preface
In this article, we analyze the current stage and cycle positioning of China's macroeconomy based on the "money-credit-growth" three-way cycle model and the classic long-medium-short cycle theory, and analyze the current market situation from the dimensions of market valuation, capital and policy, and finally share our latest views on several hot topics in the market. Investment is both a service and a communication, and we hope that our thoughts and opinions can inspire you, and we hope that you will share your views in the comments.
The mainland economy has shifted from a high-speed growth stage to a high-quality development stage, so we need a macro framework that can combine long-term and short-term factors in investment, which is the basic starting point of our investment strategy.
A new macroeconomic perspective
Loose money, tight credit, weak growth
Considering China's credit expansion model dominated by indirect financing, the economic structure dominated by manufacturing and investment, and the increasingly volatile economic growth rate, we combine the financial cycle with the real cycle to construct a three-way cycle model of money-credit-growth that is more suitable for China's current situation.
Note: Monetary (central bank tightening signal & policy rate), credit (medium and long-term loans, M1-M2, credit/GDP), growth (PMI, power generation, freight traffic).
According to the three-cycle model, the upward starting point of a cycle is credit expansion (Phase 1), followed by economic recovery (Phase 2) and monetary tightening (Phase 3), and credit contraction (Phase 4) is the top inflection point signal, which is then transmitted to recession (Phase 5), and finally the resumption of monetary easing (Phase 6).
In the current macroeconomic state, the three-cycle model points to the sixth stage of easy money, tight credit, and weak growth. This is basically in line with the market performance in the past period, and the performance of assets also implies the current market expectation in the sixth stage. Whether the macro environment can move forward from the current stage in the future depends on the currency-credit transmission.
Statistics show that in the downward phase of the cycle (stage 4/5/6), the value, quality, low volatility, dividends and cash flow factors perform relatively well, and the corresponding dividends, large market and low valuation styles can provide certain downside protection and have stable excess returns. In terms of specific industries, resources and energy, industrial services, financial real estate, and transportation performed better.
China's economic cycle positioning
The long-term downward period is · the mid-cycle decline· short-term replenishment of inventory
Overall, the current Chinese economy is in the late stage of the long-term downward trend (the real estate cycle needs to be bottomed) + the medium-cycle decline (strong manufacturing investment delayed clearance) + short-cycle weak inventory replenishment (structural replenishment driven by external demand).
Note: According to the classic long-medium-short cycle, the long cycle corresponds to the real estate cycle of about 16-20 years (Kuznets cycle), the medium cycle corresponds to the equipment investment cycle of 8-10 difficult dimensions (Jugra cycle), and the short cycle corresponds to the inventory cycle of 3-4 years (Kitchin cycle).
Internal and external cycles: The dislocation of the financial cycle between China and the United States has not yet reached an inflection point
According to the Bank for International Settlements (BIS) financial mid-cycle calculation, there is a mismatch between China and the United States at the financial mid-cycle level, which is measured by the credit and real estate cycles. The rebound in the United States financial cycle is the root cause of the current round of United States economic resilience, and at the same time, the domestic policy space is limited through the transmission of external exchange rate pressures.
Since the second quarter, the overall economic prosperity of the United States has been in a slow downward trend, but with the low leverage of the private sector, the bottom of the real estate cycle and the support of the government's loose finance, the stable + soft landing of the job market is still the benchmark situation for the year. In order to reverse the cyclical dislocation between China and the United States, China must either increase the intensity of credit easing (the central government's fiscal force) or effectively reduce the financing cost of the whole society (lower the interest rate level by a larger scale).
Debt cycle: The real sector balance sheet is still in the middle of shrinking
Since 2010, China's economic growth has been driven by capital spending, a process that has pushed up the leverage ratio of China's real sector, but the margin of economic growth has continued to weaken due to capital and debt expansion, and the debt cycle is a problem that must be considered now. In the past, when the pressure on production capacity or debt became prominent, it was either necessary to rely on overseas demand to resolve it, or rely on the leverage transfer between various departments to resolve it.
At present, the growth rate of debt in the household and corporate sectors has declined, and debt repayment (flow) has decreased, but due to the loss of income & income expectations, they are all in the stage of passive leverage. The shrinkage of the balance sheet of the real sector is a typical feature of this stage: in the case of slowing income growth and weakening of the expected margin, the monetary policy and even the demand stimulus policy are ineffective, and the economy lacks the main body to increase leverage, and the central government is one of the feasible paths.
Source: Wind, Debt Crisis, Penghua Fund. Note: Passive leverage can last for about 36 months
Manufacturing capacity cycle: the contradiction between supply and demand still exists
In 2024Q1, the fixed asset turnover rate of listed companies in the manufacturing industry fell again month-on-month, which was cross-verified with the downward data of the capacity utilization rate of industrial enterprises of the Bureau of Statistics; At the same time, the growth rate of manufacturing capital expenditure and construction in progress will turn negative in Q3 and Q4 of 2023, respectively; Compared with the two rounds of history, in the absence of large-scale demand stimulus, the bottoming out of capacity utilization requires supply contraction and demand to be matched.
