Huaxi Securities: Current A-shares are in a "relatively bottom range" with limited downside risk at the index level

According to the Wise Finance APP, Huaxi Securities released a research report stating that looking ahead, from the perspectives of valuation and comparison of major asset classes, trading sentiment, and investor behavior, the A-share market is currently in a "relatively bottom range", with limited downside risk at the index level. Corporate profits in the third quarter are still at a bottoming phase, and investors still have concerns about the real estate fundamentals and future policy efforts. The market will unfold with hesitation, and the overall A-share market is expected to gradually move up in fluctuations. In terms of style, there may be alternation between dividend and technology themes.

Key Points from Huaxi Securities:

Investment Highlights

Market Review: Looking back at the A-share market from the beginning of the year to now, in February-March, driven by liquidity and risk appetite, the market interpreted an oversold rebound; by the end of April, A-shares further rose with the support of Hong Kong stocks; starting from May 20th, both the Hang Seng Index and the Shanghai Composite Index entered a phase of consolidation after reaching a temporary peak, with less than 20% of A-share stocks rising. As of now, the major A-share indices have returned to the levels of early March. On one hand, after the intensive introduction of real estate policies, the market is now in a phase of data verification, with current market confidence in economic recovery being insufficient; on the other hand, with clear regulatory policies and capital outflows from stocks with potential delisting risks under the backdrop of stock game, small and micro-cap, ST sector stocks have undergone significant adjustments, leading to cautious investor sentiment.

Analysis and Judgment:

1. After the intensive introduction of real estate policies in May, the capital market focuses on the verification of fundamental data. Following the new real estate policies in May, the period of continuous intensive policy introduction has passed, and the market has begun to focus on verifying the effectiveness of policies, such as new home transaction volume, trends in core city housing prices, and new long-term credit for residents. The latest data on May's manufacturing PMI, inflation, credit, etc., indicate that further consolidation is needed for domestic economic recovery, with industrial profits and corporate financial reports showing that A-share profits are still at a bottoming phase. Investors lack confidence in economic recovery, and A-shares need to wait for the stabilization and positive turn of PPI on a year-on-year basis to regain profit expectations.

2. Internationally, the Federal Reserve is still "unlikely to cut interest rates unless necessary" this year, but not raising interest rates is the consensus in the market. The Federal Reserve's June interest rate meeting remained unchanged, stating that current inflation "remains high" and raising the core PCE value in data forecasts. The Fed's dot plot shows that it is expected to cut interest rates only once in 2024, two times less than the forecast in March. Fed Chairman Powell stated that although recent inflation data is more favorable than at the beginning of the year, the Fed's inflation target has also made moderate progress, but current data has not given the Fed greater confidence to adjust its monetary policy stance. At the same time, no one sees raising interest rates as a basic expectation, and ultimately, interest rates will need to fall. In the short term of 1-2 months, the impact of overseas monetary policy factors on A-shares is limited.

3. The trading volume in both markets has fallen to a low for the year, and A-shares show characteristics of stock game under existing shares. Currently, public offering new funds are still at a low, margin financing balance fluctuates around 1.5 trillion yuan, the sustainability of ETF net purchases and northbound capital inflows is weak, overall, the micro-funding situation of A-shares is weakening marginally. On the policy front, after the issuance of the new nine regulations, the expansion of stocks under risk warning has accelerated, the survival of the fittest in A-shares has intensified, and once again, the regulatory tone of strict supervision in the capital market has been clarified In the context of a stock game with existing shares, the volatility of small and micro-cap stocks represented by the micro-plate stock index and the CSI 2000 has been amplified.

Fourth, from the perspective of three major dimensions and 12 indicators, the A-share market is currently in a "relatively bottom range". In our previous report "Reviewing the Characteristics of A-share Bottoming Trends in Historical Rounds", we proposed using 12 indicators from the micro-level valuation, comparison of major asset classes, trading sentiment, and investor behavior in three major dimensions to characterize the bottoming features of A-shares in historical rounds. From the current market environment, some indicators have met the characteristics of bottoming trends in historical rounds: 1) In terms of valuation and comparison of major asset classes, the latest A-share valuation percentile is at the 16th percentile in the past three years, the Shanghai and Shenzhen 300 risk premium is close to the three-year average +1 standard deviation, the stock-bond yield spread has declined to -0.9%, close to the three-year average -2 times standard deviation, which is closer to historical market bottoms; 2) In terms of trading sentiment, the turnover and turnover rate of A-shares have significantly shrunk from previous highs, with the proportion of strong stocks falling to 18%, lower than the historical average at bottoms; 3) In terms of investor behavior, the number of new accounts opened by the Shanghai Stock Exchange has declined for two consecutive months, the issuance scale of equity funds has further declined from a low base in the same period last year, and the scale of industrial capital reduction has been significantly decreasing since October 23. At the same time, the enthusiasm for A-share buybacks has significantly increased.

Investment Strategy: Looking ahead, from the perspectives of valuation and comparison of major asset classes, trading sentiment, and investor behavior, the current A-share market is in a "relatively bottom range", with limited downside risk at the index level. Corporate profits in the third quarter are still in a bottoming phase, and investors still have concerns about the fundamentals of real estate and future policy efforts. The market will unfold with hesitation, and A-shares as a whole are expected to gradually rise in a fluctuating manner. In terms of style, there may be alternating rotations between dividend and technology themes.

Key points to follow in the future include: in terms of monetary policy, the possibility of reserve requirement ratio cuts and interest rate cuts; in the capital market, the policy measures related to the capital market that the China Securities Regulatory Commission will introduce at the Lujiazui Forum on June 19; in terms of reform policies, the Third Plenary Session in July may catalyze themes related to "new productive forces". In the third quarter, continue to focus on the sales volume and price trends of domestic real estate, new long-term credit data for residents, and whether the September Fed interest rate meeting will further postpone rate cuts, etc.

Risk Warning: Policy efforts falling short of expectations, significant fluctuations in the domestic economy, changes in geopolitical situations, etc