The external stock market shook sharply, can A-shares become a "safe haven"?

The Economic Observer

2024-08-08 15:59Posted on the official account of Beijing Economic Observer

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01 The world's major stock indexes have rebounded under the leadership of the Nikkei 225 Index, but the Nikkei 225 Index has fallen sharply and fluctuated widely in the short term.

02 The A-share market has resisted the decline after the crash on August 2 and August 5, with the Shanghai Composite Index falling by only 0.92% and 1.54% respectively.

03 Experts believe that the resilience of the A-share market is related to the difference between RMB carry transactions and yen carry trades, and the actual impact on transactions at the transaction level is limited.

04 On the other hand, the valuation advantage of the A-share market is obvious, with the SSE 50 and CSI 300 trading at 10 times and 11 times respectively, while the Dow and S&P 500 are both trading at around 26 times.

05 Industry insiders said that there is not much room for A-share adjustment, and it is facing a turnaround, with long-term investment value.

The above content is generated by Tencent's hybrid model and is for reference only

After experiencing sharp declines on August 2 and August 5, the world's major stock indexes began to rebound under the leadership of the Nikkei 225 index. Although the Nikkei 225 index rose nearly 3,600 points for two consecutive days on August 6 and August 7, it still failed to recover the losses on August 5. On the contrary, the Nasdaq China Golden Dragon Index, which reflects the trend of Chinese concept stocks, closed stubbornly at the end of August 5, and rose 3.03% to 5535.85 points on August 6, successfully recovering the losses on August 2.

"Amid the volatility of the external stock market, it is clear that undervalued Chinese concept stocks are playing the role of a short-term safe haven. So, can the potential investment value advantage of the A-share market, which is in a value depression, be discovered by more capital and become a safe haven in the global storm? Infinite anticipation. On August 7, Mr. Zhu, a veteran investor with more than 20 years of experience in the stock market, updated his circle of friends.

The peripheral stock market shook sharply

After a long period of gains and record highs, major overseas stock indexes reversed and fell in mid-July 2024. Entering August, this wave of decline has accelerated significantly, of which August 2 is called "Black Friday" because major overseas stock indexes are exhausted, followed by "Black Monday" again on August 5, and Japan, Korea and other stock indexes have plummeted to circuit breakers. However, on August 6 and August 7, the global capital market rebounded sharply. Under the ups and downs, the risk of stock market volatility is fully realized.

Taking the Japan stock market as an example, the Nikkei 225 index turned around after updating a new high of 42,426.77 points on July 11, and fell to 31,156.12 points on August 5, which has fallen by 11,270.65 points (a decline of 26.56%) in less than a month, of which a single day on August 5 contributed a decline of 4,451.28 points; then the index rebounded sharply on August 6 and August 7, and led to the strengthening of global stock indexes. This is the fourth time that the Nikkei 225 has seen such a large short-term decline and a wide range of fluctuations, only in 1987, 2008 and 2011.

Regarding the amplification of the volatility of overseas risk assets, Qin Han of Zheshang Securities believes in a research report on August 6 that this is mainly due to the "recession transaction" of United States. On the one hand, Japan and Korea are export-oriented countries, and the proportion of technology stocks is relatively high, and the recent strong recession expectations in the United States economy and the continued appreciation of the yen are not conducive to export growth expectations, coupled with the decline in technology stocks, the Japanese and South Korean stock markets have been suppressed; On the other hand, international investors, represented by the yen carry trade, will borrow yen and invest in the Japan stock market in the early stage, but under the catalyst of the Bank of Japan's interest rate hike, international investors began to withdraw, resulting in a short-term market stampede.

At the same time, he stressed that the United States interest rate cut cycle is slower than the economic cycle dislocation, resulting in the risk of a "hard landing" in the United States economy, the important driving force of the previous US stock rally has basically disappeared, and the "chain negative feedback" of US stocks and yen carry income may continue to be interpreted. Therefore, the stop-fall rebound on August 6 may indicate a temporary slowdown in the liquidation transaction, but the Fed's actual interest rate cut has not yet landed and the Bank of Japan's interest rate hike cycle is still in progress, and the arbitrage funds that have accumulated a large amount of floating profits in the early stage may still be waiting for a suitable exit opportunity.

It is worth noting that in the context of the general collapse and violent volatility of the world's major stock indexes, the resilience of the A-share market is highlighted, in the "Black Friday" on August 2 and the "Black Monday" on August 5, the Shanghai Composite Index fell by only 0.92% and 1.54% respectively, far stronger than the major overseas stock indexes.

Zhang Yu of Huachuang Securities said in an article on August 6 that although the linkage between the RMB and the yen, which are both relatively low-interest currencies, has increased significantly since the Fed raised interest rates rapidly, the RMB cannot fully apply to the logic of the Japan-US carry trade. The fundamental reason is that the RMB financial account is still limited open, and the actual amount of RMB as a financing currency to purchase US dollar assets is limited. Therefore, although they are both "carry trade pricing", the Japanese-US arbitrage and China-US arbitrage are actually completely different trading entities.

Zhang Yu believes that because the main body of RMB carry trade and yen carry trade are different, the current overseas trading logic mainly disturbs A-shares in terms of sentiment, and the actual impact on the transaction level is very limited. One of the manifestations is that the volatility of United States assets has limited impact on Chinese assets through the actual carry liquidation trading channel, and A-shares will be relatively resistant to decline in the current volatility dominated by arbitrage liquidation forces.

