Haitong Strategy: Which bottom signals have appeared in A-shares?

Haitong released a research report stating that recently, the A-share market has continued the consolidation trend since late May, with the Shanghai Composite Index, the CSI 300, and the ChiNext Index approaching the early February lows of this year. Haitong believes that the market has already shown some bottoming signals: 1. Bottoming signal 1: Broad-based indices are close to the 2/5 low, valuations and risk premiums are at historical bottoms; nearly half of the industries have seen valuations at new lows since the beginning of the year, retracing all gains since 2/5. 2. Bottoming signal 2: Historically, market bottoms occur in the order of high-dividend stocks > broad-based indices > fund heavyweight stocks; the current adjustment in high-dividend sectors is significant, with uncertainty about whether they can stabilize in the future. 3. Overseas liquidity environment has improved, domestic policies are on the verge, internal and external positive factors resonate and are expected to boost the core of the stock market, with a structural focus on high-end manufacturing with superior performance. Since May this year, the domestic macroeconomic fundamentals have shown a weak recovery process, with the manufacturing PMI staying below the boom-bust line for four consecutive months. Looking at the economic data for August, production, consumption, and investment have all seen slight fluctuations due to factors such as extreme weather events and weak domestic demand. In August, industrial added value increased by 4.5% year-on-year, slightly down from July, marking the fourth consecutive month of decline; in August, social retail sales grew by 2.1% year-on-year, also down from 2.7% in July. The short-term disturbances faced by the economic fundamentals have weakened market sentiment significantly, with major indices entering a consolidation phase. Currently, the A-share broad-based index is approaching the low point of February, with valuations and other indicators showing that the market is in the bottom area. The weakening phase of the macroeconomic environment in recent times has led to corresponding adjustments in market sentiment and risk preferences, with the broad-based index declining since late May, approaching the lows of early February this year. From the perspective of A-share valuations, the current levels are close to those of early February. As of September 20, 2024, the PE (TTM) for all A-shares, from low to high since 2005, is 15.0 times/19%, while the PB (LF) is 1.3 times/0%; the non-financial PE and PB for A-shares in the petroleum and petrochemical sector since 2013 are 23.0 times/18% and 1.7 times/2% respectively. From various indicators such as the lower limit rate, risk premium, and stock-bond yield ratio, it can be seen that market risk preferences and sentiment are currently in a large bottom area. As of September 20, 2024, the lower limit rate for all A-shares is 15.9%, already higher than the average lower limit level during five bear market bottoms from 2005 to 2019 (11.3%). The risk premium rate for A-shares (1/PE of all A-shares - 10-year treasury bond yield) is 4.6%, ranking from high to low since 2005 at 0.3%, and has been above the mean + 2 standard deviations in a 3-year rolling view; the stock-bond yield ratio for A-shares (dividend yield of all A-shares / 10-year treasury bond yield) is 0.84, the highest since 2005, and also above the mean + 2 standard deviations in a 3-year rolling view, indicating that market risk preference is at a low point. The current A-share valuations are at historical lows, with very low risk preferences in the market, strong investor pessimism, and decreasing trading volume in recent times. Since August, there have been five trading days with total A-share turnover below 500 billion, including a low of 479.9 billion on August 13, marking a new low since May 2020; the daily average turnover for all A-shares from August is 581.6 billion, with a nearly 30% decrease from the beginning of the year to July. Looking at the industry level, nearly half of the industries have retraced all gains since early February. As the market has undergone adjustments since May, some industry indices have reached new lows since early February this year. As of September 20, 2024, out of the 31 Shenwan First-level industries, 13 have seen index levels below those of early February, retracing all gains since early February, with an average retracement of 1.27; the remaining 18 industries have also retraced most of their gains since early February, with an average retracement of 0.72, with industries like social services (0.97 retracement) and petroleum and petrochemical (0.95) nearing their early February lows. In terms of industry valuations, over half of the industries have seen valuations at new lows since February. As of September 20, 2024, 32% of Shenwan First-level industries have PE (TTM) valuations below their levels in early February this year, with industries like social services (PE of 17.8 times/0.06% since 2005), building decoration (7.3 times/0.1%), food and beverage (16.8 times/0.2%) having PE valuations close to their lowest levels since 2005. 