Haitong: Three major expected discrepancies in 25 years

In late September of the 24th year, the A-share market suddenly surged in volume. At that time, we analyzed the nature of the market, concluding that the three-and-a-half-year bear market cycle had ended and a new bull market cycle had begun, with the logic and rhythm behind it reminiscent of the market in May 1999. After October 8th of the 24th year, the market entered a period of adjustment. By mid-January of the 25th year, the market trend was lackluster. We once again issued a report analyzing that the phase of adjustment had either ended or was nearing its end, with a new uptrend expected to gradually unfold. We also proposed two main themes: the technology sector with strong growth prospects and the real estate, consumer goods, and pharmaceutical sector with expected differences. Around Chinese New Year, the DeepSeek concept ignited a frenzy in A-shares and Hong Kong stocks in the technology sector. The main trend of technology applications related to AI has become a market consensus. The future development of the technology sector will depend on tracking technological progress and application advances, as well as monitoring further fundamental validation. Looking ahead to the 25th year, in addition to technology, some sectors with significant expected differences are also worth paying attention to. This article explores three potential areas of expected difference. Expected Difference One: Stabilization of the Property Market The adjustment of the real estate market is significant in both time and space, and the market has very low expectations for the fundamentals of the real estate sector. Since 2021, China's real estate market has undergone a significant adjustment, with widespread pessimism in the market. Analysts uniformly expect that the cumulative year-on-year growth rate of real estate investment in 2025 will be -8.3%, an improvement from the -10.6% growth rate in 2024 but still in the negative growth territory. In terms of housing prices, the latest urban household survey results for the second quarter of 2024 show that the proportion of residents expecting house prices to decline is 23.2%, reaching a historical high in recorded data. The magnitude of the previous adjustments in property volume and price has been significant. In terms of property sales, China's sales area of commercial housing has experienced 37 consecutive months of negative growth since July 2021, decreasing from a high point of 1.79 billion square meters in 2021 to 970 million square meters in 2024, a 46% drop. Compared to other countries, China's adjustment in volume has exceeded that of the United States and Japan. In terms of property construction, China's new housing construction area has seen 39 consecutive months of negative growth year-on-year since April 2021. In 2024, the annual newly started area of housing decreased by over 60% from its peak in 2021, a correction similar to that of the United States and exceeding Japan's. In terms of property investment, the monthly year-on-year growth in property development investment has been negative for 36 consecutive months since September 2021. In 2024, property investment decreased by 32% compared to its peak in 2021, with a correction level similar to that of the United States. Housing prices across the country have seen a shift from positive to negative year-on-year growth since August 2021 and have been fluctuating around 0%. As of January 2025, national housing prices have fallen by 17% from their peak, with a slowdown similar to that of Japan but slightly slower. Continued policy measures catalyze the market, combined with significant adjustments in the real estate sector thus far, suggesting the possibility of gradual stabilization in the future. Based on the analysis above, market expectations for the real estate sector have already fallen to a low level. However, strong policies implemented since 2024, combined with significant adjustments in the real estate sector, suggest that there may be opportunities for the real estate sector to recover beyond market expectations in 2025. Since 2024, real estate policies have been shifting and continue to be strengthened. The introduction of the 517 and 924 rounds of real estate incremental policies in 2024 marked the bottom of real estate policy in China. Looking back at the specifics of these policies, the 517 policy focused on lowering the threshold for home purchases by stimulating market demand through methods such as lowering mortgage rates and down payments, allowing localities to adjust policies according to their own circumstances. The 924 policy, in addition to continuing to stimulate demand, placed greater emphasis on reducing the burden of existing property loans for residents, government-led destocking, and relief for real estate companies, shifting from monetary means at the initial stage to fiscal means. The real estate policy toolbox continues to expand, with various regions accelerating land acquisition and storage since 2025. The first batch of special bonds for land acquisition and storage announced include Henan, Jiangxi, Anhui, Zhejiang, and Guangdong, with Guangdong having the largest scale. According to statistics from CICC cited by Sohu Finance, as of February 22, 2025, Guangdong plans to acquire more than 220 pieces of land through special bonds. Recently, some positive changes have appeared in certain real estate data, suggesting further stabilization in the future. As mentioned, the two rounds of incremental real estate policies since 2024 have continued to strengthen. With the combination of policies on both the demand and supply sides, the fundamental data of the real estate sector has shown positive improvements: 1) Since November 2024, commercial housing sales have returned to positive growth, with a year-on-year growth rate of 0.4% in December 2024, and a sales volume growth rate of 2.8%. 