ZhiKe | The defensive theme continues to dominate the spotlight. Where lies the next big trend in the A-share market?

Author | Huang Yida

Editor | Zheng Huaizhou

This week (from June 16th to 20th), the A-share market index fluctuated and declined. The Shanghai Composite Index slightly dropped by 0.51% during the week, closing at 3360 points on June 20th; the Wind All A Index fell by 1.07% this week.

In terms of sectors, among the 31 first-level industries of Shenwan this week, only the banking and communication sectors rose, while sectors such as beauty care, textile and apparel, pharmaceutical biology, non-ferrous metals, and social services led the decline.

In terms of style, dividends and large-cap stocks were relatively dominant, while small and medium-cap stocks and the Sci-Tech Innovation Board showed varying degrees of differentiation. Reflected in the broad-based/style indexes, the Dividend Index and the FTSE China A50 rose this week. Indexes such as the Shanghai 50, CSI Dividend, Sci-Tech Innovation 100, and CSI 300 were relatively resilient, while indexes such as the Beijing Stock Exchange 50, ChiNext Growth, and CSI 2000 led the decline.

The trend of the Hong Kong stock market was quite similar to that of the A-share market. The Hang Seng Index dropped by 1.52% during the week; the Hang Seng Tech Index fell by 2.03% this week. In terms of sectors, among the 12 Hang Seng industry indexes, only the information technology sector rose this week, while sectors such as healthcare, energy, and raw materials had relatively large declines.

In terms of overseas major asset classes, the three major U.S. stock indexes showed differentiation this week. The Dow Jones and Nasdaq rose, while the S&P 500 fell. In Europe, except for some Eastern European stock indexes, the major stock indexes of European countries declined. In the Asia-Pacific region, Japan, South Korea, and India rose, while most emerging markets closed down. In terms of commodities, crude oil rose sharply this week. Among base metals, Shanghai copper fell while LME copper rose, and iron ore, aluminum, and rebar all closed up. The main precious metal varieties all declined this week. Among agricultural products, except for cotton which fell, most of the other main varieties closed up this week. The U.S. dollar index rose this week.

Chart: Weekly gains and losses of major global asset classes; Source: Wind, 36Kr

01 Short-term adjustment of A-shares due to internal and external pressures

Over the past month or so from mid-May to now, the A-share market has been oscillating in a narrow range. In the past two weeks, it has entered a short-term downward adjustment phase. Investors' risk appetite has also declined to a certain extent, and the style is mainly defensive. Therefore, value and dividends are relatively dominant. Essentially, the above market performance reflects that investors have begun to pay attention again to the issues of weak economic recovery and domestic demand resilience.

Looking at the macro data in the past two months, the fiscal data released this week showed that the cumulative year-on-year growth rates of revenue and expenditure from January to May both declined compared with last month. The year-on-year decline in revenue was mainly dragged down by factors such as the decline in PPI, the weakening of land transfer in the short term, and the continuous decline in the year-on-year growth rate of non-tax revenue. The main reasons for the year-on-year decline in expenditure were the generally slow issuance rhythm of special bonds and the weakening of local fiscal expenditure.

Chart: Some fiscal data in May; Source: Everbright Securities, 36Kr

The structural differentiation of economic data remains obvious. From January to May, manufacturing investment and infrastructure investment recorded 8.5% and 5.6% respectively, while real estate investment was -10.7% during the same period, which cross-validated the year-on-year decline in fiscal revenue caused by the weakening of land transfer in the short term. In the manufacturing sector, against the background of vigorously developing industrial digitalization and high-endization, the contribution rate of the equipment manufacturing industry to industrial production has exceeded 50%. However, in a low-inflation environment, the year-on-year weakening of industrial added value in May was also within investors' expectations. In terms of social retail sales, the reading from January to May was 6.4%, mainly driven by trade-in programs, cultural and tourism trips, etc.

Looking at the higher-frequency industry data, the port cargo throughput data in June showed a significant decline. Previously, under the background of the tariff war, a round of short-term strengthening of export data was driven by rush exports. However, the market expected that the decline in exports would generally occur in July. Then, the early weakening of export data, combined with the recently released macro data, The main pricing factors of asset prices have once again focused on the two core issues of weak economic recovery and domestic demand resilience.

Meanwhile, the continuous overseas turmoil is also one of the main reasons for suppressing investors' risk appetite. July is an important policy window for both China and the United States. First, the 90-day exemption policy for reciprocal tariffs imposed by the United States on other countries will expire in July. It is expected that the China-U.S. trade negotiations will also yield certain results in July. The peak of U.S. Treasury bond maturities this year is also in July. In addition, the Middle East issue has caused a short-term sharp rise in oil prices and also suppressed risk assets to a certain extent. It can be seen that the major stock indexes in Europe and the United States have declined to varying degrees this week.

Chart: Recent trend of Brent crude oil; Source: Wind, 36Kr

Looking ahead, even though the market has certain concerns about domestic demand resilience (especially consumption) and has high expectations for policies to stabilize the capital market, the consensus forecast shows that the market may adjust in the short term but will not fall sharply. The focus of follow-up attention is domestic policy hedging. July and August will be important policy windows. Further easing will receive a quick response from the market, which means that there are still short-term structural opportunities.

02 Investment strategy

In the long term, the coordination of monetary policy and fiscal policy is the key to supporting economic strength. Therefore, in recent years, one of the core observation points for investors regarding the macro economy has always been fiscal stimulus. Looking at the rhythm of fiscal stimulus, the fiscal data in May was relatively weak, and the implementation period of further fiscal stimulus may be after August. Therefore, although short-term policy easing can receive a positive response from the market, under the continuous reshaping of A-share valuations by weak recovery, the upward elasticity is limited, and investors still need to be cautious. This also explains why even in the technology sector, which is a representative of high risk, the market prefers technology stocks with good performance.

Looking at the medium term, many sectors have led the rise this year, mainly consumption and growth sectors, but the themes are relatively scattered. This means that there has not been a strong beta market centered on a certain style or theme this year. The core reason is that under the current macro expectations, corporate profits are still in a downward channel. Therefore, any theme or style has certain flaws. The highlights can drive opportunities, while the flaws lead to rapid rotation.

Therefore, in such a market, new consumer leaders with relatively good fundamentals are still favored by the market. The recent adjustment may be an opportunity in the future. Starting from the current structural characteristics of the manufacturing industry, the high-endization and digitalization of the manufacturing industry are still the core industrial trends, and the market relatively favors technology stocks with good fundamentals. Against the background of weak recovery and with investors preferring a defensive mindset, the allocation value of dividend stocks continues to stand out.

*Disclaimer:

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

The market is risky, and investment should be cautious. In any case, the information in this article or the opinions expressed do not constitute investment advice to anyone. Before making an investment decision, investors must consult professionals and make decisions carefully if necessary. We have no intention to provide underwriting services or any services that require specific qualifications or licenses to the parties involved in the transaction.