At the start of 2024, the A-share market has underperformed expectations. On January 8th, the A-share market once again fell below the 2900-point mark, approaching the low of 2882 points since 2023, and market sentiment also plummeted to an all-time low.
On January 8th, major A-share indices saw a significant decline. The Shanghai Composite Index broke through the 2900-point level, with a drop of 1.42%; the Shenzhen Component Index fell by 1.85%, and the ChiNext Index declined by 1.76%.
Guotai Junan Securities stated that the current market sentiment is relatively low, and the overall operational difficulty of the market is relatively high, with short positions pushing in the opposite direction, and it is appropriate to lower expectations in the short term.
Despite external factors such as expectations of interest rate cuts in the United States, internally, since the second half of 2023, real estate, currency, and credit have all been significantly stimulated, and the regulatory authorities have introduced a series of policies that are beneficial to A-shares. Various economic data also indicate that China's economy is recovering steadily.
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Overall, there is no shortage of positive news for A-shares, but why has the performance always been less than satisfactory? "The key issue is confidence and expectations," said Meng Lei, China Equity Strategy Analyst at UBS Securities.
Over 90% of individual stocks fell.
On January 8th, the Shanghai Composite Index opened with a gap and then fluctuated all the way. By the close, the Shanghai Composite Index reported at 2887.54 points, down 1.42%, and the Shenzhen Component Index reported at 8947.72 points, down 1.85%. The turnover in both markets shrank, with a total turnover of 657.6 billion yuan. In addition, the ChiNext Index fell by 1.76%, and the CSI 300 fell by 1.29%.
According to data from Choice Data, on January 8th, there were only 380 rising individual stocks, while the number of falling individual stocks reached 4786, accounting for 92% of all A-shares.
In terms of sectors, the tourism sector was active, with Changbai Mountain and Dalian Sun Asia successively hitting the daily limit for several trading days stimulated by the surge in tourism in Harbin. However, most industry sectors saw declines, with semiconductors, black home appliances, and military electronics leading the way, with declines all exceeding 3%.On that day, Northbound capital showed a net outflow. The total net outflow was 2.31 billion yuan, of which Shanghai-Shenzhen Stock Connect had a net outflow of 136 million yuan, and Shenzhen Stock Connect had a net outflow of 2.174 billion yuan.
Regarding the reason for the decline in A-shares, Xia Fengguang, the fund manager of Rongzhi Investment, said that externally, the capital was tight, and after the New Year, the RMB exchange rate weakened again, leading to a sell-off in the pharmaceutical and growth stocks that are highly sensitive to the capital situation. Internally, the economic data for December 2023 was still not very optimistic, and the expectation for the cross-year market faded as some indices such as the STAR 50 hit new lows, with the sentiment showing an atmosphere of panic.
Chen Xingwen, the Chief Investment Executive Officer of Heqi Capital, believes there are mainly three reasons. First, the continuous interest rate hikes in the United States and the interest rate cuts in China have led to capital outflows. Second, the redemption and portfolio adjustment of domestic institutions. After two years of "continuous rain," the recent pressure on fund redemptions is huge, and the risk exposure is being continuously released, so it is inevitable to encounter a sluggish market; in addition, many fund managers have been replaced at the beginning of the year, and the newly appointed fund managers are also choosing to sell existing stocks, favoring low positions or empty positions to wait and see until the market warms up. Third, the lack of market confidence. "A market with a stock game will form a continuous and meaningless internal volume, which will wear down the patience of strategic funds, and the entire market lacks the continuous incremental capital entry led by the national team," Chen Xingwen said to Caijing.
The Northern 50 index lost 1000 points.
In the recent wave of fluctuations and adjustments in A-shares, the secondary market of the Beijing Stock Exchange, which had been performing well in a "seesaw" effect with the Shanghai and Shenzhen stock exchanges, especially the Northern 50 index, also found it difficult to stand alone.
On January 8, the Northern 50 index lost 1000 points, closing at 999.77 points, down 4.75%, with a total trading volume of about 968 million shares and a transaction amount of about 12.87 billion yuan. On that day, only Kungong Technology and Haiti New Energy were up among the constituent stocks, while Hengjin Induction, Tonghui Electronics, Minshida, and five other stocks fell by more than 9%.
In the recent wave of declines, the Northern 50 index fell from above 1100 points to below 1000 points.
So far in 2024, in the five trading days, the Northern 50 index only rose on January 2, when the Northern 50 closed at 1105.21 points, up 2.08%. Since then, it has fallen for three consecutive trading days (January 3-5), with declines of 0.41%, 0.64%, and 4.02% respectively. On January 8, the Northern 50 continued to decline, closing at 999.77 points.From an overall perspective of the Beijing Stock Exchange (BSE) market, during the first week of 2024, both the trading volume and turnover of the secondary market on the BSE experienced a decline compared to the previous week.
According to data from the BSE's official website, from January 2nd to 5th, 2024, the market trading volume was approximately 5.83 billion shares, with a transaction amount of about 7.713 billion yuan, which is a decrease of 13.65% and 10.99% respectively compared to the previous week.
"The recent decline in the BSE is a correction and accumulation of momentum," said Yu Wei, an expert from the Economic Development Working Committee of the China Xiaokang Society Construction Research Association, to Caijing Magazine.
"The (Beijing Stock Exchange 50) index may test the benchmark level of 1,000 points again in January 2024, and may even fall below 1,000 points for a short period," said Zhou Yunnan, the founder of Beijing Nanshan Investment.
However, Zhou Yunnan also mentioned that it is expected that the Beijing Stock Exchange 50 index will still maintain an overall trend of wave-like upward movement.
