Foreword: It is very difficult to select stocks this year, and the money-making effect is weak. However, if the market value threshold is raised, looking for alpha in the beta of the era of large-cap leaders is a very effective way to improve the winning rate of stock selection.
1. Raising the threshold of market capitalization: a simple and effective stock selection idea this year
We have grouped the market performance by market capitalization interval since the beginning of the year, and we can find that market capitalization is the key factor that determines the winning rate and affects the return. Increasing the market cap threshold is a simple and effective way to increase your win rate.
Among the 122 stocks with a market capitalization of more than 100 billion, 74 have achieved positive returns this year, accounting for 60.7%. Among the 125 stocks with a market capitalization of 500-100 billion, the winning rate dropped to 42.4%. When the market value sank to the range of 100-50 billion, only 322 of the 1,239 stocks rose, and the winning rate further decreased to 26.0%. Finally, for the 3,833 stocks with a market capitalization of less than 10 billion, only 305 stocks rose, accounting for only 8.0%.
Moreover, this strategy is effective not only for the market as a whole, but also within the major sectors. It can be seen that in most major sectors, the larger the market capitalization, the higher the winning rate. Even in TMT, a sector that is traditionally accustomed to "speculating on small and new", the performance of large-capitalization stocks this year is also significantly superior.
Further, we see that not only A-shares, but also large-cap stocks have a higher winning rate this year. Similar to A-shares, whether in the U.S. stock market or the Japanese stock market, the larger the market capitalization, the higher the winning rate.
Therefore, raising the threshold of market capitalization and looking for alpha in the beta of the era of large-cap leaders is a simple and effective stock selection idea to improve the winning rate in the market this year.
Second, the large market and leading style are the beta of the times
Since the beginning of this year, we have repeatedly emphasized that in the era of high-win investment, it is recommended to look for alpha in the beta of the era of large market and leading style, which has resonated with more and more investors. There are three main reasons for this:
2.1. From the perspective of capital: incremental main force changes, and the reshaping of the united front of market leaders and core assets
The development of global passive investment is an important driver behind the outperformance of the market leaders. Referring to the United States, the expansion of passive funds has accelerated in the past decade or so. From 2010 to 2023, passive index funds investing in the U.S. collectively received a net inflow of more than $2 trillion. By the end of 2023, the market capitalization of U.S. passive funds accounted for nearly 60% of all fund holdings.
Among them, the large-cap index passive fund is the main force for expansion. Taking U.S. equity ETFs as a reference, from the perspective of market capitalization style, 76% of them focus on large-capitalization styles. At the product level, the top three ETFs all track the S&P 500 index, accounting for more than 20% of the total. Focusing on large-capitalization stocks, high concentration, and continuous expansion are the three main characteristics of the U.S. passive fund market, and its expansion has played an important role in promoting the long-term outperformance of large-cap leaders.
For A-shares, ETFs and insurance funds are important marginal incremental funds this year, which also drive the market to focus on the market leaders.
1. Passive funds have become an important marginal increment in the market this year, and are mainly concentrated in large-cap broad-based ETFs represented by the CSI 300.
In recent years, the expansion of passive funds has accelerated. Passive index funds have accelerated their expansion in recent years, especially since the beginning of the year. As of the end of Q1 2024, the market value of A-shares held by passive index funds has risen to 1,996 billion yuan, compared with only 446.6 billion yuan in 2018. Among them, since December 2023, equity ETFs have seen a total inflow of nearly 441.8 billion yuan, mainly to large-cap broad-based ETFs. In terms of splitting, the ETFs tracking the CSI 300 Index alone had a net inflow of 298.6 billion yuan, accounting for more than 2/3 of the total inflow, becoming an important source of incremental funds for the weighted leading stocks.
More importantly, as the proportion of passive funds continues to rise, their impact on market style is also more significant. As of the end of 2024Q1, among the top 50 heavy stocks of partial stock funds (passive index + active partial stocks), the proportion of passive funds has jumped to 45.7%, which is close to 1:1 with active funds, while the passive proportion at the end of 2021 was only 22.9%. Under the total holdings of partial stock funds, the proportion of passive funds has also risen to 41.2%, compared with only 21.4% at the end of 2021.
At the industry level, as of the end of 2023, under the total holdings disclosed in the fund's annual report, the proportion of passive funds in the non-bank finance, banking and building decoration industries has been higher than that of active funds, with passive proportions reaching 77.9%, 66.0% and 50.2% respectively.
Under the trend of passive funds, especially broad-based index ETFs, on the one hand, it is the promotion of its heavy position industry, and more importantly, it is the enhancement and blessing of the leading style of the large market.
2. The high increase in premiums has led to a significant inflow of insurance funds, focusing on large market capitalization leaders.
