Stock market strategy: What's next?

by SIG

The Chinese stock market (Shanghai and Shenzhen) suddenly gained momentum from the end of September, experiencing a rapid surge, setting new records in trading volume, price gains, and turnover rates that had not been seen in many years:

So, based on the current standpoint, how will the future trend of the A-shares market be?

To judge the future trend of the A-shares market, we should first briefly understand the reasons behind the sudden "mini-bull market" in the A-shares this time:

first, The decision-makers now have a relatively unified view on the current economic situation in China: The current economic situation in China is worrying, and the "chill" has reached the highest bureau. Against the backdrop of sluggish global economic recovery and insufficient domestic consumer demand, the decision-makers have realized that the economic conditions are much worse than publicly proclaimed. The downward pressure on the domestic economy has been gradually increasing, and major economic indicators such as industry, investment, and consumption have seen significant fluctuations since the third quarter, urgently needing effective measures to rescue the economy.

In this broader context, the Chinese government has quietly changed the wording in official documents from "resolutely completing" to "strive to complete" [economic targets]:

This clearly indicates that China's stance on achieving the GDP growth target of around 5% has weakened, implying that the general expectation is that this year's target will be difficult to achieve. This tone-setting comes directly from the highest level, intended to signal to the departments responsible for actual policy formulation and the market that a loosening of policies is needed.

Secondly, in terms of specific macroeconomic policies, the People's Bank of China has rolled out monetary policy measures at a very fast pace, including both interest rate cuts and reserve requirement ratio (RRR) reductions:

On September 27th, the People's Bank of China issued an announcement on open market operations, lowering the 7-day reverse repo operation interest rate by 0.2 percentage points, from the previous 1.7% to 1.5%. At the same time, the central bank decided to reduce the deposit reserve requirement ratio for financial institutions by 0.5 percentage points (excluding those already implementing a 5% deposit reserve requirement) starting from September 27th, 2024.

The simultaneous interest rate cut and RRR reduction have provided the market with ample liquidity, laying the foundation for the A-share rally.

Thirdly, the rollout of fiscal policy measures has been relatively slower, but continues to be ramped up:

On October 8th, after working overtime during the recent national holiday, the National Development and Reform Commission (NDRC) held a press conference and announced a series of fiscal measures: strengthening the countercyclical adjustment of macroeconomic policies, expanding domestic effective demand, increasing support and assistance for enterprises, stabilizing the real estate market, and boosting the capital market, among others.

However, the October 8th press conference fell short of market expectations, and the stock market showed signs of a corresponding decline. Likely aware that the NDRC's press conference did not achieve the desired effect, the decision-makers hastily announced that another press conference led by the Ministry of Finance will be held on Saturday (October 12th), where a series of fiscal policy measures will be announced.

So, what was the ignition point for this latest A-share rally, given the foundation of liquidity and policy expectations? It was the statement made by the People's Bank of China on September 24th. Some netizens jokingly referred to this as the "central bank directly joining the stock market frenzy":

On September 24th, the People's Bank of China announced the creation of two new structural monetary policy tools:

"The first one is to establish a securities, fund, and insurance company swap facility, supporting eligible securities, fund, and insurance companies in obtaining liquidity from the central bank through asset pledging.

The second one is to create a special relending facility for stock repurchases and additional purchases, guiding banks to provide loans to listed companies and major shareholders to support stock repurchases and additional purchases."

This is the maximum supportive measure that the central bank can take for the A-share market within the scope of the People's Bank of China Law. In a slightly loose summary, this means that the central bank is directly injecting liquidity into the A-share market. People's Bank of China Governor Pan Gongsheng revealed that they can set up at least three 500 billion yuan facilities, and this 1.5 trillion yuan can only be invested in stocks, which is very different from previous practices.

With the central bank's endorsement, the A-share market saw a 4.15% (Shanghai Composite Index) surge on September 24th, kicking off this latest mini-bull market.

So, will the A-share market see a true bull market? It's quite difficult.

A bull market requires the coordination of several factors: strong economic growth, good corporate profitability and growth prospects, the coordination of government monetary and fiscal policies, the restoration of investor confidence and market sentiment, and the easing of external market pressures (such as a U.S. dollar interest rate cut cycle), and so on.

Most of these conditions are not optimistic, and the market performance of the A-shares on the 11th even indicated that the market's expectations for the Ministry of Finance's press conference on the 12th are not high.

Because this latest bull run is essentially just a "mini-bull market" driven purely by liquidity, the rapid rise will bring bubble risks and can also trigger irrational behavior from investors, exacerbating market volatility. If the earnings outlook and economic fundamentals of companies do not keep up, it is very likely to lead to a major correction.

The best case scenario is that the decision-makers gradually control the market sentiment, on the one hand, continuously using positive policies to stimulate the market, emphasizing that the return to solid economic fundamentals takes time, and on the other hand, able to get positive feedback from the listed companies, with their profitability truly improving, to stabilize market expectations. At the same time, guide incremental funds to continue flowing in, using the incremental funds and improved corporate earnings to absorb the current market rally.

The above was discussing the best-case scenario.

Specifically, regarding the future trend of the A-share market, it is predicted that in the case of a lack of new incremental funds, the market index has already reached a high point, and there is not much room for further upside. Subsequently, there may be rotational increases and decreases among different sectors. The probability of the various indices going down or remaining flat is higher than going up.

For retail investors, if you have not entered the market yet, it is advised not to consider doing so now. If you have already entered and are unwilling to exit, you can consider reducing your position size, controlling your stock portfolio, and removing any leverage. The most important thing is: do not use your daily living expenses to speculate in the stock market.

For fund investors, you may want to consider gradually redeeming your holdings. Because for the foreseeable future, there may not be such good opportunities to recoup your investment again.

There is a historical fact to keep in mind: The first half of 2015 saw a frenetic bull market, but from January 1 to June 30, 2015, the returns of all equity funds were lower than those of Yu'e Bao (a popular money market fund) over the same period.

Risk reminder: Fiscal policy falling short of expectations, low efficiency in policy implementation.

Neo Zion 513

2024年10月12日星期六

Stock market strategy: What's next?

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