2) Second-hand housing prices in first-tier cities have started to rise, with a month-on-month increase of 0.1% in January 2025, continuing the trend of monthly increases since October 2024, while the decrease in second-tier and third-tier cities has also narrowed. 3) The latest high-frequency data indicates that the improvement in the fundamental aspects of real estate is still ongoing. As of February 23, 2025, the year-on-year growth rates (4-week average) of commercial housing transactions in 30 major cities were 278% in first-tier cities, 179% in second-tier cities, and 429% in third-tier cities. Looking ahead to 2025, with fiscal stimulus driving accelerated land acquisition and storage in the real estate sector, a further stabilization in both volume and price of real estate is expected. Expectations for real estate stocks have reached historical lows, and if the fundamentals improve, it may lead to an unexpected recovery in the sector. Since 2021, as the real estate market continued to decline, real estate stocks also weakened. Currently, the stock prices, valuations, and fund positions in the real estate sector have all fallen to historically low levels. For example, as of February 27, 2025, the cumulative decline from the peak in April 2019 in the real estate industry was 56.4%, with the maximum decline being 67.3%. The adjustment period has now exceeded five years. Historically, there have been few instances where an industry has experienced consecutive declines for more than four years. For instance, the building decoration industry has experienced five consecutive years of decline, while the steel, coal, banking, and retail industries have experienced four years of decline. This suggests that the current adjustment period for the real estate industry has been relatively long. In terms of valuations, the valuation of the real estate industry has fallen to historically low levels. As of February 27, 2025, the PB (LF) of real estate was 0.7 times, representing the 8th percentile of historical data from 2013, and the sector's price-to-book ratio was 34.0%, also at a relatively high level compared to the past 13 years. In terms of fund allocation, the allocation rate of funds to the real estate sector has reached historically low levels, with the proportion of holdings in the real estate sector in the top holdings of funds in the fourth quarter of 2024 at 0.9%, at the 0th percentile since 2013, and an overallocation rate of 0.0 percentage points.Ranked at the 64th percentile since 2013. Looking ahead to the next 25 years, with the continued efforts of policies, the fundamentals of the real estate sector may gradually stabilize. Once the fundamentals improve and exceed expectations, the recovery and reflection in the stock market are often more intense. The real estate sector is expected to see a better-than-expected recovery.Expected difference two: consumption recovery Consumption has been weak for a long time, and the market has low expectations for the growth rate of social consumption. The continuous deterioration of the balance sheet of Chinese residents' assets and liabilities in recent years has led to a continuous decline in their consumption capacity and willingness. The growth rate of social consumption was only 3.5% in 2024, an increase of 0.2 percentage points from the previous three quarters. However, there is still a significant gap compared to the pre-pandemic growth rate of around 8%. Additionally, from the perspective of first-tier cities like Beijing and Shanghai, the weakening of consumption is more evident. In 2024, the social consumption growth rate in Shanghai was -3.1% and in Beijing was -2.7%, 6.6 and 6.2 percentage points lower than the national social consumption growth rate, respectively. The weak domestic demand and lackluster consumption situation have led to low market expectations for consumption recovery. Analysts unanimously expect a 4.5% growth rate in social consumption in 2025, which is an improvement from 2024 but still lower compared to the pre-pandemic central growth rate of around 8%. While household income growth has improved, consumer confidence still needs to be strengthened. In 2024, the real growth rates of per capita disposable income and per capita consumption expenditure in China were both 5.1%. The former increased by 0.2 percentage points from the previous three quarters, while the latter decreased by 0.2 percentage points. However, in terms of household consumption tendencies, the proportion of household consumption to disposable income in the fourth quarter was 73.2%, showing a seasonal increase from the third quarter but still at a historically low level. This reflects that current consumer willingness to consume still needs to be further improved. The underlying reason for low consumer willingness is that Chinese residents lack confidence in future employment and income prospects. In December 2024, the consumer employment confidence index was 72.5 and the income confidence index was 94.0, significantly lower than the pre-pandemic central values. If the property market stabilizes and the "two new" policies are expanded, consumer confidence and social consumption growth are expected to recover. Time propels the revitalization of consumption as of late. In December 2024, the Central Economic Work Conference proposed that boosting consumption and expanding domestic demand were the top priorities for 2025, indicating an increasing emphasis on policies to promote consumption. If subsequent fiscal support for real estate and consumption gradually takes effect, the current low market expectations for consumption recovery may be broken. If policy support stabilizes the property market, it may help restore consumer confidence. China's household asset allocation structure is significantly biased towards real estate. According to statistics from the Chinese Academy of Social Sciences, real estate accounts