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Financial Index Weekly Report 2019/2/25

Fang submitted 2019-02-25 13:44:26

Market Summary:

Last week, there was generally increase over the market. SSE Composite Index (000001.SH) changed 4.54 % to 2804.23. Specifically, small cap shares perform much better than large cap shares and we can observe that CSI500 did better than SSE50 (6.10% vs 4.20%).

As for the overall market valuations, they remain at low level in a longer historical view.

As for Credit spread between A-rate corporate bonds, a small drop for 1Y spread is observed. As for the spread between Shibor Rates and Treasury bonds yield, short-term (1M) spread experienced some drop. As for treasury bond yield, last week, short-term yields a experienced some drop.

As for exchange rate, there were some appreciation for both inland and offshore rates, that CNY/USD changed -0.91% (up to 16:30 of last Friday) and CNH/USD changed -1.00%.

As for foreign fund flows via both Shanghai and Shenzhen-Hong Kong Stock Connect, last week there were both net inflows for Shanghai and Shenzhen markets. The net inflow over last week was 19.48 billion CNY and the cumulative net inflow was 753.82 billion CNY at last Friday, another historical new high. Specifically, more fund flow in Shanghai market than Shenzhen market.

In sum, the market kept experiencing rebound. Last week both small and large cap shares experienced huge rebound and foreign funds kept inflow, the confidence is boosting. The market holds its optimistic view.


News:

(1) Xinhua News Agency published a series of reviews on China's economy to meet the two sessions of the National People's Congress, saying that despite the complex and changeable external environment, China's domestic development is facing the "throes" of transformation, and China's economy is still steadily advancing in meeting the challenges. New momentum is growing, market expectations are improving, and future economic prospects for high-quality development are becoming clearer and clearer. China's development is still in and will remain in an important period of strategic opportunities for a long time.

(2) Xinhua News Agency: The Central Committee of the Communist Party of China and the State Council issued "China's Educational Modernization 2035" proposing to focus on rural areas to improve the level of pre-school education popularization and the level of high school education popularization. To ensure that the expenditure on education in the general public budget, which is based on the average number of students in schools, increases only year by year, and that the proportion of national financial expenditure on education to GDP is not less than 4%. By 2035, we will realize the modernization of education in general, step into the ranks of powerful countries in education, and promote our country to become a powerful country in learning, human resources and talents.

Ten key tasks were put forward. The first is to implement the project of "Lide Tree Man" in the new era. Second, we should promote the consolidation and improvement of basic education. Third, deepen the integration of industry and education in Vocational education. Fourth, promote the connotation development of higher education. Fifth, we should strengthen the construction of teachers in the new era in an all-round way. Sixth, we should vigorously promote the informatization of education. Seventh, we should implement the plan for the revitalization and development of education in the central and Western regions. Eighth, the regional innovation experiment of promoting educational modernization. The nine is to promote the "one belt and one road" educational action. Tenth, we should deepen the comprehensive reform of education in key areas.

Ministry of Education: China's Education Modernization 2035 is the first medium-term and long-term strategic plan with the theme of education modernization in China. The Implementation Plan for Accelerating Education Modernization (2018-2022) is positioned in the action plan and construction plan. It is the timetable and road map for accelerating education modernization and building a powerful country in education during the term of office of this government.

(3) Xinhua News Agency: On February 22, at the Oval Office of the White House, President Trump met with Chairman Xi Jinping, Special Envoy of the seventh round of China-US high-level economic and trade consultation in the United States, member of the Political Bureau of the Central Committee of the Communist Party of China, Vice Premier of the State Council and Chinese leader Liu He of the China-US comprehensive economic dialogue. Trump said that the current round of high-level economic and trade consultations has made tremendous progress, while there is still a lot of work to be done. To this end, the two sides have decided to extend this round of consultations for two days.



1. Indices

(1) Indices Performance

Graph 1: Indices performance over the past 3 months

During last week, SSE Composite Index (000001.SH) changed 4.54 % to 2804.23, CSI 300 INDEX (000300.SH) changed 5.43 % to 3520.12, CSI SmallCap 500 index (000905.SH) changed 6.10 % to 4777.30, SSE 50 Index (000016.SH) changed 4.20 % to 2623.07, FTSE China A50 Index (830009.XI) changed 3.87 % to 12009.64.


(2) Sectors Performance

Graph 2: Sectors performance under Wind Level-2 classification (%)


In the view of sectors, during last week(from 2019-02-15 to 2019-02-22), 24 of 24 Wind Level-2 sector(s) increased while 0 sector(s) dropped. Specifically, Diversified Financials(17.01%), Semiconductors & Semiconductor Equipment (10.64%) and Technology Hardware & Equipment(9.86%) did the best performance while Banks(0.90%), Consumer Durables & Apparel(0.95%) and Household & Personal Products(1.05%) did the worst performance.


(3) Indices Valuation Measures (TTM)

Graph 3: Indices P/E Ratio over recent 5 years (TTM)

The current P/E for SSE50, CSI300, CSI500, SSE Composite Index are 9.5279,11.7036,19.0620,12.4427 respectively.

Graph 4: Indices P/B Ratio in recent 5 years (TTM)

The current P/B for SSE50, CSI300, CSI500, SSE Composite Index are 1.1856,1.4168,1.7663,1.3828 respectively.


Graph 5: Indices P/CFO Ratio in recent 5 years (TTM)

The current P/CFO for SSE50, CSI300, CSI500, SSE Composite Index are 5.9773,8.2446,20.1121,8.6693 respectively.

