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The three major A-share indices continued their upward momentum today. The Shanghai Composite Index closed up nearly 6%, the largest single-day gain in five years, and successively regained the two integer thresholds of 3,200 and 3,300 points, setting a new high since March 2018. Market transaction volume continued to expand, with the total transaction volume of the two markets exceeding 1.5 trillion yuan, reaching 1.56 trillion yuan, and the transaction amount hit a five-year high. All industry sectors rose, with financial sectors such as banking, insurance, and securities seeing a surge in limit-up stocks, leading the gains among major industry sectors. Northbound funds had a net inflow of 16.436 billion yuan today. Specifically, the Shanghai Composite Index closed up 5.71% at 3332.88 points; the Shenzhen Component Index rose 4.09% to 12941.72 points; and the ChiNext Index rose 2.72% to 2529.49 points.
Institutions have expressed their views on the future market trend.
CITIC Securities said that the rebound of the undervalued sector is not a style switch, but a short-term style rebalancing, and also a preview of future style switches. It is expected that the compensatory rally will continue for 1 to 2 weeks, but the rate of increase will slow down; after the pressure of lifting the ban and performance verification, the market will return to equilibrium. Starting from the late third quarter, finance and cycles will become one of the main lines of the next round of upward trend that will last for several months.
Any adjustments and structural loosening in the market in the third quarter are new opportunities for entry and the best time for allocation in the second half of the year. First, the basis for the rebound of undervalued sectors is the more extreme industry valuation differentiation, and the short-term catalyst is the improvement of industry meso-level data. However, after the accelerated influx of funds in the early stage, the future growth rate is expected to slow down, and the short-term fundamental verification period also restricts the upward space of the sector.
A short-term style rebalancing is not expected to evolve into a major mid-term style switch. Secondly, it is expected that the compensatory rally will last for 1 to 2 weeks. The pressure of reducing holdings brought by the peak of the lifting of restrictions in July and the high valuation cannot be ignored. The technology sector is under relatively greater pressure; while the consumer and pharmaceutical sectors are still in the performance verification period. After the pressure of lifting the ban and performance verification, the market is expected to return to equilibrium.
Finally, we need to pay close attention to factors that may disrupt market equilibrium, such as the overseas epidemic and domestic liquidity expectations. The epidemic in the United States is in the "secondary outbreak" channel, and the critical point of the impact on the U.S. stock market is approaching; while the disturbances in domestic macro liquidity expectations and market liquidity relay are increasing. After the overseas epidemic and liquidity expectations are broken, it is expected that at the end of the third quarter, the market will start a round of trend-based upward trend lasting for several months, and then the cyclical and financial sectors will become one of the main lines of the market.
Haitong Securities believes that A-shares have been very resilient amid the global spread of the epidemic in the first half of this year, due to abundant macro and micro liquidity, and the bull market pattern that began on January 19 has not changed. In the second half of the year, corporate profits will rebound to double digits year-on-year, the bull market will enter a dual-wheel drive of earnings and valuations, and the market is expected to break upward. The market will spread from local opportunities to round-up increases, with the main line of technology + securities companies gaining momentum again, and undervalued and under-allocated industries experiencing phased rebounds, such as banks, real estate and cycles.
CICC analyzed that A-shares have shown a clear style switch, which has not ended but will continue for quite a long time. The securities sector was the first to rise by 20%, and its valuation has been improved to a certain extent, but against the backdrop of financial reform and the expansion and strengthening of the capital market, there is still room for growth.
Against the backdrop of credit easing and rising monetary interest rates, investment opportunities in the insurance sector remain prominent. Valuation levels in the real estate industry remain low, but performance will improve as the economy recovers. Insurance, securities, real estate and banks are still worth adding to.
Guotai Junan believes that the essence of the current low-valuation rebound feature of A-shares lies in the downward trend of risk-free interest rates, and the driving force behind it lies in the reduction of expected returns on bank wealth management products, which further strengthens the phenomenon of funds chasing assets. Therefore, we are optimistic about the future market, breaking through 3,300 points and waiting for 3,500 points, attacking brokerages and leading stocks with low valuations and good performance, first cyclical stocks and then consumption and technology.
Guosen Securities believes that the issue that the market is most concerned about at present is undoubtedly the sustainability of style switching. Behind this issue is the high differentiation in trends and valuations among sectors over the past year or so. Extreme valuation differentiation may indeed trigger a certain degree of market recovery, but this is a short-term pulse.
Looking back at the history of A-shares, every important style or sector switch was caused by a switch in the business cycle. We have never seen a major change in market style due to valuation reasons. In the growth stock boom from 2013 to 2015, growth stocks dominated the market significantly in the two "abnormal fluctuations" and the rebounds after the two circuit breakers. It was not until the second half of 2016 that the market style completely switched from growth to value, when the nominal economic growth rate rebounded after the supply-side reform and the profitability of traditional blue-chip companies increased significantly.
Some readers may ask, what about the second half of 2014? The outbreak of the financial cycle sector in the second half of 2014 was largely due to the catalyst of the "Belt and Road Initiative", which triggered changes in the market's long-term expectations for the output of production capacity in traditional industries. Do you remember that everyone was calculating the economic development status of countries along the route at that time? But we don't have such a catalyst at the moment.
In summary, the cyclical, low-valuation sectors need to make up for the losses and recover from the extreme differentiation, but the space for switching is limited. Consumption upgrades and technological innovation remain the main trend opportunities in the future market.
Everbright Securities pointed out that looking forward, the current A-share market value/M2 is at the 59.6% historical percentile since 2011, which means that the currency-driven valuation repair of A-shares has been basically completed, and the future driving force for A-share growth will switch from currency-driven to profit-driven. However, before the recovery of corporate profits is generally recognized by the market, the risk of excessive policy tightening or the market's excessive concern about policy tightening may cause the market's short-term upward momentum to weaken, which is called "a thrilling leap from monetary-driven to profit-driven."
Starting this week, data such as June CPI and M2 year-on-year growth rate will be released one after another. Investors need to pay attention to whether the above economic data will once again trigger market concerns about policy tightening. In the long run, even if the market's excessive concerns about policy tightening lead to a temporary decline in the market, the profits of listed companies are gradually recovering. In the future, when the profit recovery is generally recognized by the market, the market will still have the momentum for continued growth.
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