On the penultimate trading day of 2023, the A-share market in China saw a significant volume increase and a rise in stock prices. Data from the closing on December 28th showed that the Shanghai Composite Index rose by 1.38%, closing at 2,954 points. The Shenzhen Component Index increased by 2.71%, the ChiNext Index surged by 3.85%, and the Beijing Stock Exchange 50 Index went up by 2.68%. In terms of industry sectors, power equipment, beauty and personal care, and food and beverage led the gains, while the coal sector declined. Core assets represented by new energy and baijiu (Chinese liquor) collectively strengthened, and the net purchase by northbound capital reached 13.5 billion yuan in a single day.
The Hong Kong stock market also witnessed a rebound, with the Hang Seng Index rising by 2.52% and the Hang Seng Tech Index increasing by 3.41%. The concept indices of baijiu, automobiles, and internet medical services saw gains exceeding 6%.
This rebound was like a "timely rain after a long drought" for Chinese stock market investors. According to an analysis by Bosera Fund, the significant upward movement of A-shares was mainly influenced by three factors: after the previous adjustments, the bottom characteristics of A-shares are quite evident, offering a high cost-performance ratio; the profit data of large-scale industrial enterprises continued to rebound in November; and the China Securities Regulatory Commission (CSRC) stated that it would strictly crack down on violations of the "restricted shares may not be shorted" rule.
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"These factors have, to some extent, boosted market confidence and catalyzed the market's upward movement. In addition, the significant net inflow of northbound capital today, exceeding 10 billion yuan, set a new high since August, which also had a certain uplifting effect on market sentiment," Bosera Fund believes.
In fact, institutional investors are quite optimistic about the trend of the Chinese stock market in 2024. Not long ago, Wang Hongyuan, the lifetime consultant of Qianhai Open Source Fund, stated that both the Hong Kong and A-share markets have bottomed out.
Li Bei, the founder of Banxia Investment, believes that the reason for the poor market performance previously was due to the year-end portfolio adjustments by institutional investors, including insurance companies, foreign capital, and public funds. She previously anticipated that a new round of asset allocation would begin at the start of the year, and the beginning of 2024 will be a very important turning point.
"Mean reversion is the most fundamental principle of financial markets," said Hong Hao, Chief Economist at Si Rui Group. The recent strengthening of the Chinese yuan exchange rate is a "good omen." "More people are buying yuan, which to some extent also reflects that the direction of capital flows is likely changing."
Has the market bottomed out?
This year, the inflow and outflow of overseas capital have been highly scrutinized by the market. At the 2023 Snowball Carnival held recently, Hong Hao stated that overseas capital is a marginal price setter, but in reality, foreign investors have many misunderstandings about China and have made many misjudgments. "For example, under the local governments, there is a vast state-owned enterprise system that is actually not included in the fiscal surface budget, and some policy banks are also not included in the monetary system. Foreign capital has many areas of misunderstanding about the domestic market, and we should be confident."At the 2023 China Wealth Management 50 Forum, Chen Xiaosheng, Chairman of Shenwan Lingxin Fund, described the Chinese market in 2024 as "the elephant lowering its ears," while the U.S. market in 2024 is "the elephant pricking up its ears."
Chen Xiaosheng explained: "When 'the elephant lowers its ears,' it signifies that it is very relaxed and extremely friendly." He believes that "three main factors are driving the improvement of the Chinese market: First, real estate investment in China is an important variable affecting the macroeconomy, and there is still a lot of room for urbanization, with the permanent population only around 65%; Second, the central government is very determined to leverage, and the attitude shown at the Central Economic Work Conference is to solve problems, and the speed of solving them has been greatly accelerated compared to before; Third, the digital economy represented by intelligence and the green economy represented by new energy and low carbon will drive positive investment in China's manufacturing industry."
Chen Xiaosheng believes that the U.S. market "pricking up its ears" and becoming nervous is mainly due to two reasons: First, the excess savings in the U.S. will basically be used up at the beginning of 2024, forming a very important constraint. The U.S. election, the game between the two parties, will further squeeze fiscal policy; Second, the bad debt rate of U.S. residents, which was covered by excess savings, is increasing, and in 2024 and 2025, U.S. companies will face high debt repayment pressure and profit pressure.
