Foreign investment "going long", supporting A-shares! Core assets receiving attention again?

On May 20, Goldman Sachs released a stock strategy report stating that the MSCI China Index has surged by 31% since hitting a low for the year on January 22, making it the best-performing stock market globally in the past 3 months. The resilience of the Chinese economy, along with policy support factors in macro, housing, and capital markets, have made A-shares perform strongly. At the same time, Goldman Sachs raised its 12-month target for the MSCI China Index from 60 points to 70 points, and for the Shanghai and Shenzhen 300 Index from 3900 points to 4100 points, maintaining a "buy" rating on A-shares. Foreign institutions like JPMorgan also hold an optimistic outlook on A-shares. The attitude of foreign funds and the performance of northbound funds also give an insight. Since the end of April, northbound funds have turned from net outflows to net inflows, with weekly inflows of 27 billion yuan since the end of April. The prediction of the target for the Shanghai and Shenzhen 300 Index by Goldman Sachs this time also indicates the attention of foreign funds on core assets in China. Finding a "handy" tool for laying out core assets For investors who want to easily lay out core assets in A-shares, representative broad-based indices are undoubtedly a "handy" tool. The newly released CSI A50 Index this year covers 50 leading companies in the CSI Third Level Industry, with balanced industry distribution and a strong large-cap style, making it a core asset index that is highly watched in the market. Currently, there are already products tracking this index, such as the CSI A50 ETF E Fund (563080). In addition, since the CSI A50 Index has set criteria for stock selection in the Stock Connect program, requiring constituent stocks to be listed companies within the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect scope, foreign ownership accounts for about 7.0% of the CSI A50 Index constituent stocks' market capitalization. In the future, when the interest rate differential between China and the US narrows and foreign funds flow back into A-shares, the CSI A50 Index, with a higher share of foreign ownership, may benefit. How to invest in CSI A50? When conducting index investments, many people will consider valuation and its percentile to judge the relative high or low position of the index. According to Wind data, currently, the rolling price-to-earnings ratio of the CSI A50 Index is less than 17 times, and based on backtesting of current constituent stocks, the valuation is around the 40th percentile since the index base date. Historical data backtesting of the CSI A50 Index shows that the valuation percentile level and the profitability probability are roughly negatively correlated. The lower the valuation percentile, the higher the profitability probability usually is. Also, when the holding period is less than 2 years, valuation has a greater impact on profitability probability; when the holding period exceeds 2 years, the impact of valuation is relatively small, but if the valuation percentile is higher than 60%, careful decision-making is still required considering various factors. In other words, buying at relatively low levels, accumulating cheap chips, and holding quality assets for the long term can increase profitability probability to some extent.