After the outbreak of the epidemic, the market is full of toughness, and the technology growth sector has rapidly rising. The core lies in the weakening of the "herd effect" of private investors and the strengthening of institutional investment which has become the assurance of the A-share market. The biggest opportunity and change in the A-share market in the future lies in the increase in the proportion of equity allocated from residents' funds, which changed from direct shareholdings to indirect allocations such as funds, insurance, and wealth management. Institutional investment will continue to increase and strengthen.
It is particularly noteworthy that funds have become an important channel for residents to enter the market and an important support for the growth of science and technology. The recent fundraising continues to be hot, accelerate the market recovery, and continue to provide financial support for the growth of technology. From the beginning of the year to February 16, a total of 22 stock funds, 43 hybrid funds, and 8 bond funds were established in the market, with a total size of 24.14 billion yuan, 102.30 billion yuan, and 4.78 billion yuan. Last week, 6 stock funds and 12 hybrid funds were set up, with a total issue size of 33.83 billion yuan and 38.56 billion yuan, respectively. From the perspective of current institutional positions, technological growth sector is the focus of new fund allocation. In particular, since the beginning of the year, a number of science and technology themed funds have been issued in a centralized manner, with a total scale of 68.24 billion, which has become an important "promoter" for the science and technology growth sector.
Although the recent gains have been huge, the general logic of technological growth has not been disrupted: 1) First, incremental funds will continue to flow in. There will be 206 equity funds that have already been audited and 38 equity funds that have been audited but have not been issued in the next 3 months, and they will bring 100 billion-level increment funds to the market in the future. 2) The easing monetary environment continues. 3) The refinancing easing cycle is coming, and technology growth sector is the most beneficial. 4) From a fundamental point of view, technological growth sector also has strong support and economic advantages.
The divergence between A share and overseas markets is a marginal change worthy of attention. Profit-driven, mild policies, and a fall in risk premium are the three major drivers supporting the spring market. US treasury and gold prices indicate that the global economic recovery may be less than expected. This week, overseas markets and A-shares have begun to diverge, and the pace of risk premium decline may be affected in the short term. The adjustment of overseas semiconductor leaders may have an impact on the short-term A-share style. In terms of profit and policy, the short-term impact of the epidemic may exceed expectations, but the strength of this round of profit recovery is also expected to exceed expectations, and countercyclical policies and capital market reforms are in line with expectations.
From the perspective of inside, outside and industrial capital, there is no need to worry about overheating sentiment. In terms of the inside funds, the current turnover rate is significantly lower than the peaks in 2015 and 2019. The performance of new shares on the 30th day is at a low level in the past 5 years. As for the outside funds, in January 2020, the number of A-share and credit account openings was near the historical mid and low levels, and the pace of new fund issuance was far lower than the peak in 2018. In terms of industrial capital, the discount rate for large-scale transactions is high, and major shareholders have reduced their holdings more strongly, reflecting off-market funds' concerns about valuation. Overall, the current market sentiment is still far from overheating.
Valuation, positions, and market performance show that structural differentiation has reached historical peaks. In the case of making money, outside funds are expected to support the market to continue upward. In the short to medium term, under conservative assumptions, bank wealth management, northbound funds, and newly established public funds are expected to contribute a total of 900 to 1000 billion yuan in incremental funds in 2020. From a long-term perspective, the proportion of institutional investors and foreign investment in China is expected to increase significantly with the promotion of policies. From the comparison of large-scale assets, China's residents' equity asset allocation is extremely low, the expected return rate of the real estate market has dropped, and the potential for transfer of residents' funds to the equity market is huge.
Overall, it is advised to allocate high-quality technology industries and previously oversold and underestimated traditional industries.