Regarding the recent performance of A-shares, senior investment analyst Huang Yongyao has a different view. In an interview with reporters, he said that the reason why A-shares have recently resisted the decline is because they have "fallen through" before; "A-shares have not seen a real bull market since 2015, and there has been no decent rebound after 2019, and they are in a 'deep valley', while major overseas stock indexes such as United States and Japan have returned after hitting record highs."

He further said that on the one hand, the violent fluctuation of the global stock market is a personal risk education for mainland investors (especially investors who blindly went overseas to take over at a high level during the peak of Japanese stocks and U.S. stocks in the early stage, resulting in high premiums for related cross-border ETFs), and no country has a stock market that only rises but does not fall; On the other hand, the road to the return of the value of the A-share bubble in the early stage may also be a "blessing in disguise", and if the subsequent situation is handled well, it is likely that the A-share market will become a "safe haven" for global funds due to its characteristics of valuation depression.

Can the A-share market become a global "safe haven"?

Mr. Zhu, a veteran investor, said that in order to become a "safe haven" for global venture capital, the prerequisite is to have a smooth channel for these funds to enter and exit. Although the mainland has previously launched measures such as QFII (Qualified Foreign Institutional Investor) and RQFII (Renminbi Qualified Foreign Institutional Investor) and achieved good results, it is clear that it still needs to be improved. "The new QFII regulations will be implemented at the end of this month, and it happens that the peripheral stock market is volatile, which is a good opportunity. I am confident that the A-share market can become a 'safe haven' for global venture capital." He said.

According to data released on the website of the China Securities Regulatory Commission, as of the end of June this year, the number of qualified foreign investors in mainland China had reached 839 (36 of which were approved in the first half of this year). On this basis, in order to further deepen the foreign exchange management reform of qualified foreign institutional investors and RMB qualified foreign institutional investors, and steadily promote the opening up of the financial market, the People's Bank of China and the State Administration of Foreign Exchange have recently revised the 2020 version of the Regulations on the Management of Domestic Securities and Futures Investment Funds of Foreign Institutional Investors, which will come into effect on August 26, 2024.

According to the reporter's understanding, the main content of the revision is four aspects, namely, to further simplify business registration procedures, further optimize account management, further improve exchange management, and unify the foreign exchange risk management model of QFII/RQFII and direct entry into the interbank bond market (CIBM).

"With the further deepening of the reform of the QFII/RQFII system, it is more convenient for foreign institutional investors to invest in China's securities market. Against the backdrop of recent volatility in global stock markets, the QFII/RQFII regime is likely to be more compelling and is expected to be favored by more funds around the world. On August 6, Zou Ye, a partner at Merits & Tree Law Firm, said in an interview with reporters that many funds managed by overseas asset management institutions (especially international asset management institutions) have investment strategies for global asset allocation to diversify investment risks, and A-shares have a weight of 0.4% and 4.2% respectively in the MSCI global market and emerging market index.

Zhang Xia of China Merchants Securities also believes that foreign capital may re-flow into A-shares in the near future. In the research report, he pointed out that the external environment has suddenly taken a major turn in the past month, since the United States election waves, the growth rate of United States Treasury bond balances has begun to slow, and various recent data have also shown signs of slowing. At the same time, investors gradually increased their trading in United States recession expectations, the dollar index and US Treasury yields fell sharply, commodities and overseas stock markets fell sharply, and the RMB exchange rate strengthened sharply.

In this context, Zhang Xia believes that there will be major changes in the trading logic of A-shares at this time: on the one hand, the domestic demand policy needs to be further strengthened to hedge the upcoming decline in external demand, A-share investment has changed from external-oriented to internal-oriented, and investors should pay more attention to technology, consumer medicine and medicine related to domestic demand; On the other hand, the risk of overseas stock markets has increased, but there are important institutional investors in China to support the bottom, and there is an expectation of RMB appreciation, once the domestic demand policy is forced, so that investors can see signs of stabilization of the domestic economy and corporate earnings, foreign capital is likely to return to A-shares.

As for whether the A-share market can become a safe haven in this global storm, Huang Yongyao told reporters that from the perspective of valuation, the A-share market is indeed in a valuation depression, and the current price-earnings ratios of the SSE 50 and CSI 300 are 10 times and 11 times respectively, while the price-earnings ratios of the Dow and S&P 500 are about 26 times, and the valuation advantage of the A-share market is obvious.

In addition, relevant statistics show that the A-share market has seen a significant increase in ETF trading and net subscription recently, with a cumulative net inflow of 152.5 billion yuan of ETF funds in July. In this regard, Zhang Xia said that after the market adjustment, important investors of ETFs began to increase their efforts to increase their holdings of ETFs, providing stable incremental funds for the market and forming important support for follow-up funds; At the same time, the policy is also ushering in an important inflection point, which is expected to gradually reverse the weak domestic demand environment in the past three years; In addition, the United States is expected to enter a cycle of interest rate cuts, US bond yields are falling, the dollar index is weakening, the RMB is beginning to strengthen, and the external liquidity environment facing A-shares is also improving.

Therefore, Zhang Xia believes that there is not much room for A-share adjustment, and the current scenario is similar to the fourth quarter of 2018, A-shares are in the process of continuing to build a bottom, but may start a decent rebound at any time.

Huang Yongyao is also optimistic about the investment prospects of A-shares, believing that the A-share market is facing a turnaround, "The A-share market is returning to the road of standardization under strict supervision, and the current CSI 300 price-earnings ratio is only 11 times, which has long-term investment value."

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