This week, China's A-share market has displayed a trend of oscillating rebound, demonstrating remarkable activity with trading volumes consistently around 1.5 trillion yuan. Although this figure represents a 50% decrease from previous highs, it still exceeds two times the volumes observed two months ago. Back then, when the market was languishing, daily trading volumes fell below 500 billion yuan. The current sustained high volumes indicate a robust willingness among investors to engage in transactions, reflecting a better profit-making capacity compared to the period before the market's reversal.
The underlying logic propelling this market upturn has not fundamentally changed. A shift in policy indicates that more measures to stabilize economic growth will gradually come into effect, in line with targets set out during the September 26 Politburo meeting. The aim is to achieve the social and economic development goals established at the beginning of the year, including reaching a GDP growth of around 5%. Furthermore, in 2024, it is anticipated that counter-cyclical adjustment policies will be further intensified, fostering a sustained recovery in the economy and potentially providing significant encouragement for market confidence.
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The first wave of market advancement has been primarily driven by a long-suppressed enthusiasm for buying. This has led to a dramatic surge in trading activity until October 8, when market sentiment peaked, resulting in a subsequent period of fluctuation. Currently, we find ourselves in the adjustment phase following this substantial increase, suggesting that the market may be gearing up for a second wave of momentum. As we near the close of 2024's trading calendar, the yearly trend has reflected a pattern of suppression followed by recovery, supporting the forecasts I articulated at the end of last year.
On a global scale, the Federal Reserve commenced its interest rate cutting cycle on September 18, having already enacted two rate reductions. Expectations are building around another anticipated 25 basis point cut during the December meeting, based on recent minutes from the Fed's November discussions. My earlier predictions explicitly stated that the Federal Reserve would conclude its interest rate hiking phase this year, transitioning toward a lowering cycle. This shift is poised to influence global capital markets and currency valuations, with monetary policy expected to become more accommodative in order to support economic revival.
Moreover, the People's Bank of China, under the leadership of Governor Pan Gongsheng, has indicated public support for the economic recovery through potential rate cuts before the year concludes. Even though the November Loan Prime Rate (LPR) remained unchanged, indicative of a cautious market stance, there remains potential for further reductions down the line. The previous cuts of 25 basis points for both one-year and five-year LPRs on October 1 were substantial, necessitating a period of observation for the impact those adjustments will have on the marketplace.
In my previous forecasts, I highlighted a significant trend: following the policy shift, a mass movement of household savings toward capital markets would infuse new capital into the stock arena. This phenomenon has become increasingly apparent over the past two months, with numerous banks' transfers indicating a growing influx of cash from savings into investments. Investors are actively creating new accounts, demonstrating that stockholders are re-engaging, while mutual fund investors are somewhat lagging. Typically, mutual fund investors are more attuned to short-term market movements; thus, sustained upward momentum in the market, compounded with stronger profit-making capacity, could stimulate more direct engagement among these investors.
This anticipated behavior is crucial, especially as many mutual funds are still recovering from declines experienced over the past three years. To catalyze such recovery, a subsequent market push to reinforce those gains is necessary. The superior experiences that investors could gain during this phase may hasten their commitment to equity investments, heralding a robust return that could propel the market out of its current oscillatory state into a burgeoning bull market.
In the 2024 forecasts, I also discussed a forthcoming structural bull market following the policy shift. There will be increased correlation between A-shares and Hong Kong stocks, which could attract more both foreign and domestic investments into the market. This trend has recently become notable, with Hong Kong stocks experiencing volatility after an initial surge but still possessing considerable room for valuation improvement. Comparatively, A-shares and Hong Kong stocks continue to operate at relatively low valuation levels, especially in contrast to historic benchmarks, providing a conducive atmosphere for further recovery and appreciation.
On an international front, the recent rhetoric from political leaders, particularly regarding tariff increases on trading partners, could present complexities for the market. The intentions to impose a 25% tax on exports from Canada and Mexico, alongside an additional 10% tax on exports from China, received some media attention. However, these figures pale in comparison to the 60% tariffs proposed during previous election campaigns, suggesting that immediate impact on markets will be minimal. Nonetheless, imposing such tariffs on goods may disrupt the already intricate web of international trade relations, and could trigger retaliation, increase inflationary pressures, and exacerbate economic burdens on American households.
Even though external factors may influence short-term market fluctuations, the overarching logic driving this ongoing bull market and long-term recovery remains intact. As a result, it is prudent for investors to maintain a focus on value-driven investment strategies. Currently, with the market still positioned at relatively low levels, it presents an opportune moment to strategically allocate capital into quality stocks or reputable funds, and patiently await the inevitable valuation recovery that is likely to herald significant new wealth generation.
- 2024-09-01
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