Fermentation of overseas new coronavirus epidemics is a "first wave of epidemic" for overseas markets, but actually a "second wave of epidemic" for A shares. After reviewing the historical epidemic record, the rule of the epidemic affecting the market can be summarized as follows: After the first wave of epidemics, the risk appetite and market generally drops first, and after that, the epidemic situation is expected to improve and the market start to diverge, and finally the risk appetite will stabilize and the market rebound. With the continuous improvement of China's epidemic data, the characteristics of the third stage of A shares are being deduced. And the second wave of epidemic fermentation is generally difficult to become the main contradiction of the market, and the overall impact on the market is generally relatively short, and only for a few industries and themes (such as epidemic prevention-related medicine, domestic industrial chains that benefit from shrinking overseas supply, etc.). It is believed that the influence of overseas epidemic fermentation on A-share risk appetite can refer to the experience of the second wave of epidemic in history. Therefore, the characteristics A-share market's correction margin is significantly smaller than that of overseas may continue.
The sharp drop in overseas stock markets constituted the direct reason for the northbound funds turning to a net outflow. However, it remains to be seen whether this can reverse the pattern of the overall incremental funds structure of A shares market. The amount of new fund issuance in February and market risk appetite is generally stable, and the financing balance has risen steadily, and the concentrated inflow of northbound funds at the close reflects the management’s “steady expectation” willingness, which can still supply stable incremental funds supply of A shares market. Overall, the structural impact of the net outflow of northbound funds may be greater than the total impact, and the domestic investment style will be dominated by relative return funds, and the focus on technological growth sectors may continue.
How does the overseas epidemic affect the domestic? During the epidemic response stage, the differences between China and overseas in the interpretation of epidemic situations and the response methods have made the Chinese market relatively dominant in this regard. Significant improvement has been made in China's epidemic control, and the current situation in the surrounding areas may be equivalent to that of China a month ago. And China has taken decisive isolation measures in response to the epidemic, but it remains to be seen whether other regions can effectively respond to the epidemic similarly. From the demand side, the spread of the epidemic overseas will directly affect China's external demand. At present, China's exports to several countries and regions with severe epidemics account for 16.1% of the total, which requires dynamic assessment in the future. From the perspective of the supply side, if the epidemic evolves in some countries and regions with a more important position in the global industrial chain, considering China's position in global manufacturing, such as technology and hardware manufacturing, this will also affect production in China. From a policy perspective, in order to deal with the potential impact of these factors, domestic policies may be more active in supporting non-trade sectors and areas with relatively high controllability in domestic demand (“completely domestic demand”). We believe that there may be opportunities on these sectors with completely domestic demand for phased allocation, including the real estate industry chain, some new infrastructure and consumer services industries.
In the past week, the number of new coronavirus outbreaks outside China has increased significantly, causing market panic. In terms of countries, the number of cases in South Korea, Japan, Italy, and Iran has increased rapidly in the past week. Prior to this, the international market had underestimated the spread of the epidemic.
In the short term, the impact of the epidemic on the global economy is mainly on the supply side. The more important the status of the epidemic-generating country is in the global industrial chain, and the stricter the government's control is over the epidemic, the greater the impact will be on the global economy.
As for the industrial chain, exports from Japan, South Korea, and Italy accounted for a relatively high proportion of global exports, and their impact on certain products was relatively greater. In terms of industry, Japan and South Korea account for a relatively high proportion of exports of transportation equipment, mechanical and electrical products, and Italy account for a high proportion of leather and textiles. For China, if the production activities in Japan, South Korea, and Italy slow down due to the escalation of the epidemic, the supply chain will have a greater impact on the manufacturing industry: furniture, computers and electronics, metal products, and electrical equipment. In terms of different countries or regions, the major dependence on Japan, South Korea, Italy, and Iran is mainly their neighboring countries, which means that the Asia-Pacific and European economies will face greater challenges.
