Following the highly anticipated "Treasury Dad Press Conference" on Saturday, there has been a plethora of interpretations in the market. Among these, I believe that the commentary by Fu Peng, the Chief Economist at Northeast Securities, is quite impartial and insightful.
He pointed out that fiscal policy has a lengthy process and many concerns. The main message of the Treasury Dad Press Conference was to convey "trust us," demonstrating a positive attitude towards market communication. It also emphasized that what the state desires in the financial market is "stability" rather than "mania."
But will the market accept this message?
Yesterday, the A-share market made its stance clear.
The market bottomed out and rebounded, with the Shanghai Composite Index rising by 2.07% yesterday, and the ChiNext Index increasing by 2.6%. Over 5,000 stocks across the market were up, with a combined transaction volume of 1.635 trillion yuan in the Shanghai and Shenzhen stock markets, an increase of 63.2 billion yuan compared to the previous trading day.
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In this wave of market movement, trading volume is a very important observation indicator. Although the current market trading volume has declined, it remains above the high level of 1.5 billion, indicating that the willingness to trade among funds is still active.
Xingye Securities commented in its latest report that the recent sharp rises and falls are, to some extent, due to investors amplifying short-term market fluctuations under the influence of emotions.
The report pointed out that at this juncture, setting aside short-term psychological changes and emotional disturbances, understanding "why the market rises," "why it falls," and "how long the future market trend can last" are the keys to determining our subsequent judgments and investment decisions.
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Why did this round of market movement rise?Over the weekend, I took the opportunity to listen to a roadshow by the century-old fund Baillie Gifford. Sophie Earnshaw, the investment manager of the firm's China Growth Trust, shared their views on the recent trend in the Chinese stock market, which I believe can represent the mainstream perspective of overseas capital.
She mentioned that the Chinese stock market had experienced a consecutive three-year decline, a situation that was unprecedented. The rebound of Chinese assets this year is mainly based on three reasons.
First, the valuations were extremely low.
Before the rebound, the price-to-earnings ratio of the Chinese stock market was 9 times, almost one standard deviation lower than the average over the past 5 and 10 years, less than half of the valuation of the U.S. stock market, and below the levels of the MSCI Global and Emerging Markets.
Second, large companies are increasingly focusing on shareholder returns, and the government is also encouraging companies to repurchase shares.
Third, the government is gradually introducing policies to support the economy.
After the market rebound, Baillie Gifford remains optimistic about the performance of the Chinese market.
Sophie Earnshaw pointed out that over the past 20 years, China's economic growth has been synchronized with that of the United States, but the stock market performance has been different, because the U.S. market is more enthusiastic about share buybacks. However, this situation has begun to change, with Chinese companies also starting to repurchase shares and paying more attention to shareholder returns.
"China remains the place where growth companies are born," Sophie Earnshaw said, adding that the rebound so far has only been a valuation repair, and many excellent Chinese companies still have very attractive valuations, and their earnings growth also leaves room for further increases in stock prices.Why has it fallen again?
Xingye Securities believes that the answer lies in the fact that after a significant increase, there must be fluctuations, which is a result of human nature.
Referring to historical experience, each period of increase can generally be divided into three stages:
1) The first stage, when the market starts, will mostly go through a phase of rapid bottom repair;
2) The second stage, the market enters a consolidation period, under the dominance of short-term fear of heights, the market enters a phase of large fluctuations and large differentiation after a rapid rise;
3) The third stage, as investor confidence further establishes and the main line of the market gradually emerges, the market enters a window where the rate of increase is relatively flat, the duration is longer, and the profit effect is stronger.
"The significance of each fluctuation and consolidation lies in the fact that while digesting the previous increase and allowing the market's excitement to subside, it is more a process of allowing the market to straighten its thinking and gradually reveal the medium and long-term main line in the fluctuations, which is beneficial to the medium and long-term development of the market."
In other words, the biggest bearish factor of this wave of the market is "too much increase."
