What's next for A-shares? Watson talks about "stock market expectations" again

Watson, a well-known economist, recently posted an article entitled "The Stock Market Looks Forward to the Year of the Dragon" on his personal Weibo. He believes that the V-shaped reversal in the securities market is mainly due to the fact that the central policy has changed market expectations and greatly enhanced people's confidence. The market will rise another 10% to 20% at the current level, which is effectively supported by the relatively low policy, capital and corporate valuations.

At the same time, Watson reminded that even an unlimited supply of funds will be subject to the inherent constraints of market forces, and cannot push up the stock price indefinitely. A higher fundamental-backed market uptick requires an overall upturn in economic conditions and a clear rise in corporate earnings. Moreover, history has repeatedly proven that the mad bull market will inevitably lead to a market crash eventually, when it is mainly retail investors who will lose the most. Therefore, both the market and regulators should be wary of the stock market soaring out of control. A wave-like slow bull with a gradual improvement in economic fundamentals, rather than a big upheaval is clearly what regulators are pursuing.

Watson believes that now that the central government's major policies have been clear, the key depends on the introduction and implementation of specific policies of various departments. Unlike the stock market, which can produce immediate results, the economy needs greater strength and more scientific and accurate leverage. In his view, the most important thing for complex economic policy choices is to identify the breakthrough point of a stronger, more focused, more sustainable, and more impactful comprehensive macroeconomic policy and structural transformation.

Previously, China Securities Journal published an article "Watson: New Expectations for the Stock Market" in March 2024. At that time, Watson said that the transformation of the securities market from mainly serving financiers in the early days of its establishment to being investor-oriented was a fundamental change in the strategic direction. The significance of investor-oriented is not only limited to investor protection in the secondary market, but also closely related to the high-quality development of listed companies, the backbone of China's economy, and the function and role of the securities market.

Attached is the full text of Watson's Weibo

The Year of the Dragon, the stock market is looking forward to it again

Lately, too many people have come to ask about the stock market. I said that I really don't understand 99% of the time about stock trading, and I don't dare to give advice. Some people do not give up and cite that you issued a signal of a long bear market in 2001, a signal of a turning point in the market in 2005, a new era of the securities market in 2006, a signal of overheating in the market in 2007, and a signal that the mad cow is unsustainable in 2015. Now that the stock market drama has become stunning, you must give another signal. I can only explain repeatedly that I was only studying the institutional mechanism of the stock market at that time, and I happened to make some auxiliary judgments on the trend of the stock market by the way. I was lucky enough to say the wrong thing, just because I didn't know how to say more, don't make it difficult for me.

I don't want an old guy to come to my door today, saying that at the beginning of the Year of the Dragon, the new chairman of the China Securities Regulatory Commission took office, and you wrote a very influential post on "New Expectations for the Stock Market in the Year of the Dragon", which was later published on the front page of the "China Securities Journal". Now that the new expectations are really coming, if you don't take a stand, you are too irresponsible. I'm the same person, and at this age, it seems that I'm still irritated, so I can't help but say a few more words.

The reason why I say that we should have new expectations at the beginning of the Year of the Dragon is that the development of China's stock market has not yet departed from the policy market at this stage, and the change of leadership of the stock market at a critical juncture reflects the great concern of the central government about the stock market. At the first panel discussion of the new chairman, I also said that the chairman of the SFC is a high-risk position. One of the main reasons is that although the China Securities Regulatory Commission is directly responsible for the stock market, the trend of the stock market is more constrained by economic fundamentals and the constraints of various parties. Objectively speaking, although the China Securities Regulatory Commission (CSRC) has adopted a lot of coercive administrative intervention this year that has a mixed reputation, on the whole, it has done a lot of commendable and important basic work in improving the quality and investment value of listed companies. But despite this, the market still came out of new lows until mid-September, affected by the environment outside the stock market. As soon as last week's banking and financial support measures were announced, especially after the announcement of the decision of the Politburo meeting, the market immediately experienced an unprecedented violent rally. It can be seen that in order for the securities market to truly grow well and strong, it needs the efforts and support of all quarters.