In terms of epidemic prevention and control, the Japanese, South Korean, Italian, and Iranian governments have taken measures that are relatively strict, which also means that the short-term impact on local economies may be relatively large. Global outbreaks generally have short-term negative impacts on asset prices. Historical data shows that within one month after the outbreak of the epidemic, A-shares and the MSCI global index tend to drop, but over time, most stock markets have returned to their own fundamental trends. In the bond market, within one month of a major epidemic, yields on Chinese and U.S. bonds typically fall, and after six months, if the development of the epidemic is controlled, the yield on treasury bonds usually rises.
The overseas epidemic is not the factor that will end the recent rally in spring. The "three main expectations" after the Spring Festival are the basis for the rally of the spring market. The logic that could possibly end the recent rally is at home not abroad. Since the Spring Festival, the market has generally remained strong, mainly based on three expectations: (1) macro liquidity was looser than expected. First, the central bank overinvested in reverse repurchases, and short-term interest rates remained at the lower limit of the oscillating range. Liu Guoqiang, the deputy governor of the People’s Bank of China, stated that he would consider lowering the benchmark deposit interest rate. (2) The volume of public raised funds has not been affected by the epidemic situation (according to statistics, since the beginning of the year, about 60% of new-raised funds have not yet allocated positions, with a total size of about 69.4 billion yuan), and ETFs are also expanding rapidly. (3) The characteristic of concentrated inflow of northbound funds has always existed at the close. Therefore, it is believed that the main contradiction in the current market is the incremental game dominated by "asset shortage", while overseas markets cannot fundamentally falsify the spring rally. What is the real risk? It is believed that there are three main points: (1) The epidemic situation is completely stable, and special policy measures during the epidemic period need to be withdrawn. (2) Macro-liquidity is no longer loose due to inflation or other factors. (3) Some local problems accumulate. The implementation of new rules for refinancing is one of the important logics supporting the current market, but excessively high valuations will curb the reheating of the refinancing market. And the reduction of holdings of major shareholders will increase. And the 6-month lock-up period of private placement may affect the supply and demand of funds in the stock market when those stocks are lifted. Some companies' annual reports for 2019 and first quarter reports for 2020 may be lower than expected. These are the factors that may end the spring rally, but before April, these factors won’t reach the verification period.
What determines the A-share style? Why isn't it time to switch?
Any continuous unilateral style interpretation in history, whether it is the "beautiful 50" or "Nasdaq tide" of the US stocks, or the "GEM" and "core assets" of the A stocks, are ultimately the result of fundamental effects. Therefore, the essence of style interpretation lies in the prosperity, and the prosperity cycle is shaped by a variety of factors, including macroeconomics, industrial trends, policy environment, and money supply.
From a macro to micro perspective, the main chain of macro variables transmitted to the market is that economy determines profit, and profit determines market style. From the perspective of the impact of economic growth on market style, the growth-sensitive style is more dominant during the expansion of the economic cycle, and vice versa. In fact, the relative trends of the two styles in the past ten years were basically in line with the inventory cycle, which reflects the corresponding relationship between economic growth and the stock market style.
Although there is fundamental logic support behind the style, the marginal change of incremental funds is the direct driver of the formation of the style. When the type of incremental funds changes, the market style will naturally switch with it.
Why is it not time to switch the style? First, the macro expectations have not reversed, and they are still in a "loose monetary policy and tight credit" environment. Second, technology sector has benefited more from easing refinancing policies. From the perspective of incremental funds, domestic funds are at the dominant position at this stage, and technology funds continue to enter the market. Finally, relative to the prosperity perspective, technology stocks are relatively dominant in terms of industry trends and performance. In general, the trend and logic of the technology market is still valid, and it is still too early to have a systematic style switch.
