Zhike | After falling below 3300, is the market style going to change?

Author | Huang Yida

Editor | Zheng Huaizhou

Last week (November 18 - 22), A-shares fluctuated and declined. The Shanghai Composite Index dropped by 1.91% during the week and closed at 3267 points on November 22; the Wind All-A Index declined by 2.08% last week.

In terms of sectors, among the 31 first-level industries in Shenwan, only the Comprehensive, Commerce and Retail, and Textile and Apparel sectors rose last week, while the Social Services, Food and Beverage, Communication, Non-banking and other sectors had the largest declines last week.

From a style perspective, small-cap stocks and dividend stocks were relatively resilient last week, while the Science and Technology Innovation sector, which had risen significantly earlier, had a relatively deeper decline last week. Reflecting on the performance of style indices and broad-based indices, the CSI 2000, Wind Microcap, CSI Dividend, Dividend Index, and Guozheng 2000 had relatively smaller declines last week, while Chuangchengzhang, Beizheng 50, and Chuangjiazhi had relatively deeper declines last week.

Chart: Recent Trend of the Shanghai Composite Index; Source: Wind, 36Kr

The trend of the Hong Kong stock market last week was similar to that of A-shares. The Hong Kong stock market also fluctuated sideways last week, with the Hang Seng Index dropping by 1.01% during the week; the Hang Seng Technology Index declined by 1.89% last week. In terms of sectors, among the 12 Hang Seng Industry Indices, only the Materials, Energy, and Information Technology sectors rose last week, while the Non-essential Consumption, Real Estate, and Healthcare sectors had deeper declines last week.

In terms of overseas major asset classes, most of the major stock indexes in Europe, the United States, and emerging markets rose last week, while the main stock indexes in Japan and Russia declined last week. In terms of commodities, crude oil had a relatively high increase; most basic metals declined; most precious metals rose with a relatively high increase; the main varieties of agricultural products rose, while some varieties declined. The US Dollar Index continued to rise last week.

01 When the Market Returns to Calm, the Current Decline is an Opportunity for the Future

Last week's A-shares can be said to be lackluster. However, most investors still remember the decline on Friday vividly. When the market started to dive, what investors were most concerned about was what happened. Based on the available information, the main reasons for the significant decline in the A-share market on Friday and the deeper decline in the previously strong sectors are as follows:

First, the Regular Press Conference of the Information Office of the State Council at 10 am on November 22 mainly introduced the relevant policy measures to promote the stable growth of foreign trade. Regarding the sharp decline on Friday, many investors believed that the conference answered media reporters' questions about the possible deterioration of the global trade environment after Trump took office, which to some extent suppressed risk appetite. In fact, the market has already expected Trump's "small yard, high fence" foreign policy. It has to be said that the exchange rate does put pressure on A-shares, and the key lies in the understanding of domestic economic policies.

After years of market education, the current investors have a clear attitude towards policies. On the one hand, they focus on the rhythm of policy implementation. On the other hand, the short-term policy market needs unexpected policies to support it. A typical example is this year's 924 market. This round of soaring market did not last long. Essentially, it takes time for good policies to be implemented, but investors are "not willing to act without seeing clear benefits". If a good expectation is to continue, the next good expectation needs to be injected. For the content of this press conference, the market simply understands that there is no unexpectedness, and it forms a resonance with the decline in risk appetite.

Second, the situation in Eastern Europe has deteriorated again, and geopolitical risks have risen, suppressing risk appetite. Reflecting on the prices of major asset classes, it can be seen that the Russian stock market had the deepest decline among European stocks last week, and the prices of precious metals such as gold and silver soared in the short term, indicating a strong market risk-averse sentiment. This risk-averse sentiment has also been transmitted to A-share investors, and the previously dominant dividend sector has returned. However, the market behaves somewhat divided when it is suppressed. While some investors seek stability, small-cap stocks and themes also flew around last week.

Third, some active funds chose to take profits when the market cooled down. This is the impact of trading behavior itself on the market. Some sectors have accumulated a certain increase in the early stage, such as non-banking, real estate, military industry, electronics, etc. When the market accelerates its decline, investors choose to secure their profits, and these sectors with higher previous increases naturally have a relatively deeper adjustment last week.

In general, the current market has entered a period of calm. It takes time for good policies to be implemented, so a temporary cooling of the market is normal. What needs to be done during this period is to track the economic recovery through high-frequency data to verify whether the policies are effective in stages. From the economic and financial data in October, there have been certain marginal improvements, such as the narrowing of the negative growth rate of M1, the warming of real estate transactions, and the expansion of social consumption growth. Therefore, investors should have confidence and patience in the future.

02 Investment Strategy

In the current A-share market, although it has cooled down, the pattern is not bad. In terms of funds, last week, A-shares still maintained a net inflow trend with the support of various funds such as large net purchases of A500ETF and newly established partial equity public funds. Among them, the continuous large-scale subscription of A500ETF supports the large-cap blue-chip style. It can be said that the relevant large-cap stocks have trading opportunities in the short term and also have long-term investment value if the current expectations for economic recovery are followed.

As the market enters a period of calm, trading enthusiasm declines, and it forms a resonance with the decline in risk appetite. Moreover, there is still some time before the Central Political Bureau Meeting and the Central Economic Work Conference in December. The next period belongs to the policy gap period. In the case of an unclear core main line, the market focuses more on stability and takes the safety margin as the key consideration, therefore, the previously dominant dividend sector has returned, and the market as a whole is in a rebalancing stage.

At the same time, the cooling of the market does not mean a complete loss of temperature. Some active trading funds still linger on small-cap growth stocks with greater flexibility, which explains why there was a relatively divided market style last week. These investors are quite fascinated by exploring new themes. For example, the concept of controlled nuclear fusion strengthened last week, so that many listed companies urgently replied to investors through announcements or interactive trading platforms. The controlled nuclear fusion technology is indeed being developed, but its impact on the company's performance is currently very small. Here, we still need to remind investors that the risk of concept speculation is very high, and they should participate with caution.

For the outlook of the future main line, according to the current policy tone and direction, under the background of the economic kinetic energy switch, consumption is expected to improve with the economic recovery and thus become one of the core main lines in the future. Considering the supporting role of the market capacity for the economy, the market generally favors sectors such as automobiles, home appliances, and consumer electronics. At the same time, the main line status of technology is expected to remain unchanged, and themes such as semiconductors, computing infrastructure, and artificial intelligence in the "Tech Special Valuation" are also favored by investors in the long term.

*Disclaimer:

The content of this article only represents the author's views.

The market is risky, and investment requires caution. Under no circumstances does the information in this article or the opinions expressed constitute investment advice for anyone. Before making an investment decision, if necessary, investors must consult a professional and make a cautious decision. We do not intend to provide underwriting services or any services that require a specific qualification or license for trading parties.