Is there hope for core assets?
After the long epidemic season finally passed, the long holiday just passed seemed to be a full decompression, and people walked to the mountains, rivers and lakes to watch the Asian Games competitions. The 10-day closure of the exchange frees the secondary market from endless tug-of-war.
After all, after three years of hard work since the bursting of the bubble in core assets in the spring of 2021, stock investment has not waited for the "low-hanging fruit" to return. Looking up, there is still a large area of net worth waterline that is still being repaired. The subjective price investment that is deeply injured is better to leave the landscape for the time being and forget about it for the time being.
Since the peak of hype around value investing in early 2021, core assets have deteriorated.
Even Kweichow Moutai, the value benchmark of A-shares, has a maximum adjustment of nearly 50% in its stock price, and other factors such as "duty-free Mao" and "tooth Mao" have fallen by more than 70%, and are still on the way to the bottom.
At that time, the funds that flocked in when the emotions were at their most heated could be described as deeply harmed, so now when it comes to subjective price investment, everyone is more ridiculed and disdainful.
However, when everyone is thinking about core assets, it may also be the time to verify that John Templeton "always produces pessimism". According to him, this is also the only way to achieve an extraordinary return on investment.
After Fusheng steals two days of leave, the second-level migrant workers who return to work may also need to think backwards about "how far is the spring of core assets".
Happiness is always sad
Back in 2021, few could have imagined that the current round of core asset declines would last so long, and the adjustment would be so deep, and the main logic driving core asset declines has been changing.
Among them, for the initial peak and decline, everyone now often likes to blame the market for trading the Fed's interest rate hike expectations, U.S. bond interest rates rising, but the simple rise in U.S. bond interest rates obviously cannot explain why the major stock indexes in Europe, the United States and even other emerging markets only briefly corrected at that time, and then quickly recovered the lost ground, and did not finally peak until 2022, only the CSI 300 did not improve after hitting a record high.
The core variables that dominate the CSI 300 trend and the global market are actually the domestic economic environment and monetary policy.
From the timeline point of view, from 2017 to 2020, the early stage of the new crown epidemic, the domestic economy has been on a downward trajectory, and the monetary policy is relatively loose.
Although the new crown epidemic in 2020 had a further impact on the market, because the domestic epidemic was well controlled, production took the lead in recovery, the international cycle of "Chinese production - US consumption" was reconstructed[1], and the domestic economy briefly returned to incremental mode, so the central bank took the lead in withdrawing from easing from the third quarter, and monetary policy gradually returned to normal.
The A-share market also ended its continuous rise after March, turning into volatility, when the most popular phrase in the market was "sideways digestion valuation", and now it is speechless.
The calm state of the second half of the year was finally broken by the "Yongcoal Incident" at the end of the year.
According to the analysis of the Qin Han team of Guotai Junan Securities, in order to hedge the credit contraction under the impact of the "Yongcoal Incident", the central bank increased capital investment in November, and the liquidity was loosened, although it successfully rescued market confidence, but also triggered the longing for "releasing water", the sentiment of long heating up significantly, and the market entered the final madness.
However, the "Yongcoal incident" has always been just an episode, and the tone of monetary policy normalization has not changed under the support of the fundamentals of sustained recovery.
Just when the market's optimism about the capital side reached its climax, the central bank uncharacteristically did not carry out the usual cross-Spring Festival hedging, the funding rate rose significantly, and the phantom of the "money shortage" once reappeared[2].
Until the soaring commodity prices during the long holiday and the rise in U.S. bond interest rates further exacerbated the panic, funds switched to small-cap stocks with higher performance growth, and the already fragile core asset stock prices were drawn to the bottom. As a result, the leading market, which has soared for more than three years, completely reversed on the first trading day after the Spring Festival after the Lunar New Year.
Good times don't always come
In fact, throughout the more than 30-year history of A-shares, large-cap stocks represented by core assets have only outperformed in two periods, namely 2003-2006 and 2017-2020, and most of the other times are small-cap stocks performing better[3].
Among them, the emergence of large-cap stocks can be traced back to 2003.
At that time, public funds that pursued the theory of value investment began to rise, subtly changing the A-share investment ecology, and since then, until 2006, the stock price performance of large-cap stocks that is more in line with Buffett's price investment aesthetic has been dominant.
But in '07, the storm changed.
From this big bull market that came after that, small-cap stocks gradually took the initiative and dominated the A-share market for a decade. The reason is not the failure of fundamental factors——, after all, for most of the time since 03, the rise and fall of individual stocks has been positively correlated with the growth rate of performance. Exactly 20, and between 07-2016, it was clear that small-cap stocks grew at a higher rate.
The logic is not difficult to understand: finding growth rate is always the main line of the A-share market. However, the turbulence of the macro environment will inevitably lead to drastic changes in the sector/style with "growth rate". The difficulty of A-shares is that both the growth rate itself fluctuates and the places where there is a high growth rate are changing rapidly.