On March 3, the US Federal Reserve suddenly announced that it would lower the target range for federal funds rate by 50BP, and at the same time reduce the IOER by 50BP, which slightly exceeded expectations. At present, various economies have not yet shown a state of economic crisis, but policies have evolved according to the crisis situation. The US Federal Reserve is the global gate of liquidity, and it may drive global interest rates down. It is expected that China's central bank will systematically cut interest rates in March, to support domestic demand that was damaged due to the shutdown and production in the previous period, and prevent the decline in external demand caused by global spread of the epidemic. The complex forecast of the global epidemic itself determines the difficulty of forecasting the economic reversal point. No one can predict the duration of the epidemic. In the short term, there is a bullish expectation on both China's stock and bonds market, and interest rate bonds may have a stronger room for interest rate downwards under the influence of the systemic RRR cut in March. A-shares will have a good anti-epidemic effect combined with the development of counter-cyclical policies. In addition, we continue to be bullish on gold, benefiting from the weakening of the US dollar index, the decline in real interest rates, and the catalysis of uncertain events such as the outbreak of epidemic and the US election.
There were already risks in the US stock market before the outbreak of epidemic, and the epidemic is only a trigger for the decline. First, the US economy is not optimistic. The short-term high of the U.S. economy has declined in 2019. In August 2019, the PMI of the ISM manufacturing industry in the US fell below the threshold. In February 2020, the US Markit service PMI also fell below the threshold. Second, before the adjustment of US stocks, stocks have been overbought on the technical level, and positions are concentrated, and the market sentiment is high, and the static valuation has a high degree of deviation, which has accumulated a large adjustment risk. Third, there are many uncertain factors in the election year. The epidemic situation is stacked, and US stocks may undergo a significant adjustment similar to the fourth quarter of 2018. Credit market bubbles and SME debt are the fragile points of the US financial system. If the epidemic triggers a debt crisis for SMEs in the United States, the possibility of the end of the bull market is exists.
As global central banks begin to cut interest rates, overseas markets have rebounded. If the global spread of the epidemic causes a substantial economic shock, there might be a second decline in overseas markets and a true bottom might emerge. The first decline corresponds to panic, the second decline corresponds to expectations of a recession, and the intermediate rebound corresponds to the easing of global central banks.
Judging from the current overseas epidemic curve, overseas epidemics may not be controlled with great probability. If China's centralized prevention and control method is not adopted, the epidemic situation may continue until the temperature rises from May to June. It is foreseeable that the economic data of the United States, Europe, and Japan will perform poorly in the second quarter, which may have a greater impact on China's exports in the second quarter and the global industrial chain.
The plunge in the external market has accelerated the endogenous adjustment and style switching in the domestic market. With the acceleration of the resumed labor recovery and the introduction of policies, the extreme differentiation of growth stocks and value stocks has converged, and the defensive attributes of low-valued value stocks have relatively risen, and some normal callbacks have occurred in growth stocks, and the differentiation of technology companies will continue to grow, and the focus is still on the long-term trend of the industry.
The approval of infrastructure projects has accelerated, and the margin of investment has improved in the past two weeks. The total approved investment in infrastructure in 2019 reached 20.95 trillion yuan, a year-on-year increase of 63.8%. In 2020, due to the impact of the Spring Festival holiday and the epidemic, the approved investment in infrastructure has been disrupted obviously. With the orderly advancement of resumption of work and production and the issuance of special bonds, the approved investment in infrastructure has improved significantly in the last two weeks. Only a few days have passed in March, the amount of infrastructure approval has reached 372 billion yuan (49% of the approved investment in February), and the number of approved projects reached 4,677 (47% of the approved projects in February). Recently, several provinces have successively launched a list of investment plans for major projects in 2020. According to incomplete statistics, the investment list of major projects in each province has exceeded 18 trillion yuan, and the total investment in Fujian, Yunnan, Henan, Chongqing, Hebei, Jiangxi and other provinces has exceeded 1 trillion yuan. From the perspective of the investment field, infrastructure construction such as track construction (highway, high-speed rail), power transmission and transformation projects, and environmental protection are main investment directions.