The main reason for the V-shaped reversal in the securities market is, of course, that the central government's decision has changed market expectations and greatly increased people's confidence and expectations. It shows the government's strong belief in the centrality of economic development, especially since the financial and securities markets at the top are not as concerned and valued, as some have assumed. At the same time, this commitment to the unconventional and ultra-limited credit support for the stock market is a point-point measure to promote the market to rebound accurately and effectively. With the stock market soaring in five trading days, the next step for the stock market in the Year of the Dragon has naturally become the focus of attention.

It can be considered that the market will rise by another 10% to 20% at today's point with the effective support of relatively low policy, capital and corporate valuation, and only when the platform is reached and stabilized can the majority of shareholders and the basic people of public equity funds be able to basically turn losses into profits. Therefore, since this battle is struck, it cannot be defeated. Of course, emotional outbursts and hype from market participants can push the market to much higher levels.

However, it is also necessary to be soberly aware that even the unlimited supply of funds will be subject to the inherent constraints of market forces, and cannot push up the stock price indefinitely. The clever and innovative design of Treasury bonds and credit support lies in the fact that the target of its precise support is the stocks of blue-chip listed companies that can be used to arbitrage interest rate differentials, rather than encouraging flooding of mountains and rivers, let alone allowing the disorderly expansion of over-the-counter high-leverage capital allocation leading to sharp rises and falls. This is the major difference between the stock market launched by this policy and the 2015 stock market mad bull compared to many humans. As a result, the demand for loans will naturally shrink rapidly as the expected dividend yields and medium- and long-term returns of these blue-chip companies approach the cost of 2.25% of Treasury bonds or credit as the stock price rises rapidly. As for the underperforming stocks that follow the hype and lack growth prospects, they will inevitably see bare swimming when the tide is low.

On the other hand, prudent capital will stop when China's stock market returns to the market highs of 2021 and the usual levels of emerging markets in a favorable environment inside and outside 2021, and large technology companies in mainland China are rapidly catching up with the top seven valuations in the United States market. A higher fundamentally-backed market uptick would require an overall upturn in economic conditions and a clear rise in corporate earnings.

It is also important to point out that history has repeatedly proven that the mad bull market will eventually lead to a market crash, and the most serious losses at that time have always been mainly retail investors. In the five days before the holiday, the 7 or 8 trillion yuan worth of stocks sold in the skyrocketing market trading should be said to be the vast majority of retail investors who cut meat and threw it. Therefore, both the market and regulators must be wary of the stock market soaring out of control. A wave-like slow bull with a gradual improvement in economic fundamentals, rather than a big upheaval and a big upswing, will obviously be the goal of governments and regulators as well.

It should be recognized that whether the market can continue to develop healthily and achieve a sustainable trend reversal after the first wave of stimulus and strong rebound depends on the choice and strength of fiscal and other relevant policies. Now that the central authorities' overall planning and guidelines have been clearly defined, the key lies in the introduction and implementation of specific policies in various fields and departments. Unlike the stock market, which can produce immediate results, the economy needs greater strength and more scientific and accurate leverage.

In my view, since we are currently facing a negative feedback spiral of the triple overlap of the economic cycle, structural adjustment and institutional transformation, the measures and approaches currently under discussion are not sufficient to reverse the trend of economic fundamentals, especially those that propose to further invest heavily in investments and projects that may have enumerable social benefits without a tangible return on economic benefits (which is the crux and root cause of the current heavy debt burden, especially the problem of local government debt), Focusing on short-term effects will only further increase our debt burden and reduce the scope for policy manoeuvre.

I have always believed that there are not many effective measures to solve any problem, but a few measures that are really in place can be effective. Therefore, at present, in addition to the immediate and effective first-aid medicine for the stock market, the key to the complex economic policy choice is to identify the breakthrough point of the comprehensive macroeconomic policy and structural transformation that is stronger, more focused, more sustainable, and affects the whole body.

After a difficult bottom-finding and turbulent turning point in the medium term, I sincerely wish that the stock market in the Year of the Dragon can continue to walk out of a higher and more stable new starting point.