GF SEC: The Fed interest rate cut cycle is coming, foreign capital is expected to accelerate into the CSI A500 index.

GF Securities released a research report stating that the long-term return rate of the CSI A500 Index significantly outperforms similar broad-based indices, supported by its strong fundamentals. The current valuation of A-shares is in the middle range after rebounding from historical lows, with the PE ratios for the CSI A500 and the Shanghai and Shenzhen 300 Indexes being 14.8X and 13.0X, respectively, lower than the valuation of major overseas market indices. Index component selection considers ESG ratings, which align with the preferences of foreign investors; as the Fed's rate-cut cycle approaches, foreign capital is expected to accelerate flow into the index. The CSI A500 Index (000510.CSI) has a significantly higher long-term return rate compared to similar broad-based indices, supported by its strong fundamentals. Since 2005, the cumulative return rate of the CSI A500 Index is 391.4%, with a Sharpe ratio of 0.31, significantly higher than other broad-based indices. The support behind this performance is its strong fundamentals; in the past three years, the ROE of the CSI A500 has been 0.2-0.5 percentage points higher, with an asset-liability ratio lower than 2%, and better liquidity and quick ratios. Six factors that make it a new generation core asset under the background of China's economic transformation and upgrading: 1. Low volatility, high returns, more suitable as a core holding. The annualized return rate of the CSI A500 is 8.6%, with a Sharpe ratio of 0.31, making it more suitable as a core holding, higher than other broad-based indices. 2. Overweight in emerging industries, the index better reflects changes in the capital market structure and industrial transformation and upgrading. The new productivity industries in the CSI A500 (TMT + electronics, defense, pharmaceuticals, automobiles) account for 45.8%, compared to 36.8%, 30.6%, and 24.1% in the Shanghai and Shenzhen 300, Shanghai Composite, and SSE 50 indices, respectively. 3. Aggregating segment industry leaders better represents equity assets in China. The components of the CSI A500 that are not in the Shanghai and Shenzhen 300 are mainly concentrated in banks and non-banking sectors; the components of the CSI A500 that are not in the Shanghai and Shenzhen 300 are mainly the leading stocks of various emerging industries. 4. Consistent expectations for net profit growth are better than other indices. In terms of growth ability, the CSI A500 index's net profit growth rate (24~25E) is 9.62%. In terms of profitability and cash flow, the CSI A500 index's ROE and cash flow per share are 11.0% and 1.4 yuan/share, respectively, higher than other broad-based indices. 5. The outcome of the U.S. presidential election has been determined, reducing overseas macro uncertainty, while China's policy bottom has been reached, and equity asset positions are still relatively low. The current valuation of A-shares is in the middle range after rebounding from historical lows, with PE ratios of 14.8X for the CSI A500 and 13.0X for the Shanghai and Shenzhen 300, lower than overseas market indices. 6. Index component selection considers ESG ratings, aligning with foreign investor preferences; as the Fed's rate-cut cycle approaches, foreign capital is expected to flow into the index at a faster rate. (1) The CSI A500 excludes securities with ESG ratings of C and below; the median ESG score in the index sample is 0.85, higher than the overall market level, and more in line with foreign investor preferences. (2) As a representative of high-quality core assets based on fundamentals, the CSI A500's component stocks are favored by foreign investors, with a median foreign ownership of 2.55%, far higher than the overall A-share level of 1.09%. (3) In the past two years, there has been a mismatch in the Chinese and American economic cycles; with improvements in overseas liquidity and policy support, the outflow pressure of foreign capital is expected to ease, and domestic monetary policy constraints are reduced, helping to enhance stable growth, making Chinese assets relatively attractive. The GF CSI A500 ETF (563220) is an exchange-traded open-ended index fund (ETF) closely tracking the CSI A500 Index (000510.CSI). As of November 12, 2024, the scale has exceeded one hundred billion, with a circulation scale reaching 10.55 billion yuan.