for around 60% of household assets in China. Since 2021, the Chinese property market has been undergoing continuous adjustments, with falling house prices causing a shrinkage in household assets, thereby suppressing consumer willingness and confidence. However, since September 24, property policies have been issued frequently. The Political Bureau meeting in September stated that efforts should be made to promote market stabilization, while the Central Economic Work Conference in December proposed to stabilize the real estate and stock markets. As mentioned earlier, with the deployment of policies on both the demand and supply sides of the property market, fundamental data in the property market has started to recover, such as a rise in... If the "two new" policies are strengthened and fiscal support for consumption takes effect. We expect the direction of fiscal policy in 2025 to shift from the previous focus on "investment" towards "consumption." The Central Economic Work Conference proposed to "strengthen and expand the implementation of the 'two new' policies." Directionally, the program aimed to expand the categories of products eligible for trade-in. On January 8, the National Development and Reform Commission and Ministry of Finance announced that four categories of home appliances, including microwave ovens, water purifiers, dishwashers, and rice cookers, would be included in the subsidy program, with subsidies provided for the purchase of consumer electronics such as cell phones. According to macro forecasts from Haitong Securities, if the 2025 consumer goods trade-in subsidy program continues at 150 billion yuan, it may boost social consumption growth by 0.45-0.6 percentage points. If the subsidy scale expands to 300 billion yuan, it could lift social consumption growth by 0.9-1.2 percentage points. As fiscal stimulus gradually takes effect, sectors benefiting from policies such as "two new" are expected to continue to recover. As incremental policies are implemented to accelerate improvement in fundamentals, social consumption growth is expected to improve alongside nominal GDP growth. The current macroeconomic policy tone remains positive, with growth stability policies likely to be further strengthened. The Central Government's debt space and deficit increase space will be opened up. On February 21, Finance Minister Lofan stated that this year's fiscal deficit ratio will be increased to inject more momentum into economic development. Subsequently, it is necessary to continue tracking the implementation of various policies around the time of the annual sessions of the National People's Congress and the Chinese People's Political Consultative Conference in March, as well as the extent of improvement in fundamental data. We expect China's nominal GDP growth in 2025 to recover... Consumer sector has been declining for a long time, undervalued and under-allocated, repair of balance sheets + fiscal stimulus may lead to a reevaluation of consumption. Over the past few years, the continued deterioration of Chinese residents' asset and liability balance sheets has led to a continuous decline in their consumption capacity and willingness. Social consumption growth has fallen from around 8% before the pandemic to 3.5% in 2024. In this context, A-share consumer sectors have been undergoing a 4-year adjustment, with the largest decline in food and beverage at 58.8% and pharmaceuticals at 55.3%. Currently, the valuations and fund allocations in the food and beverage and pharmaceutical industries are at historically low levels. As of February 27, 2025, the P/E ratio for pharmaceuticals was 31.6 times (28.4% from low to high in the past 13 years), and food and beverage was 20.2 times (16.0%). In terms of fund allocation, the allocation levels of... With the repair of household balance sheets and incremental fiscal policy stimulus, consumption growth may gradually recover, and the fundamentals and stock prices of consumption stocks may have upward elasticity. Since the end of September 2024, a series of policy combinations have focused on real estate and the stock market, aiming to restore household balance sheets. As asset prices stabilize and recover, consumer confidence may gradually return.After the superimposed follow-up fiscal policy is expected to boost domestic demand repair, this is expected to drive consumption growth gradually rebounding, and sector valuation is also expected to return to the central level.Expected difference three: Foreign capital inflows The current A-share market's expectations for foreign capital remain low, mainly reflected in the net outflow of northbound funds for the entire year of 2024, as well as the underweighting of Chinese assets by global asset management institutions. With the improvement in the fundamentals of real estate and consumer pharmaceuticals driving risk appetite, A-share micro funds are expected to return to an active state in 2025, with a potentially significant difference in expectations for incremental foreign capital. Below, we will further analyze this. The proportion of global asset management institutions' allocation of Chinese equity assets may already be at an underweight level. When professional asset management institutions allocate global assets, they often use the share of the stock market's market value in the global total or the share of GDP in the region as criteria for asset allocation weights. From these two perspectives, China's weight in the global economy and capital markets may already be close to 20%, but the proportion of Chinese assets in the portfolios of global asset management institutions may still be significantly low. Looking at the passive allocation proportion, we use the weight distribution of China assets in the MSCI ACWI index as a proxy indicator for passive allocation proportion. As of the end of 2024, the proportion of China assets in the index assets was only 