In the context of continued overweight infrastructure, the building materials and construction machinery sectors have strong demand resilience. As the downstream has not yet fully resumed construction, the prices of construction materials such as cement and glass have shown a slight downward trend. With the increase in the number of resumed enterprises and the recovery of downstream demand, it is expected that the price of construction materials will improve marginally in the next few weeks. The construction machinery industry (especially excavators) is in its own replacement cycle, and the epidemic will cause a certain extension of the update cycle. The provinces will start to invest in infrastructure construction, with the accelerated approval of infrastructure construction projects, demand of construction machinery is expected to rebound.
The current margin trading balance as a percentage of the free float market capitalization of A shares increased from 3.57% at the end of June 2019 to 3.74%. The pricing power of the margin trading and short selling funds has increased recently, but not too much. The proportion of the margin trading and short selling funds increased to 4.22% in 2015, and increased to 2.5% in 2013, resulting in significant market fluctuations. At present, the scale of the margin trading and short selling funds has increased, but the impact on the market is relatively controllable.
The preference of the remaining margin trading balance for non-bank and pharmaceutical biomedical sectors is relatively stable, and the preference of margin trading funds has gradually switched from cycle to growth. Compared with 2015 and 2013, where pricing power of margin trading funds has been greatly improved, it is found that non-bank and pharmaceutical biomedical sectors are always in the top five industries with margin trading balances. In 2013, the margin trading balance of the media industry entered the top five. The balance of banks and real estate in 2013 and 2015 was high, but it has declined in 2020. However, after 2015 and 2020, the balance of margin trading in the electronics industry remains at the forefront. It can be seen that the preference of margin trading funds is gradually switching from traditional bank and real estate sectors to the growth sector.
Margin trading and short selling funds, as leveraged funds, basically has the characteristics of "cherry on the top" and "accelerating the market decline" on the market. It is advised to pay attention to the dual nature of capital characteristics. In the market rising stage, leveraged funds can accelerate the upward speed of the index, and in the market decline stage, leveraged funds may cause large fluctuations in the market due to liquidation pressure. Investors need to pay attention to both sides of leveraged funds.
In the next few weeks, the European and American stock markets will continue to fluctuate to the bottom, and the unstable state of frequent ups and downs is expected. Fundamentals are expected to be suppressed by the epidemic, and high valuations will be adjusted. In the medium term, based on the Fed's decisive cooperation in leading the global interest rate cut and the global strengthening of epidemic prevention and control, we believed that the big probability of American stocks in 2020 is a slight bear market or a shocking market. It is less likely to trigger a large-scale bear market in global stock markets. As for the domestic market, the short-term "cold spring adjustment" needs to be dealt with cautiously. In the short term, China's A-share and Hong Kong stocks still face the pressure of adjustment in the cold spring. It is advised to be vigilant against overseas market risks, performance risks of annual and quarterly disclosures of Chinese listed companies in March and April, pressure on stock financing or reduction. The inflow of A-share northbound funds began to slow down at the end of February. The spread of short-term overseas risks has restricted the strength of capital allocation to Chinese assets.
In terms of investment strategy, the short-term adjustment pressure is mainly reflected in the technology market that has rose too much in the early stage, and the phased value stocks have relative returns. Since the beginning of the year, the technology market represented by GEM stocks has clearly outperformed the Shanghai Composite Index, significantly deviating from global risk appetite, and will be partially corrected in subsequent market adjustments. In the long term, it is still recommended to allocate China's leading technology-based growth leaders at the bottom. Technology stocks are the strongest main line throughout the balanced market structure of 2020. It might be a better time to allocate high-quality technology stock companies in April, including new Energy vehicle industry chain, 5G industry chain, semiconductor industry chain, information consumption, intelligent manufacturing, new infrastructure led by smart cities, etc.
