation increase in the future. From a cyclical perspective, the Hong Kong stock market reached its bottom in late October 2022 and has since entered a period of horizontal consolidation. This cycle precedes the A-share market, with a more thorough turnover during the bottoming-out phase, indicating a higher probability of entering an upward cycle subsequently.
Currently, the first phase of the market, characterized by a general rise in valuations, is nearing its end. The second phase is likely to see structural differentiation around fundamentals and policies. As corrections occur, indices such as the Hang Seng Technology Index, which benefit from liquidity and fundamental strengths, are expected to attract more long-term capital driven by fundamentals.
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