3%, significantly lower than the benchmark due to two main reasons: firstly, there are relatively few freely tradable shares in emerging capital markets such as China, and secondly, A shares are not fully included in the MSCI Global Index (currently the inclusion factor is only 20%). Looking at the active allocation proportion, referring to COPLEY's research report on the positions of global active funds, as of January 2025, the holdings of A+H shares by global active funds accounted for only 2.2%, significantly lower than the peak of over 5% in 2020, and already lower than the 2.6% passive allocation proportion of the MSCI global index. It can be seen that the active allocation proportion of overseas asset management institutions to Chinese assets may have already fallen to an underweight level. Furthermore, looking at representative large foreign institutions, the world's largest sovereign wealth fund, the Norwegian Government Pension Fund Global (GPFG), had an asset size of approximately 3.9% in A+H shares in 2024, a decrease of about 2.5 percentage points from 6.4% in 2020, indicating that Chinese equity assets in foreign positions may have been underweighted. Since 23, northbound funds have experienced rare large outflows from A shares, and the proportion of foreign capital in A shares' market capitalization has been continuously decreasing. In addition to the proportion of foreign capital allocated to China, the inflows and outflows of the A-share Stock Connect are also important indicators for observing foreign investment trends. Taking a longer view, since 2014, the Stock Connect funds have recorded net inflows every year, but in 2024 there was a historic first net outflow for the entire year, with a net outflow of approximately 62.2 billion RMB, and in Q4 of 2024, a single quarter outflow of approximately 138.5 billion RMB, the highest outflow in a single quarter in history. This is mainly due to changes in the macro environment in China causing fluctuations in foreign capital. Under the dilemma of deflation facing the economy, northbound funds that have traditionally stably allocated A shares have experienced a reduction in position. Looking at the structure, stable foreign institutions and flexible foreign institutions respectively had net inflows of approximately 1.6 trillion RMB and 400 billion RMB from the first quarter of 2018 to the second quarter of 2023, but since the third quarter of 2023, they have had net outflows of approximately 130 billion RMB and 86 billion RMB, indicating that foreign capital that has steadily increased holdings in A shares has also continuously flowed out since 2013. With the continuous net outflow of northbound funds, the proportion of foreign capital in A-share market capitalization has also been continuously declining in recent years. We use the "foreign institutions and individuals holding domestic RMB financial assets" as reported by the central bank, with the stock items representing the market value of A-shares held by foreign capital. As of Q4 2024, foreign capital held a market value of approximately 2.9 trillion RMB in A-shares, accounting for approximately 3.8% of the market value of A-shares in 2021. Since the continuous outflow of northbound funds since the third quarter of 2013, the proportion of foreign capital has accelerated its decline. It can be seen that in the context of rare large outflows of northbound funds, the proportion of foreign capital in A shares has continuously declined to a relatively low level. With the improvement in fundamentals and market sentiment, as well as recent signs of early foreign capital inflows into Hong Kong stocks, the return of foreign capital to A shares is expected to become another major difference in expectations. As mentioned above, the current A-share market's expectations for foreign capital are already low. Looking ahead, given the resonance of multiple positive factors, the return of foreign capital to A shares in 2025 may have a significant difference in expectations. On one hand, the improvement in domestic macroeconomic fundamentals combined with the recovery in the A-share market is expected to attract foreign capital back. In previous reports, we have analyzed that since 2024, there has been a clear shift in the tone of domestic macroeconomic policies, and incremental policies are expected to improve the macroeconomic fundamentals. Meanwhile, combining the shift in policy tone, the bull-bear cycle regularity, and the bottoming out of market sentiment, the market since 2024 has seen a reversal rather than a rebound. A shares may be poised for a new round of gains, with the improvement in fundamentals and the rise in the stock market, foreign capital is expected to return to A shares. On the other hand, recent signs of early foreign capital inflows into Hong Kong stocks may be a positive signal for A shares, with the potential for foreign capital returning to A shares. We have used the international intermediary custody funds in the Hong Kong Exchange Clearing System as a proxy indicator for foreign capital and have divided foreign capital into stable long-term foreign capital and flexible short-term foreign capital. For Hong Kong stocks, foreign capital has been in a continuous outflow for a long period of time, but recently, there have been signs of flexible foreign capital returning early and a narrowing of the outflow of stable foreign capital. The total amount of stable foreign capital and flexible foreign capital that have flowed into Hong Kong stocks over the past 4 weeks has increased from -127.7 billion Hong Kong dollars and -52.3 billion Hong Kong dollars at the beginning of this year to -36.2 billion Hong Kong dollars and 31.2 billion Hong Kong dollars recently. For A shares, the early return of foreign capital to Hong Kong stocks may be a relatively positive sign, with expectations for the return of foreign capital to A shares in the future.