In the stock market, leading enterprises can gradually encroach on the market share of competitors by virtue of brand advantages, scale effects, etc., and the production and sales rate of products is higher, so the performance growth rate is often far faster than that of small and medium-sized enterprises.
And when the industry boom rises and demand is high, the production and sales of leading enterprises are first saturated, orders overflow, and small and medium-sized enterprises have a good opportunity for development, such as in the highlight of the photovoltaic industry in 2021, the upstream polysilicon in the industrial chain is in short supply, and leading enterprises such as Tongwei shares have made a lot of money, but from the competitive pattern, the market share of the industry CR5 that year has declined slightly.
And 07 is the climax of the release of China's WTO accession dividend, the GDP growth rate of that year refreshed the high point of the early 90s to reach 14.23%, and almost all companies in almost all industries are making money.
Although the financial crisis of '08 caused some disturbance to the upward trend of the economy, the subsequent "Four Trillion Plan" stimulated the economy to return to the upward channel, so small-cap stocks with greater performance flexibility always prevailed.
It was not until 14 or 15 years that the "sequelae" of overcapacity after the "four trillion" began to appear, and the economy entered the stock mode, and core assets regained their prospects.
In the economic downturn itself, the head enterprises can offset some of the negative beta of the economic downturn by expanding their market share. In the macro environment of policy-guided deleveraging and tight credit, the "Matthew effect" of leading companies has been further amplified because they have more stable operating leverage and more abundant cash flow.
Therefore, starting from around 2017, the tendency of public funds to increase their holdings of core assets is very obvious, and it has gradually evolved into a "fund huddle", and the proportion of "Mao Index" constituents in public fund holdings increased from 5.4% at the end of 2016 to 26.6% at the end of 2020[4].
And if the core assets of public funds "huddling" still have a certain passive component, after all, because of the rapid expansion of the management scale of C-end traffic outbreak, as well as regular performance appraisal mechanisms, ranking pressure, etc., they have to "buy soy sauce at 100 times PE", then northbound funds may have bought core assets at a valuation premium from the beginning.
Compared with A-shares, most overseas leading companies have achieved a valuation premium compared with non-leading companies, and institutional investors have a higher tolerance for valuation. Therefore, fueled by northbound funds, core assets soon passed the stage of performance growth supporting stock price rise, entered the process of valuation and gradually had a bubble tendency.
In the end, just like the plot that has been repeated countless times in history, the market inevitably collapsed. In the end, A-shares are still emerging markets, it is not that it is not fundamental, but the fattest part of the growth rate is always changing.
What day you come back
Since the beginning of 2021, it has been more than two years since the core asset adjustment, and the logic that led the decline of core assets has changed several times - first from the initial contraction of domestic liquidity, to the Fed's interest rate hike in 2022 and the release of systemic risks in global equity assets after the Russia-Ukraine war, and it was not until the end of 2022 that it followed the phased rebound of the global market.
And if 2022 is still an eventful autumn, then 2023 will completely enter the cold winter and completely reverse expectations, people who take off their masks do not wait for the imaginary expectations, and how the behemoths that are hundreds of billions and trillions at every turn continue to grow on the volume has become the biggest uncertainty hanging on the "core assets". As the domestic economic recovery was less than expected, market sentiment turned pessimistic again, especially after the CPI turned negative year-on-year in July this year, which is expected to further deteriorate into fears that the economy will fall into deflation.
Even if there are many positive policies in the near future, and the determination to protect the securities market is self-evident, the market still expresses many differences in a short-term game and sector rotation. It still failed to warm investor confidence.
But is everything really as bad as the market expects? Expectations often need to be revised, just as liquidity in 2021 was not as optimistic as the market expected, and the current economy may not deserve such pessimism.
In fact, sell-side analysts had expected a negative CPI in July.
According to the analysis of Huachuang Securities' Zhou Guannan team, pork prices rose greatly in July last year, so the CPI base was high, and the reason why CPI continued to decline this year was mainly dragged down by food prices represented by pork. After excluding the disturbances of supply and high base, the core CPI in July rose sharply month-on-month, driven by the release of travel demand, hitting a new high in the same period since the data began, releasing a signal of consumer demand recovery.
In the future, under the effect of low base, CPI may rise again year-on-year [5].
Judging from the results, the CPI in August has indeed turned positive as expected, so it is difficult to say deflation, at least for now.
What is relatively uncontroversial is that the trend of A-share institutionalization will not be interrupted, so the performance factor will become more effective in the rational state of the market.
Where the controversy lies is the question of where the growth rate is.
On the one hand, there are various mid- and small-cap index ETFs that continue to invest resources, and on the other hand, the core assets under the stock model, which are only waiting for recovery to be catalyzed, and given that the domestic economy has also been in the stock mode for a long time, the performance of core assets will eventually outperform SMEs and return to the center stage.
From the perspective of performance growth, after entering 2023, the profitability of core assets has taken the lead in stabilizing, so Li Bei, the "private equity witch", asserted at the end of July that "CSI 300 enters slow bull[6]".