At present, the capital expenditure of the manufacturing industry has fallen from a high point but is still far from the bottom, and the capital expenditure/depreciation of representative industries (photovoltaics, automobiles, semiconductors) is above 2.5, reflecting that the pressure on potential supply (capital expenditure→ construction in progress→ fixed assets) has not yet ended.
Note: There are two good indicators for measuring clearance: first, capital expenditure/revenue, capital expenditure/revenue falls below 1 standard deviation of the mean of the historical range; Second, the capital expenditure/depreciation and amortization of representative industries generally fell below 1.
economic growth
Price for quantity, strong production, strong manufacturing continuation
In the first half of 2024, domestic demand-related real estate, infrastructure, and consumption will all contract, industrial added value and manufacturing investment related to production and physical workload will remain resilient, and export growth will continue to exceed expectations. On the whole, strong production and strong manufacturing in exchange for price and quantity are the most prominent characteristics of the macro at this stage. However, the impact of this model: strong production + price for volume = > price pressure + nominal GDP is weaker than real GDP, and the pressure on domestic demand is amplified; At the same time, the time for the clearing of manufacturing capacity has also been delayed.
Exports are the core of a strong production model, in the first half of the year, exports benefited from overseas replenishment + rush to export, and in the second half of the year, export demand faced the test of weakening replenishment demand and tariff uncertainty; However, before the external demand is confirmed to fall, "volume production" is still a last resort choice for domestic residents and the government to deleverage.
Specifically, China's current economic growth has the following characteristics:
First, traditional manufacturing has dragged down capacity utilization, and emerging manufacturing is generally strong.
There is a differentiation within the strong manufacturing field, and the industries with high fixed investment growth rate and high capacity utilization rate are concentrated in emerging manufacturing such as medicine, general equipment, and communication electronics. Looking ahead, the pattern is expected to change little, and emerging manufacturing is still the key force/policy key guidance direction.
Second, the slow issuance of bonds restricts the physical workload, and the pressure of debt and weak demand hinder the implementation of infrastructure investment.
Under the lifelong accountability of debt borrowing and the reverse investigation of debt problems, the willingness of local governments to borrow is low, some new special bonds are used to convert debts, and the physical workload such as infrastructure investment, asphalt, project start-up, and fund availability rate is lower than expected at the beginning of the year. Even if infrastructure improves in the second half of the year, it may be relatively modest, and it is unlikely to be significantly boosted.
Third, exports also show the characteristics of exchanging price for volume, and there is a risk of weakening in the second half of the year.
In the category, the traditional advantages of mechanical and electrical products, high-tech products, integrated circuits, automotive appliances and other fields maintained high growth. From the perspective of export regions, the mainland's exports to developed countries such as Europe and the United States have declined, but the emerging markets continue to remain strong, and ASEAN is still the first driving force. With the weakening of the replenishment, the possibility of intensifying geopolitical frictions, and the end of the rush to export, exports will face certain downside risks in the second half of the year, mainly structural, and the boost of exports to the total volume may weaken.
In the current economic environment, the central bank has more constraints on action, and at the same time, the natural stimulus effect of monetary policy in a low inflation environment is limited, and monetary policy has retreated to the "second line", and the focus of countercyclical adjustment is actually on finance.
Credit environment
Households shrank their balance sheets and their savings soared
At present, the loss of residents' assets, liabilities + cash flow restricts credit and consumption behavior. The decline in asset prices erodes the balance sheet, the weakening of income and its expected growth rate impacts the cash flow statement, and the willingness of residents to borrow is weak and the contraction behavior tends to intensify in 2024. In the context of an aging population + weak income expectations, it may be difficult to release high savings effectively, and demographic trends are difficult to change in the short term, which means that greater income growth is needed to fill the gap.
At the same time, consumption presents structural bright spots: (1) residents' willingness to travel is not weak, and consumption is concentrated on holidays, (2) consumer goods are exchanged for volume, and the performance of the sinking market is relatively good, (3) mandatory is better than optional.
It is difficult to make a profit on the enterprise side, and large enterprises are better than small enterprises. Due to weak demand and strong supply, price pressures and corporate profits suffered, corporate utility maximization decisions shifted to cost minimization, and behavior was biased towards contraction & weak credit demand, and there is no obvious sign of improvement from the perspective of PPI and other leading indicators. In terms of the types of enterprises, large enterprises are better than small enterprises because of their better ability to resist risks, management capabilities, and scale advantages.
The financial side maintains its concentration and forces it to trigger an increase. In the first half of the year, the fiscal revenue and expenditure situation was weak, the broad fiscal revenue and expenditure both declined, and the fiscal performance was "full of determination", and the key areas of support were new quality productivity, as well as equipment renewal & trade-in on the policy side. The second half of the year is expected to accelerate, but it is not advisable to expect too much. First, the annual quota of special bonds is determined, the progress in the first half of the year is slow, and the pace may be accelerated in the second half of the year, but the pace is still relatively stable (it is difficult to have concentrated project demand), and second, after the end of the general election cycle in the second half of the year, the environment will be clearer, and more measures are expected to be introduced & landed.