Nie Qingping, former chairman of China Securities Finance Corporation, also compared the Chinese and U.S. stock markets and warned of the risks of the U.S. stock market. "The U.S. and the West are mainly in a leverage cycle, which means that the implicit risks in the economy can explode at any time. In 2024, it is necessary to focus on short-term fixed interest rate assets and reduce investment in stocks. Especially in the U.S. market, there is a serious interest rate mismatch and asset mismatch, including currency mismatch, and the potential risk of dollar exchange loss and stock market risk needs to be carefully guarded against."
Where are the opportunities in 2024?
Nie Qingping believes that there is a serious mismatch between the valuation and market value of component stocks in the Chinese stock market. "The Shanghai-Shenzhen 300 accounts for 70% of the total market value of the stock market, but the valuation of this part is now between 5 and 6 times, with very few stocks at 10 times, and the average is around 7 or 8 times. However, its return on equity is basically around 5%, and there is no long-term capital, no large capital to invest in this part."
"Since we are optimistic about China's growth, theoretically, its valuation should be doubled to the same level as the U.S. The U.S. has already reached a price-earnings ratio of more than 25 times, and Chinese blue-chip stocks don't have to reach 20 times, as long as they reach 17 or 18 times, the Chinese stock index is a very worthwhile investment direction," said Nie Qingping.
"The entry of long-term incremental funds into the market is the important driving force for the bottom reversal of A-shares," said the Li Lifeng team of Huaxi Strategy. "Patient capital," including social security funds, basic pension insurance funds, annuity funds, insurance funds, and other institutional professional funds, is the long-term capital that can play a role in "stabilizing and leading the capital market."
Looking forward to the future, the Li Lifeng team believes that after the overshoot of A-shares, there is hope for a short-term stabilization, and the overshoot sectors will rebound first within the year. Subsequently, with the acceleration of chip rotation, the market bottom will be more solid. The space for this round of overshoot rebound in the market depends on three aspects of policy guidance: First, pay attention to the possibility of the central bank's interest rate cut in January 2024; Second, pay attention to the effect of the relaxation of real estate policies in first-tier cities; Third, in addition to fiscal, monetary, and real estate policies, it is also necessary to pay attention to the implementation of non-economic policies.
Tang Hujun, Chief Quantitative Investment Officer of Ping An Wealth Management, believes that there are both opportunities and risks in 2024. He explained: "From the current situation, the Russia-Ukraine conflict has not been resolved, the Israeli-Palestinian conflict and the Middle East situation have also begun to be turbulent, and the Federal Reserve is transitioning from a rate hike cycle to a rate cut cycle. There will be a lot of uncertainty in this process, but the impact on these developed market countries will be greater than the impact on our domestic market."Huatai Asset's Deputy General Manager Wan Huiyong stated that, from the perspective of equity investment, high dividend assets are increasingly gaining attention. "Data shows that from 2010 to the present, in the A-share market, there are indices such as the CSI Dividend, SSE Dividend, and Low Volatility, and the average annualized return of the total return index has been 10%." He believes that encouraging companies to increase dividends and the payout ratio of dividends will bring significant benefits to such assets.
In terms of direction, Peng Kun, General Manager of China Post Wealth Management, suggests that reasonably adjusted value stocks, and sectors such as technology, digital, artificial intelligence, and manufacturing that are vigorously promoted by the central government for high-quality development, will have more opportunities in 2024.
Huaxia Fund analysis indicates that since 2021, the issuance of new funds has declined, and the increase in foreign capital has been insufficient. In the context of market stock game, the small and medium-cap style has been relatively more advantageous. "There is a certain correlation between macro liquidity and the style of large and small caps. When the margin of macro residual liquidity falls, the market style that favors small caps may switch."
Looking at the investment style, the changes in growth and value styles are mainly influenced by the changes in residual liquidity. Generally speaking, the expansion of residual liquidity will lead to the expansion of the relative returns of growth.
Huaxia Fund believes that in the A-share market in 2024, there is not an environment where growth and value styles can dominate significantly, but it may be a pattern where growth has a slight advantage, and the effectiveness of prosperity investment will rebound. Based on the above judgment, in terms of style strategy, a balanced micro-cap strategy is considered, with a positive outlook for the growth of science and innovation.