With the high increase in premiums, the expansion of insurance capital has brought important increments. Since the beginning of the year, insurance companies' premium income has maintained double-digit growth, supporting the year-on-year increase in the balance of insurance capital. At the same time, the equity position of insurance funds is still at a historically low level, with stocks and funds accounting for only 12.02% of the total as of the end of 2023. As the market recovers, its willingness to increase positions is expected to rise. As insurance capital holdings have always preferred large-capitalization stocks, their expansion will bring a large amount of capital allocation needs to the leaders.
In addition, an important change in insurance capital in recent years is that it has become more likely to use ETFs to deploy A-share assets. Taking insurance capital as an example, the proportion of stock investment in life insurance companies fell overall during Q2-Q4 2023, while the proportion of securities investment funds was relatively stable, indicating that insurance funds rely more on funds to deploy equity assets. From the holders disclosed by the major blue-chip ETFs, we can also see the trend of increasing the holdings of insurance funds.
3. In addition to passive funds, active fund holdings are "long-term and must be combined", refocusing on the market leader.
Referring to historical experience, the concentration of fund holdings changes in a trend every 3~4 years. The position concentration of this round of mutual funds has fallen for three consecutive years from the peak at the end of 2020 to the end of 2023. At present, according to the latest quarterly report data of the fund in the first quarter of 2024, we observe that the proportion of the top 5/10/30/50/100 heavy stocks in the market value of all heavy stocks held by active equity funds has increased by 1.12 pct, 1.42 pct, 2.91 pct, 3.06 pct, and 3.40 pct respectively compared with the previous quarter. A new round of holdings from "diversification" to "concentration", from market capitalization sinking to focusing on leaders, and a turning point in core assets may have appeared.
In addition, from the perspective of the industry, the proportion of the top 3/5/10 heavy industry holdings of active equity funds decreased by 4.24 pct, 3.16 pct, and 2.02 pct respectively compared with the previous quarter. The concentration of individual stocks has increased, while the concentration of heavy positions in industries has decreased, indicating that the market is more inclined to look for high-quality leading assets from various industries, rather than focusing on a certain industry track.
In addition, from the perspective of individual stocks, they are basically concentrated in the core assets represented by the leaders of various industries. Among these figures, there are Yangtze River Power and COSCO Marine Energy, which are biased towards dividends, and new kinetic energy leaders whose stock prices have hit a record high, represented by Zhongji InnoLight and Shanghai Electric Co., Ltd., as well as home appliance leaders such as Midea and Haier, as well as traditional enterprises such as Zijin Mining and China Molybdenum, which are driven by rising commodity prices and new gold prices. In addition, key targets of core assets that have performed poorly in the past few years, including CATL, Wuliangye and Sany Heavy Industry, have also ushered in stabilization and repair this year, and even risen significantly.
4. In addition, foreign capital is also entering the market this year, and it is still focusing on the market leader, forming a resonance with various domestic institutions. At the industry level, northbound funds mainly increased their positions in banks, food and beverage, electronics, non-ferrous metals and other sectors. At the individual stock level, the increase in positions is also concentrated in leading white horses such as CATL, China Merchants Bank, Yangtze River Power, and Kweichow Moutai.
2.2. From the perspective of risk appetite: the world has entered the era of high-probability investment
In recent years, the global geopolitical situation has been turbulent, and market uncertainty has risen systematically. In recent years, with the outbreak of the Russia-Ukraine conflict and the Palestinian-Israeli conflict, the global geopolitical landscape has become increasingly complex, and the geopolitical risk center has shifted upward. In addition, in the post-pandemic era, the global economic growth slowdown, the debt surge, the rise of the far right and ultra-nationalism, and even the rise to power, the political level is also facing the test of uncertainty.
This year, in particular, is a global "super election year". According to statistics, a total of 83 elections are expected to be held in 78 countries and regions in 2024, involving 4.2 billion people, accounting for 60% of the global population. Among them, 40 countries and regions will hold government elections represented by leadership elections, or legislative elections represented by parliamentary and parliamentary elections, accounting for 41% of the world's total population and 42% of GDP.
In the context of economic weakness, geopolitical turmoil, and increasing uncertainty, the pursuit of certainty and high-probability investment have become a global consensus. Against this backdrop, gold prices also hit record highs, which is also a sign of a contraction in global risk appetite and a search for certainty.
For A-shares, on the one hand, they are affected by overseas risk appetite, and on the other hand, the current capital market environment has further strengthened the market's pursuit of high-probability assets and high-quality leaders. The new "National Nine Articles" require "strict access to issuance and listing", "strict continuous supervision of listed companies", "increase the supervision of delisting", "strengthen the supervision of securities and fund institutions", and "strengthen the supervision of transactions".