New infrastructure in a narrow sense generally refers to infrastructure related to high-tech industries, while new infrastructure in a broader sense also includes some areas of shortcomings. According to the analysis of the PPP project investment direction, traditional infrastructure projects represented by transportation and municipal construction account for more than 70% of investment, which is still the main force of infrastructure investment; while the new infrastructure investment in a narrow sense accounts for only about 0.5%, and new infrastructure investment in a broader sense accounts for about 16%, which is still not high. In terms of scale, the value of new infrastructure in a narrow sense in 2019 is only about 88 billion yuan, and its proportion is relatively stable; the value of new infrastructure in a broader sense is almost 2.9 trillion, and its proportion in infrastructure has increased.
The role of new infrastructure in stabilizing growth is limited. According to estimates, the infrastructure investment is expected to boost nominal GDP growth by 1.5 percentage points this year, which is an improvement over the previous two years. Among them, the new infrastructure in a narrow sense can only drive 0.1 percentage points, and the role is still relatively limited; while the new infrastructure in a broader sense can drive nominal GDP growth by 0.6 percentage points, which is still less than the steady growth of traditional infrastructure.
In summary, the source of funding in the broad sense of finance is the main limitation, the recovery of the growth rate of infrastructure investment is relatively limited, and it is difficult to reproduce the pattern of relying on strong stimulus to stabilize growth. There will be more policy tilt in the new infrastructure sector, and the growth rate is expected to remain high, but the overall volume is not large enough, and the role of stable growth should not be overestimated.
Since the outbreak of the COVID-19, at the central level, the combination of monetary policy, fiscal policy, industrial policy and people's livelihood policies has been introduced: the policy is mainly structured, with a focus on easing the survival pressure of industries impacted strongly by the epidemic and the production capacity pressure of strategic material production enterprises, and the pressure on the funding of small and micro enterprises;
the combination of currency, finance, industry, and people's livelihood policies, and the addition of unconventional means such as reloans, financial discounts and financial countercyclical adjustments have been introduced to mitigate the impact of the epidemic; stimulating new and old industries, refinancing loosening, optimizing venture capital exit mechanisms, increasing the cost reduction of the pharmaceutical industry and other adjustment policies, such as accelerating the construction of new infrastructure, aim to promote the adjustment of industrial structure; compared with SARS, people’s livelihood policies are greater to help boost consumption and adapt to changes in the economic structure. At the local level, the counter policy emphasizes on stabilizing jobs and loans of small and medium-sized enterprises, with distinctive regional characteristics and a trend of migration from the supply side to the demand side. At the real estate level, the counter-cyclical adjustment policy is based on the policy of individual city, and the current policy is focused on the front end. Policies in the later period are expected to migrate to the back end. Short-term monetary policy is expected to be introduced, and medium-term industrial and fiscal policies are expected to be in force. With the increase of counter-cyclical policies, it is recommended to pay attention to the four income-side industries (infrastructure and new infrastructure, vehicle and electric vehicle, medical equipment and finance) that benefit both in numerator and denominator, and the cost-side industries (military, communications, machinery industries) that benefit in numerator.
With the global spread of the epidemic, external demand pressure is becoming the focus of the market. First, China’s export dependence has weakened significantly, and the share of exports in GDP has fallen from 35% in 2007 to 17% in 2019. Secondly, the impact of the epidemic on the global economy is relatively controllable. According to estimates, the global economic growth rate may decline by 0.4% to 0.8% due to the epidemic. Under the premise of no complications or sequelae, the characteristic of short-to-medium term impact of the epidemic will not change. During the subprime mortgage crisis, global GDP fell from 4.32% in 2007 to -1.68% in 2009, with a total decline of up to 6%. Even in a pessimistic situation, the impact of the epidemic on the global economy is not worse than the subprime mortgage crisis, and the recovery period of demand after the epidemic will still form a certain repair of the global economy. In addition, China's export trade shows some resilience over other major exporting countries. China's overall participation in the global value chain is high. Most industries are in the middle of the value chain. Export products are less replaceable and export toughness has increased. Therefore, it is believed that the export shock constitutes a domestic economic challenge this year, but the decline is expected to be less than the 20% decline in exports from January to August 2009.