In addition to the increase in market concentration and the expansion of the share of leading enterprises, there are two very important points that are cost reduction and going overseas:
1) Cost reduction. Including labor cost, capital cost, raw materials, energy, etc.
2) Increased concentration and share expansion.
3) The competitiveness of Chinese enterprises in this round is relatively improved, external demand is resilient, Chinese enterprises set up factories overseas, or direct exports, the global share is expanded, and the export/overseas profit contribution is large. A few examples: home appliance faucets, semi-trailer faucets, excavator faucets, automobile faucets, this year's overseas/export profit contribution is not small. In the United States, the home appliance companies and semi-trailer companies with the largest market share are actually Chinese companies.
Among them, raw material and energy costs may change cyclically, but other logic can be maintained structurally in the long term.
In her view, although the macro-control policies of the past few years have led to a large number of collapses of real estate companies and the shrinkage of Internet companies, which has increased the downward pressure on the economy, at the same time, it has also freed up more resources to fight for high-end manufacturing.
For example, BYD, which was widely circulated in the market, "the number of Tsinghua Peking University students recruited in a year is the sum of all historical stocks", or "the increase in manufacturing loans jumped up a step at once" and so on.
Therefore, domestic manufacturing investment ended the nearly 10-year decline cycle and returned to a growth rate of more than 10%.
Although in the eyes of many people, 2022 is "a year of great difficulties and major setbacks for China's economy", from the perspective of foreign trade in several major manufacturing regions in the world, the competitive advantage of China's manufacturing industry is expanding, because "both Europe and Japan and South Korea have turned from trade surpluses to trade deficits, and only China's trade surplus continues to expand to record highs" [7].
Of course, there are also people who have different opinions, such as Sheng Fengyan, a newly promoted fund manager of tens of billions of yuan. Compared with Li Bei's clear optimism about midstream and downstream blue chips, Sheng Fengyan now prefers small-cap stocks and goes head-to-head with Li Bei.
However, on the whole, Sheng Fengyan's thinking angle is more inclined to short-term chip games. In the previous closed-door communication of the institution, Sheng Fengyan said that the "risks of the current institutional reporting group have not yet been cleared", so it should be kept away. As for the point of clearing, Sheng Fengyan's forecast is not until after February next year [8].
But he also acknowledged that when U.S. Treasury rates fall, there is logically a bull market in core assets.
End
In The Psychology of Money, the author quotes economic historian Dale Dry McCloskey as perhaps fitting the current environment:
Optimism is like a salesman with rhetoric, while pessimism is like a well-wisher who helps. For reasons I can't understand, people like to hear people say the world is going to end.[9]
Therefore, under several articles of Banxia Investment, cynicism can be seen everywhere, but Li Bei's bullish logic is not untargeted, and her logic is exactly consistent with the logic of the US stock "Beautiful 50" continuing to outperform the S&P 500 after the 70s of the 20th century.
Although the US stock market is now a "beacon" in the minds of many people, there have been many crisis moments in the United States in history.
For example, in the Great Depression of 1929, there were also people who envied the Soviet Union that "the unemployment rate in the socialist economy was zero, and everyone was working for the country"; Since the "oil crisis" in the 70s of the last century, the United States has never returned to the "golden age" of rapid economic growth after the war [10].
But it is precisely since the 70s that the "Beautiful 50" with consumer stocks as the core has come out of the 30-year-old bull, relying on the change of industrial structure (the proportion of household consumption in GDP has continued to increase from 1965 to 2010), the increase in industry concentration and the three axes of global expansion.
Although history has never simply been copied and pasted, and core assets may not really copy the growth miracle of the "beautiful 50s" after the 70s, at least there is no need to be overly pessimistic in the current environment where the valuation of core assets is so low that Zhang Kun exclaims that "many high-quality companies can be counted as accounts for privatization".
Resources
[1] Xu Gao: Global Recycling, Chief Economist Forum
[2] This round of bull market resumption and our reflections, Qin Han Investment Notes
[3] A-share "evolutionary theory" (1): new ecology, new equilibrium, new method, GF Securities
[4] The style drift of the "Mao Index" and the good times of the "core assets" are difficult to repeat, BOC Securities
[5] It is difficult to say deflation, the low point of CPI in the year may have appeared - interpretation of July inflation data, Guannan fixed income vision
[6] See the completion of the dragon in the field, the blue-chip slow bull is rising, and the half-summer investment
[7] Standing at the beginning of a new bull market, invest in half summer
[8] Trapped mother-in-law again? Western Lide Shengyan shouted A shares, "now it is worth being very radical", but stay away from public huddle stocks, Cai Lian News
[9] The Psychology of Money: The Eternal Truth of Wealth, Humanity, and Happiness, Morgan Morgan Hauzer
[10] The Great Turn, Mark Levinson
[11] Pretty 50: After the bubble bursts, what characteristics can companies be able to cross the cycle, TF Securities
Editor: Zhang Jieyu
Draftsman: Zhang Weidong
Visual Design: Shurui
Responsible editor: Zhang Jieyu