52% of industries have PB (LF) valuations lower than their levels in early February, including environmental protection (PB of 1.11 times/0.1% since 2005), petroleum and petrochemical (1.12 times/0.1%), and building materials (0.89 times/0.13%) nearing their lowest levels since 2005. Overall, from the perspective of broad-based indices, industry-level share prices, valuations, etc., the current A-shares are already in the bottom area. Moreover, looking back at the characteristics of the industry structure during past stabilization and bottoming phases of the A-share market, it can be observed that high-dividend sectors tend to stabilize first, followed by index stabilization, with fund heavyweight stocks stabilizing after a decline. For example, during the market bottom in January 2012, high-dividend stocks stabilized in September 2011 and then trended upward, while the Shanghai and Shenzhen 300 Index continued to decline until January 5, 2012, with fund heavyweight stocks hitting bottom on January 18, 2012. Similarly, during the market bottom in January 2016, high-dividend stocks had already stabilized by August 2015, followed by the Shanghai and Shenzhen 300 Index and fund heavyweight stocks bottoming out later in late January 2016, with the latter experiencing greater declines. Currently, high-dividend sectors have shown more obvious declines, while fund heavyweight stocks are still declining. Since the market adjustments in late May, high-dividend sectors have experienced significant corrections, with the maximum decline in the CSI Dividend Index reaching 19.3%, compared to 15.0% for the Shanghai and Shenzhen 300 Index during the same period; within the high-dividend sector, except for banking, other related industries like coal have experienced notable declines (maximum decline of 26.5%).The adjustment of high dividend sectors such as banking (29.1%), non-ferrous metals (27.2%), and petroleum and petrochemicals (22.3%) has been quite significant. It can be seen that the decline in high dividend sectors is very apparent, and it remains to be seen whether these sectors will gradually stabilize. Meanwhile, some heavily weighted stocks in certain funds are still experiencing declines. Since the consolidation of A-shares in May, the Wanda Fund Heavy Index has experienced a larger decline, with the Shanghai and Shenzhen 300 Index falling by a maximum of 15% during this period, while the heavy index of funds fell by 19%.The overseas liquidity environment has improved, and domestic policies may already be in the works. The recent weakening of the macro environment has cooled investor sentiment in A-shares, continuing the consolidation and buildup since late May of this year. Looking ahead, the Fed's interest rate cut has been implemented, which may help improve liquidity in A-shares. At the same time, domestic policies are gradually being implemented, with potential to boost both macro and micro fundamentals. With positive factors at home and abroad, the A-share market index may see some uplift. On the overseas front, the Fed's interest rate cut has been implemented, which may lead to a return of foreign capital in the near future. Recent US inflation and employment data have paved the way for the Fed's interest rate cut, with a 50 basis point cut expected in the September Fed meeting. The Fed's economic outlook shows a weakening US economy, rising unemployment rate expectations, and falling inflation rate expectations, leading the bank to believe that further interest rate cuts are likely to continue. According to CME observations, as of September 19th, the market expects a high probability of a 25 basis point rate cut in November and a 50 basis point rate cut in December. This preemptive interest rate cut by the Fed may help improve liquidity in A-shares and drive an upward trend. On the domestic front, the implementation of growth-stabilizing policies is expected to lead to a recovery in both macro and micro fundamentals. Recent economic data have shown some fluctuations, and the mid-year reports of listed companies indicate a weak rebound in overall profits, reflecting ongoing pressure on macro and micro fundamentals. However, growth-stabilizing policies are gradually being intensified, with the NDRC stating on September 19th that macro policies will be strengthened and more targeted, with countercyclical adjustments being enhanced and a batch of incremental policy measures being timely introduced. In terms of consumption, after the Ministry of Commerce issued the "Notice on Further Improving the Work of Scraping Old Cars and Buying New Ones" in August, Beijing, Shanghai, Guangdong, Tianjin, and other areas have actively responded to the measures in various aspects to support the growth of car consumption. In the real estate sector, Beijing further optimized real estate policies on September 20th, abolishing standards for ordinary and non-ordinary residential housing, which will help stimulate demand for improved housing. Basic data in the real estate sector for August show that supply and demand are both still adjusting, with real estate-related industries still playing a significant role in the domestic economy. If the fundamentals of the real estate sector continue to decline, it will put more pressure on economic recovery, and the bank believes that there may be further adjustments to real estate policies to support the release of housing demand. Looking ahead, the bank believes that there are three factors that will drive the improvement of fundamentals and expectations: first, fiscal stimulus is expected to boost domestic demand, with still room for expansion in China's fiscal spending, and the 7th political bureau meeting in July proposed to "prepare early and