Graph 6: Indices P/S Ratio in recent 5 years (TTM)

The current P/S for SSE50, CSI300, CSI500, SSE Composite Index are 1.0708,1.1842,1.1119,1.1028 respectively.


Graph 7: Indices CFO/E Ratio (=(P/E Ratio)/(P/CFO Ratio)) in recent 5 years (TTM)

The current CFO/E for SSE50, CSI300, CSI500, SSE Composite Index are 1.5940,1.4195,0.9478,1.4353 respectively.

Graph 8: Indices ROE (=(P/B Ratio)/(P/E Ratio)) over the past 5 years (TTM)

The current ROE for SSE50, CSI300, CSI500, SSE Composite Index are 0.1244,0.1211,0.0927,0.1111 respectively.


2. Interest Rates

The term structure of treasury bonds’ yields is currently upward sloping in concave shape. Specifically, last week, short-term yields short term yield of treasury bond experienced some drop and 3M yield now at 2.0%-2.2% level. Furthermore, as for long-term yield, there is a small fluctuation. 10Y yield is about 3.0%-3.2%.

Graph 9: Term Structure Evolvement of Treasury Bonds During Recent 3 Months (%)


3. Credit Risk

Graph 10: Differences Between Shibor Rates and Treasury Yields During The Period Of Recent 3 Month (%)

Graph 11: Differences Between Corporate Bonds Yields (A Rate) and Treasury Yields During The Period Of Recent 3 Month(%)


4. Exchange Rates

Graph 12: USD/CNY, USD/CNH and USD Index in the Period Of Recent 1 Month



5. Foreign Fund Flow

Graph 13: Fund flow via both Shanghai and Shenzhen-Hong Kong Stock Connect in past 1M (100 million CNY)

Graph 14: Fund flow via both Shanghai-Hong Kong Stock Connect in past 1M(100 million CNY)


Graph 15: Fund flow via both Shenzhen-Hong Kong Stock Connect in past 1M(100 million CNY)


6. Index Future Market Liquidity


Graph 16: CSI300 Current/Next Month Contract Roll Spread Distribution (2s frequency)

Graph 17: SSE50 Current/Next Month Contract Roll Spread Distribution (2s frequency)

Graph 18: CSI500 Current/Next Month Contract Roll Spread Distribution (2s frequency)

There are 5 trading days during last week, so the distribution is worked out with 36005 data points for each contract.




Macroeconomic Topic:

Later on 2019/02/21, the central bank released its fourth-quarter monetary policy report. According to the report, in sum, since 2018, the global economy has continued to recover, but the external environment has changed significantly and uncertainties have increased. China's economy has maintained a strong resilience, but in the stage of the transformation of old and new energy, the risks accumulated over a long period of time have been exposed more and more. The financing difficulties of small and micro enterprises and private enterprises are more prominent, and the economy is facing downward pressure.

Central Bank Monetary Policy Report for the Fourth Quarter of 2018

The biggest point of view is that it has a more comprehensive exposition of “the prudent monetary policy”.

Graph A: Excess Deposit Reserve Ratio (Excess Reserve Ratio): Financial Institutions(%)

In monetary policy, the expressions of "neutrality" and "general gate" have been removed, and "reasonable abundant liquidity" has not been mentioned at the same time. According to the bank over-deposit rate data released by the central bank in the fourth quarter, after several downgrades, the over-deposit rate of financial institutions has risen to 2.4%. That is to say, back to the level of the fourth quarter of 2016. The deposit reserve of large financial institutions at that time was 17%, and now it is 14.5%. This shows that the liquidity of the current banking system has been relatively abundant, and all kinds of interest rates in the market have declined.

It emphasizes that prudent monetary policy does not mean that monetary conditions remain unchanged, but that the fluctuation of economic cycle should be moderately scaled down according to the dynamic and counter-cyclical adjustment.

The prudent monetary policy is standard to some extent. Firstly, the quantitative criteria, i.e. the growth rate of M2 and social finance scale, are roughly matched with nominal GDP; secondly, in terms of price, the interest rate level should meet the requirement of keeping the economy at a potential level. That is to say, the level of interest rate should serve many goals, such as stable economic growth, full employment, price stability and balance of international payments.

The prudent monetary policy is structural. In the case of moderate total amount, we should use structural monetary instruments to give full play to the function of directional drip irrigation, optimize the direction and structure of liquidity, and promote structural adjustment and reform. In the current context, we should strengthen support for private enterprises and small and micro enterprises.

The prudent monetary policy is loose and moderate. It should not only prevent the risks caused by too tight monetary conditions, but also prevent the water flooding from aggravating distortion and continuing to accumulate risks. The core of the prudent monetary policy is to serve the real economy.

The prudent monetary policy is not to avoid reform. The central bank's monetary policy implementation report focuses on interest rate marketization and RMB exchange rate marketization. In the interest rate marketization aspect, the central bank more considers guiding the market interest rate downward through the policy interest rate of the open market activity, instead of adjusting the benchmark interest rate. In terms of exchange rate marketization, we have noticed a slight change in wording, as previously stated to enhance the flexibility of the RMB exchange rate and maintain two-way fluctuations. However, in this quarterly report, the elasticity of the RMB exchange rate will be improved to "maintain" the elasticity of the RMB exchange rate. The central bank's quarterly report fully takes into account the impact of various factors on the exchange rate of RMB. Although the RMB has appreciated considerably since this year due to the fall of the US dollar index and the Sino-US trade negotiations, with the development of capital account, the management of the RMB exchange rate will face more arduous and more challenges.


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