This December marks the beginning of the final trading month of the year, signaling an exciting period for investors in the Chinese stock market. As trading opened on the first day of the month, both the Shanghai and Shenzhen stock exchanges experienced a notable rally, maintaining the upward momentum seen the previous Friday. The recent fluctuations and adjustments in the market have laid the groundwork for a second wave of market enthusiasm, driven primarily by a significant policy shift. Since late September, various government departments have rolled out a series of comprehensive measures aimed at stimulating investment, boosting consumption, stabilizing the real estate market, and revitalizing the stock market, resulting in a notable turnaround in market dynamics.
Following a substantial volume-driven climb in the market, it is clear that after three years of decline, many quality assets have dropped to levels that are perceived as undervalued. This has ignited a strong appetite among investors to buy into the market. The recent surge has created a strong profitability effect, luring both domestic and international funds. Over the past two months, there has been a significant influx of capital into the markets, with both the A-shares and Hong Kong stocks showing a promising recovery. This resurgence has instilled a renewed sense of confidence among market participants.
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The rally in the stock market has led to palpable wealth effects, particularly among the vast pool of 200 million A-share investors and 700 million fund investors in China. As these individuals experience newfound wealth, their consumption enthusiasm has noticeably increased, providing a positive boost to overall consumer spending. While some economists express concern over a potential market correction following an uptick, which could lead to losses for investors and hinder consumption growth, I maintain that at current levels around 3,000 to 3,300 points, the market is still historically low. If we consider the historical average price-to-earnings ratio of the CSI 300 Index, the corresponding index value should be approximately 4,000 points, indicating that the A-shares are still undervalued. A recovery back to historical valuation levels would significantly expand market capitalization, resulting in substantial profit effects that could further bolster consumer confidence and stimulate economic recovery.
Looking ahead, we are optimistic that the ongoing transformation of the economy, coupled with the development of new economic sectors, will enable China to uncover fresh growth avenues. This economic evolution will likely provide opportunities for listed companies to enhance their profitability, which could shift the focal point of the market upwards from the current lower-range holding patterns. A continuous upward trend in market focus would herald a slow but steady bull market, generating sustained wealth effects that are intrinsically linked to driving consumer spending.
As we analyze the current policy environment, it has become apparent that a shift has indeed occurred, with anticipation of further incremental policies set to be unveiled soon. Although the implementation of these policies may take time to manifest in tangible results, the objectives are clear: to rejuvenate economic activity, stabilize the real estate market, and invigorate the stock market. Experts are even now suggesting ambitious plans amounting to three separate ¥10 trillion initiatives: the first aims to localize debt, freeing up capital for regional governments to enhance investment efforts; the second focuses on distributing consumer subsidies directly to residents to spur spending; and the third seeks to establish evaluation funds to support the stock market. Currently, the first ¥10 trillion initiative has commenced, with a new debt quota of ¥6 trillion allocated to local governments, and we expect to witness its positive effects in the near future.
These developments would significantly augment the momentum of China's economic recovery and create lucrative opportunities in the capital market. Success in value investing hinges on recognizing broader trends rather than being fixated on short-term market fluctuations. At the end of each year, I issue ten predictions for the upcoming year. Last year, amidst prevalent market pessimism, I put forth ten forecasts for 2024, highlighting a clear pivot in policy direction, reinforcing support for economic growth, and gradually lifting restrictions in the real estate sector. I further anticipated increased financial support for real estate, a structural bull market for capital assets, and a large-scale migration of household savings which would channel fresh capital into the stock market.
Two months ago, many investors were skeptical of my forecasts regarding 2024, yet they are now witnessing most of these predictions materializing. With the Federal Reserve's noted decision on September 18 to cut rates by 50 basis points, followed by an additional 25 basis point reduction in November, it validated my outlook. The Fed is anticipated to announce another rate cut in December, which is likely to temper the previously strong dollar and facilitate the appreciation of other currencies, including the yuan. This month, I will also present my ten predictions for 2025, sharing them promptly with the public.
As the market stabilizes and transitions into a more favorable trading phase, the focus now shifts to overcoming any hesitation among investors and seizing opportunities in fundamentally sound stocks or high-quality funds that may have been overlooked. I greatly appreciate the ongoing support from investors. Starting today, for the upcoming two weeks, my team will initiate a secondary offering of the Qianhai Kaiyuan Shenzhen Special Economic Zone Selected Fund through Agricultural Bank. Committing to value investment and strategically positioning in quality stocks or funds represents a sound investment strategy. With clear policy objectives in place, we eagerly await the realization of more increment policies and their subsequent effectiveness. My hope is that through a commitment to value investing, investors will become stakeholders in great companies or acquire solid funds, optimizing their chances to participate in this bull market and achieve a substantial turnaround in their financial fortunes.
- 2024-09-07
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