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Can the market continue?In fact, many funds believe that short-term market corrections are actually opportunities to increase positions. For instance, during last week's market turmoil, the inflow of foreign capital did not stop increasing its positions. EPFR fund data shows that foreign capital continued to flow into the Chinese market last week (October 3rd to October 9th). Among them, A-shares saw an inflow of $200 million in active foreign capital and $4.1 billion in passive funds; at the same time, Hong Kong stocks and ADRs saw a total inflow of $4.44 billion from overseas funds. Jeff deGraaf, co-founder and CEO of Renaissance Macro Research, even publicly expressed optimism about Chinese assets on Wall Street. "Doubt, valuation, stimulus, momentum, and trend changes (these favorable factors) appear simultaneously," Jeff deGraaf said, calling it one of the "best market environments" he has seen in his 35-year career. He expects the CSI 300 Index to reach 6,000 points within the next 12 months, which means it could rise by another 50%. Why are foreign investors willing to bet on China? Sophie Earnshaw from Baillie Gifford has a representative view. She pointed out that China is already the world's second-largest stock market, a size that cannot be ignored."Investing in China carries risks, but missing out on China also carries risks." Sophie Earnshaw points out that the current valuations of the Chinese stock market are very attractive, and the performance of excellent companies is also continuously growing. Once the Chinese economy returns to normal, the stock market will rise.
How to grasp the main thread of the market trend?
After clarifying the general direction, short-term fluctuations are not actually terrifying. So, how can we find the main thread for further development of the market trend?
In fact, from the interpretation of foreign capital, we can also find that "focusing on shareholder returns" and "performance growth" have always been the focus of foreign capital. They usually pay more attention to long-term value investment and have a higher preference for high dividend stocks. Therefore, the main thread of high dividends is still worth paying attention to.
Morgan Stanley stated that the 500 billion yuan swap facility was officially launched last week. It is expected that A-shares will benefit from this type of stable funding, so companies with good dividend rates and higher free cash flow are recommended.
Huatai Securities also pointed out that the return of foreign capital allocation to Chinese assets means that it is necessary to re-examine China's core assets under the global valuation framework.
"In terms of the relative cost-effectiveness of A-shares and H-shares, we maintain the view that H-shares are slightly better than A-shares." Huatai Securities said that, measured by the PB-ROE and PE-G frameworks of Chinese and overseas leaders, after the first phase of valuation repair, the overall cost-effectiveness of Chinese internet, real estate chain, dividend, and export chain leading enterprises is still prominent compared to overseas leading enterprises.
High dividend H-shares are also the vanguard of this round of market rebound.
We analyzed the H-share state-owned enterprise dividend ETF (code 513910, the code outside the venue is 021142.OF; 021143.OF) in September. (Related reading: Just staring at gold? The increase in H-shares has caught up with the Nasdaq!)The ETF tracks the CSI Hong Kong Stock Connect Central Enterprise Dividend (referred to as "Hong Kong Stock Connect Central Enterprise Dividend") Index, which has three characteristics: Hong Kong Stock Connect, central enterprises, and high dividend yield.
In this round of the market, the Hong Kong Stock Connect Central Enterprise Dividend ETF (513910) has significantly outperformed the market. The ETF started to strengthen on September 12th, and as of October 13th, in just one month, the cumulative increase has reached 29.25%, outperforming the Hang Seng Index (23.29%) during the same period.
According to Wind data, as of October 14th, the price-to-earnings ratio TTM of the Hong Kong Stock Connect Central Enterprise Dividend Index is only 6.04 times, the price-to-book ratio is even lower, at only 0.54 times, while the dividend yield has reached 6.53%. Since 2024, the total cash dividend has reached 503.364 billion yuan, making it a truly high dividend, low valuation asset.
Conclusion: How to stand unscathed on the boxing ring?
There is a passage in "The Turtle Trading Rules":
"Trading is not a race, but a boxing match. The market will swing an iron fist to hit you, doing its utmost to defeat you. To win, you must still be standing unscathed on the boxing ring when the bell rings at the end of the 12 rounds."
How to "stand unscathed on the boxing ring" during market turmoil?
In fact, low valuation dividend assets are the "protective gear" of our investment portfolio.
The characteristics of low valuation and relatively stable dividend income can reduce the volatility of the investment portfolio to a certain extent. It is both a protective umbrella in the downturn and is expected to become an accelerator in the rising market.Investing carries risks; entering the market requires caution.