introduce a batch of incremental policy measures in a timely manner", changes in external factors in the future may provide opportunities for China's fiscal stimuli; second, with supply and demand advantages, China's advanced manufacturing is expected to bring new points of growth to the external economy; third, reforms are expected to enhance and release dividends expectations, with the current lack of confidence in the Chinese economy and stock market, anticipation is high for economic and capital market reforms to progress. With recent growth-stabilizing policies being implemented and the positive changes in the abovementioned three factors in the future, China's macro fundamentals are expected to stabilize. According to the macro forecast of HT securities, the year-on-year growth rate of China's real GDP in 2024 is expected to reach 5%, and on a micro level, it is estimated that the year-on-year growth rate of A-share net profit attributable to shareholders in 2024 will reach 2%. In terms of industry allocation, China's advanced manufacturing may become a medium-term theme in the stock market. With the improvement of the macro and funding environment in the second half of the year, China's advanced manufacturing with better fundamentals is expected to become a medium-term theme in the stock market. The "Decision of the Central Committee of the Communist Party of China on Further Comprehensive Deepening of Reform and Advancing the Modernization of China" pointed out the need to enhance a new quality production factor mechanism tailored to local conditions, and promote the deep integration of the physical and digital economy. In the medium term, focusing on high-level self-reliant technology, China's advanced manufacturing is expected to become an important sector leading the development of new quality productivity, specifically focusing on high-end manufacturing and AI technology-driven technology. In terms of high-end manufacturing, the current basic fundamentals of related high-end manufacturing industries are advantageous, with a wide demand space in the future, benefitting areas such as automobiles, home appliances, and machinery. From the demand side, both domestic and foreign demand in related fields are expected to resonate: from the external-demand perspective, emerging countries have strong demand and a high level of dependence on China, which may lead to a new volume of Chinese exports; from the domestic demand perspective, on August 24th, the Ministry of Commerce and 4 other departments issued a notice on further improving the work of exchanging old home appliances for new ones, marking the official start of a new round of exchanging old home appliances for new ones, according to the NDRC, the annual demand for replacement of cars and home appliances in China is at a level of over trillions of yuan, stimulated by subsidies, the consumption of automobiles, home appliances, and other areas are expected to receive a boost. From the supply side, China's high-end manufacturing has advantages in industrial clustering, engineer dividends, and technological accumulation. In addition, the recent uncertainty of the US elections has magnified concerns about the impact on Sino-US trade in the future, since the mid-2021 market adjustment, the degree of adjustment in the high-end manufacturing sector has been significant, the bank believes that sectors with small disturbances in Sino-US relations and areas that can be hedged through the EU, ASEAN, etc., may be of higher cost-effectiveness, such as home appliances and automotive parts within the mid-end manufacturing sector. In terms of technology manufacturing, under the dual drivers of policy support and technological innovation, future sectors related to technology manufacturing are expected to benefit further. Specific areas to focus on within the sub-sectors include: first, AI technology enabling the resurgence of consumer electronics. The application of AI technology is continuously generating innovative terminals such as AI smartphones and AI PCs, and the trend of resurgence in the consumer electronics industry is gradually becoming apparent. IDC predicts that with the rapid iteration of new chips and user scenarios, the share of next-generation AI phones will rapidly rise after 2024, reaching over 150 million units by 2027, with a market share exceeding 50%. Second, the AI wave driving the upturn in the semiconductor cycle. The advancement of AI technology's performance has a promoting effect on the demand for key semiconductor components, and it is currently seen that the global semiconductor cycle is clearly on the rise. Third, areas related to digital infrastructure under the backdrop of fiscal stimulus. The demonstration projects of "vehicle-road-cloud integration" in major cities nationwide have been initiated recently, and with the favorable policies, the construction of relevant roadside infrastructure is expected to accelerate. According to the Predictions Industry Research Institute, the market for the car-road cooperative industry in China will reach $244.8 billion by 2028, with a compound growth rate of 13% between 2023 and 2028. Risk warning: Implementation of growth-stabilizing policies The pace is not as expected, and the domestic economic recovery is not as expected.This article is sourced from the "Haitong Research Strategy" WeChat public account, with analysts He Miannan and Wei Yongqiang as the authors; edited by GMTEight: Jiang Yuanhua.