Zhitong Special Offer | Plummeting? Don't panic! Three reasons why the market continues to be bullish in this round

The Hong Kong stock and A-share markets plummeted today. The reason for the decline was nothing more than concerns about the continuation of the stimulus policy and risk aversion due to uncertainty about whether the strength of subsequent policies would meet expectations.

In the author's opinion, similar situations seem familiar. In years such as 2016 and 2019, and even at some point in early 2009, a similar sharp rise in slope and subsequent market decline and sluggish sentiment were the same as today.

So the next question is, after the sharp drop, what will the market think in the future? In the author's opinion, the current pullback is a normal market adjustment. Next, there are three reasons to be more bullish.

1. The determination to actively promote policies has not changed

With the support of policies, economic fundamentals have improved, driving some stocks out of long-term trends. This is what we can look forward to in the next phase.

As far as the current round of market conditions is concerned, with October 8 as the boundary. From September 24 to October 8, the rapid influx of transactional capital became the index's one-sided strength. The overheated mood of short-term capital reached its peak on the first trading day after the long vacation. On October 8, the net inflow of financing capital reached 107.5 billion dollars, accounting for close to 12%. The net inflow of individual investors estimated by small orders was 110 billion dollars. When the risk of overheating “began to show signs”, industry figures guided the market to cool down in due course, marking the stage of market transformation..

Currently, investors' attention to policy is mainly focused on fiscal policy. However, financial concerns or specific manifestations are in three aspects: First, what is the central government's intention to increase leverage? This was answered affirmatively at the Ministry of Finance press conference on October 12 — “The central government still has more room to borrow money and raise the deficit”;

Second, how are short, medium- and long-term financial mechanisms deployed? The press conference focused on long-term mechanisms. It is proposed to increase support for localized bonds and issue special treasury bonds to support major state-owned banks to supplement core tier 1 capital; in terms of short-term measures such as “filling the gap” in fiscal expenditure during the year, the press conference mentioned that “China's finance is resilient enough. By adopting comprehensive measures, it is possible to achieve balance of income and expenditure and achieve this year's budget target”;

The third point is how is the investment structure of fiscal expenditure? The press conference focused on debt, real estate collection and storage, and some livelihood arrangements (higher education, etc.), while potential deployments in the consumer sector (childbirth/low-income groups, etc.), which other investors are more concerned about, require further policy observation.

Overall, the Ministry of Finance's press conference on October 12 confirmed the determination of the Ministry of Finance to be active. As far as policy rules are concerned, the NPC Standing Committee meeting to be held in late October or early November needs to be further closely followed. If fiscal, monetary, and real estate policies can form a strong linkage, credit can be expected to stabilize, and the center of market turbulence is expected to rise upward.

2 The trend of China's industry being deeply integrated into the global economy has not changed

In the medium term, there are still trading opportunities based on the decline in the global interest rate center and the recovery of the global economy.

First, although expectations of interest rate cuts were drastically lowered due to the sharp rise in US non-farm payrolls data in September, current CME interest rate futures prices show that there was still a 25 bp drop in November, while the probability of a 25 bp drop in December is roughly half. Thus, it is indicated that by the end of this year, US interest rates will drop at least another 50 basis points.

Therefore, the certainty of interest rate cuts will still support interest rate sensitive sectors. As far as Hong Kong stocks are concerned, they are mainly in the pharmaceutical sector, the Internet of Technology, and the real estate sector.

The second is boom trading, which is a transaction based on the performance of a listed company. November is about to enter the third quarter performance period for Hong Kong stocks. Investors are focusing on China's G-side and overseas B-side transactions, benefiting not only from equipment upgrades or new infrastructure investments, but also from rising external demand. Among them, the upward trend in construction machinery/industrial control automation/power grid equipment/optical communication boom is prominent.

Specifically, demand for the global copper cable business has skyrocketed due to the growth of data center business driven by the wave of AI and artificial intelligence overseas. Meanwhile, the leading company in the copper cable sector is A-shares in China, called “Shenyu Shares,” and its stock price has increased 9 times since the beginning of the year. A perfectly proper big bull stock. This is a typical success story of Chinese industrial chain shares benefiting from “overseas B”.

However, as an investor, you can find such niche and high-quality targets by rejecting people and patiently and carefully exploring stocks and investment opportunities.

3. The trend of credit recovery and domestic economic upgrading has not changed

After the high-slope valuation repair is completed, the direction in which the market fluctuates depends on whether the credit cycle can shift from a downward trend to a stable stage, driven by a combination of policies. For example, in the spring market turbulence in early 2019, there is a phenomenon of “broad currency and tight credit” that is very similar to the current one. Furthermore, after the stock market peaked partially in April, trade disputes in May led to a decline in the market.

But then, the extended credit cycle began. The improvement in the credit cycle was driven by monetary policy, real estate policy, and fiscal policy, which led to an improvement in economic fundamentals and a recovery in consumption. As a result, market conditions were relayed in July.

Since the “9/24” policy package and the “9/26” Politburo meeting, the deployment of monetary and real estate policies has gradually been implemented and has entered the stage of verifying the effectiveness of the policy. Investors' confidence and sentiment have clearly picked up due to recent statements from the central bank and the Ministry of Finance; in addition, some types of real estate chains, such as home appliances and home furnishings, have shown signs of stabilizing domestic demand under the influence of the previous policy (trade-in). If the credit cycle and high-frequency real estate data show a clear recovery trend thereafter, the real estate chain and domestic demand consumption may have an opportunity to reassess risk premiums.

4 Summary

If we calculate from the point in time when the Federal Reserve cut interest rates on September 18, then to the highest point before October 8 (A shares opened on October 8), the Hang Seng Index rose 32.6%, the Hang Seng Technology Index rose 52.3%, the Shanghai Composite Index rose 28.9%, the Shenzhen Securities Index rose 44.1%, and the GEM Index soared 66.3%.

Accumulating such huge gains in half a month also meant accumulating huge profit margins. Well, once there is a bit of hustle and bustle, it is quite normal for a profit board to choose a settlement. So even though it's a pullback, it makes sense.

The development of the market has always been like two aspects of contradiction. The initial excitement will inevitably evolve into a phased downturn, and in the midst of sluggishness and doubt, new opportunities are nurtured. As an investor, the most important thing now is to understand that the determination to further strengthen the policy has not changed, the pattern of China's deep integration into the global industrial chain has not changed, and the trend of credit recovery and improvement in economic fundamentals has not changed. Based on these factors, future market conditions can still be expected. We might as well have more confidence in the Chinese stock market.