Data source: wind, Penghua Fund, data as of May 2024.
The current market valuation is reasonable
The direction of high prosperity is still scarce
Based on the M1-M2 and US dollar pricing model, the current A-share ERP is in the cost-effective range of +1 times standard deviation, but from the perspective of the fundamental pricing model, the risk premium level implied by the current stock price is basically reasonable, and there is no obvious overvaluation or undervaluation.
On the policy side, as a policy outline once every ten years, the construction of the "1+N" top-level system of the nine articles of the country will have a far-reaching impact in the medium and long term.
On the capital side, broad-based ETFs and insurance funds will become the main increments in the market. 2024 is an incremental market dominated by passive equity funds (broad-based ETFs) and insurance funds (allocation funds). As of the beginning of July, institutional heavy stocks have maintained an outperformance of the index for more than two quarters, and the concentration of public offering positions (individual stock dimension) has rebounded for the first time in three years. In incremental funds, the scale of active funds is greater than that of passive funds, and the scale of high turnover funds is greater than that of low turnover funds. In addition, the allocation funds represented by insurance funds to find relatively high interest rates and stable assets in a low interest rate environment also promote the performance of the value/dividend factor.
On the enterprise side, in the environment of weak total growth, the direction of high prosperity is still scarce, and the proportion of industries with a growth rate of more than 30% remains at a low level. Compared with previous cycles, this round of earnings cycle is more flat, and there is still downward pressure on the ROE of all A in the second half of the year. In addition, the profit differentiation of different echelons of enterprises is continuing to widen, and the ROE stability advantage of leading stocks has begun to become prominent. The profit advantage of the leading company is gradually rising, which is due to the stronger cost control ability (three rates) and the higher voice of the industrial chain (inventory turnover rate/accounts receivable turnover rate/fixed asset turnover rate). However, due to the fact that enterprises exchange price for volume production, it is difficult for profits to be transmitted from the upstream to the middle and downstream.
Q1: What stage has the bonus market reached?
There is no trend change in the fundamental conditions for the dominance of dividends, such as the downward shift in interest rates, the lack of industrial boom trends, the sluggish economic growth expectations, and the rise in prices due to supply factors.
Therefore, we believe that: (1) the trend of dividend style diffusion is not over; (2) The cost performance of stable low-volatility dividend assets with the highest consensus has decreased significantly, and (3) with the effective return of fundamental pricing, the performance factor has begun to become prominent. A stock selection strategy that combines fundamentals and dividend returns is worth paying attention to, as well as Hong Kong stock dividends.
Q2: What is the current position of the resource product?
From the perspective of the four dimensions of resource pricing (supply, demand, dollar, and de-dollar), compared with the multiple logic resonances of H1, the global manufacturing demand is expected to weaken in the second half of the year. The correlation between the prices of different metals has reached a historical high, and the market outlook is likely to diverge from the same rise and fall.
Specifically, the long-term pricing of gold involves a grand narrative; Judging from the results of the four-factor model of US dollar, interest rate, central bank gold purchase, and US dollar debt, gold prices may deviate in the short term, but the long-term logic and trend are still continuing.
With the weakening of the expected margin of the global manufacturing industry, there is pressure on the categories sensitive to total demand; The "Trump deal" has also increased uncertainty in the price of traditional energy sources such as oil.
Compared with other industrial metals, the trend of copper prices is more certain: on the one hand, the spatial mismatch and reconstruction of the global manufacturing industry have made the power system construction gap exist for a long time; On the other hand, after the copper price has pulled back from the high, according to the pricing model based on demand + financial attributes, the current copper price has returned to a reasonable range.
Q3: At present, Chinese enterprises are accelerating their going overseas, how do you view the phenomenon of Chinese enterprises going overseas?
According to the specific situation of the driving factors of going overseas, according to the logical order, the export sector can be divided into the following four categories: the first gear is the category with global competitive advantage, low trade risk and large space for going to sea; the second category is the category that benefits from global reindustrialization and industrial chain reconstruction; The third and fourth categories are low- and mid-range categories that are expected to increase penetration in emerging markets or have a competitive advantage.
Despite the uncertainty of tariffs, exports remained resilient during the year, and preferred categories with strong competitive advantages, low trade risks, large space to go to sea, and low dependence on total demand: transportation equipment, ships, agricultural machinery, excavation/refining equipment, two-wheelers, and other brands going overseas.
Q4: What are the industrial trends worth paying attention to in the direction of new quality productivity?
Emerging industry opportunities can be explored in combination with production capacity patterns, industrial trends and policies, focusing on two clues.
Clue 1: Key directions of industrial policy and technology trends: AI application mapping (AI + automotive/electronics/medical/robot, downstream computing power chain/storage, connection), smart grid, low-altitude economy, etc.
Clue 2: According to the distribution of the production capacity pattern of each sub-industry, the industries that are currently in the gradual clearing or recovery of production capacity are mainly concentrated in the third and fourth quadrants: consumer electronics/optical optoelectronics, household supplies, rail transit equipment, refrigeration and air conditioning equipment, ground armaments, wind power equipment, biological products/medical equipment, etc.
The risk disclosure is as follows
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