In addition, investing with a high win rate is also the consensus after large fluctuations. In our February report "High Winning Rate Investment: Consensus after Large Fluctuations", we systematically reviewed the market interpretation after the two major fluctuations in 2015 and 2018, and found that after a short-term rebound and repair, high-win assets characterized by high ROE/ROA/ROIC, high cash flow, and high net profit growth/revenue growth finally stood out and became the consensus direction of the market in a new medium and long-term dimension.
2.3. From the perspective of fundamentals: in the weak global macro environment, the relative advantages of leading enterprises are becoming increasingly significant
The sluggishness of the overseas economy is already gradually emerging. The US real GDP in the first quarter of 2024 was 1.6% annualized quarter-on-quarter, and then revised down to 1.3%, a significant decline from the previous value of 3.4%. Economic weakness is gradually emerging. At the same time, the eurozone has cut interest rates to protect the economy.
At the same time, the relative advantages of the fundamentals of leading companies are becoming increasingly significant, which has become an important support behind their strong performance. We have seen a continued upward trend in the EPS of the MSCI LargeCap Index since 2023, which has been an important driver of its strong performance. Behind the global economic weak macro environment, leading enterprises rely on their monopoly market position or overseas to maintain stable growth in their performance, and their advantages over the profitability of other stocks continue to expand.
Similar to overseas markets, the current profit advantage of A-share leaders is gradually becoming prominent. On the one hand, as of 2024Q1, the overall net profit growth rate of the leading enterprises is -0.91%, which is 3.35 percentage points higher than that of all A-shares, and the leading margin is significantly larger than the 0.10 percentage points in 2023, on the other hand, the number of industries with the best performance growth rate in 2024Q1 has significantly increased from 61.29% in 2023 to 70.97%.
In terms of industries, the year-on-year growth rate and ROE of leading companies in most industries are higher than those of the industry as a whole. As of 2024Q1, a total of 22 of the 31 primary industries have a net profit growth rate higher than that of the industry as a whole, and the leading ROE_TTM of all industries except agriculture, forestry, animal husbandry and fishery and comprehensive are higher than the overall level of the industry.
2.4. Summary and outlook: Can the beta of this era of large-cap leading style be sustainable?
To sum up, since the beginning of the year, the world, including A-shares, has been dominated by the market and the leading style. Behind this, on the one hand, under the global chaos, high-probability investment has become a consensus. On the other hand, the fundamental advantages of leading enterprises continue to expand. In addition, in terms of funds, the main force of increment is dominated by large-cap index passive funds and insurance funds, which also further strengthens the leading style of the market.
So looking ahead, can the beta of the era of large market and leading style be sustained? We think we're just getting started.
First, from the perspective of risk appetite, the world has entered an era of high-probability investment. In addition, the domestic market has experienced the baptism of great fluctuations in the past few years, as well as the reshaping of investment concepts in the current capital market environment, and the consensus on high-probability assets and high-quality leaders has been condensed.
Second, from the perspective of profitability, the leading advantage may continue. The bottom of the economy is now becoming clearer, but the path to economic recovery may be more modest, rather than a "V" reversal. In this context, the large-cap leader, as a benchmark with competitive advantages in various industries, may continue to generate excess returns in the coming stage.
Third, from the perspective of capital, the reshaping of the united front of the market leader and core assets has just begun. In the current capital market environment, on the one hand, ETFs and insurance funds have become an important source of incremental funds in the market, and on the other hand, the speculation of small-cap stocks and "shell value" has been suppressed, jointly promoting the market to focus on the large-cap leader, and high-win investment is gradually becoming the consensus of all funds in the market.
Therefore, with the moderate recovery of the economy and the prominence of the leading profit advantage, with the blessing of the high-probability investment concept and the united front, the large-cap leading style will still be an important source of excess returns in this year's chaotic market.
Risk Warning
Economic data fluctuates, policy tightens more than expected, and the Federal Reserve raises interest rates more than expected, etc.
Note: The report in this article is excerpted from the research report published by the Industrial Securities Institute of Economics and Finance, and the specific report content and related risk warnings are detailed in the full report. Securities Research Report: "A Simple and Effective Stock Selection Idea This Year" Released on June 28, 2024
Report Issuer: Industrial Securities Co., Ltd. (Licensed by the China Securities Regulatory Commission for Securities Investment Consulting Business) Analyst of this report:
Zhang Qiyao SAC Practising Certificate No.: S0190521080005
胡思雨 SAC执业证书编号：S0190521110003
张勋 SAC执业证书编号：S0190520070004
吴峰 SAC执业证书编号：S0190510120002
Yang Zhenyu SAC Practising Certificate No.: S0190520120002
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