The industry believes that, in the long term, against the backdrop of high-quality construction of the BSE, the BSE market still has significant investment value.
Yu Wei believes that three major logics can support the BSE to achieve a medium to long-term "BSE Bull": First, the high-quality construction of the BSE has established the main tone of vigorously developing the BSE; second, the simultaneous effort on both investment and financing sides allows high-quality enterprises and capital to be effectively allocated on the BSE; third, the significantly increased trading activity has given the BSE a good profit effect, which can further attract investment funds to enter the market.
Why the continuous decline?
Although affected by the expectation of interest rate hikes in the United States, overall, China's economy is stabilizing, and there are no shortage of positive news for A-shares. Why is the stock trend not satisfactory? Meng Lei, a China equity strategist at UBS Securities, believes that the issue lies in confidence and expectations.
Zhang Xiaodong, the fund manager of Gecko Capital, also believes that the main reason is the weakness of confidence. The reason for the weak confidence is, on one hand, the economic growth shows a slow recovery trend, but there is no acceleration; on the other hand, the current A-share market is adjusting downwards, and the confidence of traders is declining.Investors' inability to make money in the market is the most important reason for the lack of confidence.
"Often, it is the majority of investors' confidence and the self-reinforcing indicator of stock prices. Over the past two years, equity funds have significantly underperformed the Wind All-A Index. It is because of losses that there is no confidence. Because there is no confidence, people will look for all kinds of so-called fundamental explanations," said Meng Lei.
In the past few years, it was "better to trade funds than stocks," but now it has become "better to trade stocks than funds." Institutional investors also have a significant impact on market confidence.
"In fact, 2023 is an 'institutional bear market,' but it is not a poor performance of the overall A-share market. Since 2010, it can be seen that the performance of public funds has been very good. In 2023, the median performance of the top 100 institutions significantly underperformed the median of A-shares. In fact, 50% of A-shares in 2023 even rose, not fell, but the stocks that fell were those with heavy institutional holdings and large index weights. This also explains why many investors, especially our mainstream institutional investors, lack confidence because they haven't made money," said Meng Lei.
How can such a cycle be broken? In Meng Lei's view, on the one hand, corporate profits and policy efforts can help break this cycle; on the other hand, the problem of insufficient confidence needs to be addressed.
"The fundamentals have already begun to recover, and other asset classes reflect positive situations, but the stock market has some mispricing, and it needs more time," said Meng Lei, who expressed a positive and optimistic view of the A-share market by UBS.
There is no need to be too pessimistic about the future market.
Xia Fengguang believes that the market is at the end of a bear market. On the one hand, it is necessary to strengthen the confidence in holding stocks, and on the other hand, it is necessary to avoid the destructive power of extreme distortions in sentiment. Whenever there is a sharp decline driven by sentiment, it is often a characteristic of a short-term bottom.
"We believe that current short-term disturbances do not change the long-term situation, and the accumulation of extreme valuations and positive factors does not warrant too much pessimism about future performance," said Li Qiusu, Chief Analyst of Domestic Strategy at the Research Department of CICC.
Li Qiusu's team believes that the market's allocation opportunities in 2024 are expected to be better than in 2023, and it is recommended to focus on the combination of rising prosperity and defensive assets of dividend assets in the next 3 to 6 months.From the perspective of investor confidence, the team believes that looking ahead, there is still room for confidence to continue to be repaired under the conditions of extreme valuations, low trading sentiment, and the gradual accumulation of positive factors.
"The market is waiting for positive signals to emerge, and in the long run, the worst may be over," said Zhang Xiaodong.
Chen Xingwen also stated that there is no need to panic now, as a rebound could rise at any time. "The bottoming period requires some time to wait patiently. Maintaining patience is crucial. Opportunities in the stock market are created by declines; the more it falls, the closer it is to the bottom."
Opportunities arise with declines. "A-share has seen a large number of individual stocks breaking through net asset value. Currently, the valuation benchmark of the A-share CSI 300 is continuously declining, and many high dividend funds are continuously flowing in to bottom-fish, indicating that large funds have an optimistic expectation for the future," said Chen Xingwen.
"Market corrections provide a good opportunity for layout," Chen Guo, Chief Strategy Officer of CITIC Securities, believes that the broad-based index has fully reflected all kinds of pessimistic expectations in the current market, and the risk of further significant declines in the market is limited. At the same time, long-term key indicators such as implied risk premium and the ratio of stocks to bonds all indicate that the bottom signal of A-shares has already appeared.
Chen Guo also mentioned that cheap valuations alone are not enough to support a rapid market recovery; the repair of corporate profitability and the improvement of market incremental funds are equally important. Policy signals for the stability of the real estate market and the elimination of deflation expectations are indispensable, and further policy reforms in the capital market can still have a base effect.
CITIC Securities believes that mid-January is a key moment. With the landing of economic data and geopolitical disturbances, policies will continue to intensify, and it is expected that out-of-market configuration funds will gradually enter, and the market will usher in an important turning point.
In terms of capital, the industry predicts that northbound funds are expected to return to net inflows in 2024.
CITIC Securities cited data showing that since 2023, influenced by changes in the pace of the Federal Reserve's monetary policy and expectations, as well as market revisions to expectations and reality of China's economic growth rate, foreign capital in A-shares has shown a front-high, back-low trend. In 2023, the cumulative net inflow of northbound funds within the year was 43.7 billion yuan, which is a relatively low level compared to the same period in previous years.
"Looking forward to 2024, the core variables affecting the direction of northbound capital flows will shift, which is expected to drive the return of northbound funds to net inflows, becoming an important incremental fund for the A-share market," said Zhang Xia, Chief Strategy Analyst at CITIC Securities.