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Recently, along withA sharesThe market volatility is declining, and the market transaction activity is also tending to a low point. However, institutional sources said that the current market performance is greatly affected by pessimism, but includingMacroeconomicsA number of positive signals, including corporate profits and incremental funds, have emerged. The factors affecting future market performance will gradually return to fundamental expectations.

Market activity has been sluggish recently

August 14, Astock marketThe market transaction volume fell to a low point again. Wind data showed that the total market transaction volume fell below 500 billion yuan again on that day. In fact, on August 12 and August 13, the A-share market transaction volume was only 498.657 billion yuan and 479.877 billion yuan. Judging from the recent situation, the A-share market activity has been hovering at a low level, and the market transaction volume and turnover rate have fluctuated downward.

Since July, all major A-share market indices have experienced some degree of adjustment. According to Wind statistics, as of the close of August 14, the Shanghai Composite Index has fallen by more than 3% since July, while the Shenzhen Component Index,GEMThe Beijing Stock Exchange Index, Shanghai and Shenzhen 300 Index and CSI 1000 Index all fell by more than 5%, while the Beijing Stock Exchange Index, Shanghai and Shenzhen 300 Index and CSI 1000 Index fell by more than 3%, 4% and 5% respectively. From the perspective of industries, except for some sectors such as non-bank financial and commercial retail, the rest of the industries showed a downward trend, with the coal and communication industries retreating most significantly.

However, regarding the current dual downturn in market performance and transactions, institutional investors believe that the current market performance is greatly affected by pessimistic sentiment, and the factors that determine future market performance will gradually return to expectations for improvement in fundamentals.

"The current market sentiment is pessimistic, and we should examine the current environment from a more objective perspective. Valuation and profitability are the determining factors for the mid- and long-term performance of listed companies." Zhu Liang, deputy general manager and investment director of AllianceBernstein, said recently that the Chinese stock market is currently one of the most attractive markets in the world. Historically, the A-share market has a high investment success rate at a low valuation level. According to the MSCI China A-share Index, the current A-share market price-to-book ratio is 1.55 times. Since 2008, when the A-share market price-to-book ratio has fallen back to 1.4-1.6 times, the average cumulative return in the next two years can reach 52%.

In fact, the current valuation of the A-share market is considered by institutions to be at a historical low. Galaxy Securities Research Report shows that as of August 9, the PE (TTM) valuation of the All A Index fell by 2.01% to 15.54 times from last Friday (August 2), which is at the 26.33% percentile level since 2010; the price-to-book ratio of the All A Index is 1.36 times, which is at the 0.25% percentile level since 2010. On August 9, the 10-year treasury bond yield was 2.1986%. Based on this calculation, the All A-share bond spread is 4.24%, which is higher than the 3-year rolling mean + 2 times the standard deviation. Equity assets have a higher investment value than bond assets.

"The impact of overseas stock market fluctuations on A-shares may gradually weaken, and the subsequent improvement in economic fundamentals will remain the decisive factor in the trend of A-shares. We should pay attention to the investment opportunities brought about by policy changes and economic structural changes." A person from Xingshi Investment said that the new round of policies to stabilize domestic demand has entered a window period. As the policies are implemented and their effects become apparent, it is expected that the momentum of domestic demand will gradually increase and elasticity can be expected, which may drive the performance of related sectors.

Many positive signals emerge

Although the A-share market is still in a volatile downward trend recently, a number of positive signals have emerged, including in areas such as macroeconomics and corporate profits.

In terms of macroeconomics, in the first half of this year, my country's economy grew by 5% year-on-year, and the growth rate is expected to remain the highest among the world's major economies. The Political Bureau of the CPC Central Committee held a meeting recently and pointed out that since the beginning of this year, "the overall economic operation has been stable, with steady progress, and the upward trend has continued."

In terms of corporate profitability, as of press time on August 14, 331 A-share listed companies have disclosed their 2024 semi-annual reports. According to Wind statistics, the operating income of listed companies that have disclosed semi-annual reports totaled 3,034.589 billion yuan, a year-on-year increase of 3.23%; the net profit attributable to the parent company totaled 344.157 billion yuan, a significant year-on-year increase of 10.43%. The operating income and net profit attributable to the parent company of the two non-financial oil A-share listed companies also reached 2,859.003 billion yuan and 280.159 billion yuan, respectively, a year-on-year increase of 3.52% and 10.54%, respectively.

It is worth noting that in 2023, the year-on-year changes in operating income and net profit attributable to shareholders of A-share listed companies were 1.47% and -2.70% respectively. Judging from the situation in the first half of this year, corporate profit recovery has shown a clear trend.

"Judging from the profit data of industrial enterprises from January to June in the sub-sectors, the corresponding Shenwan first-level industries include basic chemicals (chemical fibers), light manufacturing, non-ferrous metals, steel (upstream iron ore mining and selection), military industry, machinery and equipment, etc. We expect that some of these companies may achieve good performance in their interim reports." said Cinda Securities.

In addition, long-term funds including public funds and insurance funds are entering the market. From the perspective of public fund issuance, Wind data shows that as of August 14, there have been 61 fund products that have been opened for subscription since August, of which 20 are stock-type and 18 are hybrid-type, accounting for more than half. Among them, the number of active equity funds has also increased significantly compared with the previous period.

The scale of equity assets of insurance funds is also expanding continuously, becoming one of the long-term sources of funds in the market. According to a research report by China Merchants Securities, the yield of fixed-income products has fallen rapidly this year, and it is unable to cover the insurance products with a predetermined interest rate of 3% on the liability side of insurance companies. In addition, the changes in the value of assets classified as FVOCI under the new accounting standards are not included in the income statement, which has increased the motivation for insurance funds to allocate equity assets, especially high-dividend assets. As of June 2024, insurance funds held a total of 3.78 trillion yuan in stocks and funds, the highest level in history, and the allocation ratio also rebounded to 12.25%.

Institutions are optimistic about the market outlook

Regarding the market's subsequent performance, institutions believe that the current A-share market valuation is still relatively low, and fundamental expectations are constantly improving. In the future, the market will gradually get rid of panic and return to being dominated by fundamental factors such as performance. The downward trend in overseas market interest rates will also have a positive impact on the domestic market.

"From January to July this year, the leading theme was based on two clues: dividends and going overseas. In addition, price increases, policy themes, AI & consumer electronics and other trading themes all had staged performances." Cinda Securities analyzed that after entering the third quarter, the market entered a stage of eliminating the false and retaining the true in various logics, and the style and industry allocation will return to differentiation based on performance realization. The decline in interest rates usually does not affect the trend of the growth value style for 2-3 years. After the turning point of the interest rate decline, the dominance of the growth style may expand within half a year to a year. The direct impact of the decline in interest rates on bank stocks may be whether the credit risk can be eased.

"Corporate profits are supported. China's listed companies are expected to maintain profit growth in 2024, with earnings per share (EPS) growth estimated at around 15%." Zhu Liang said that the newNine Articles, the suspension of securities lending by the China Securities Regulatory Commission, and the interest rate cut by the central bank show that policymakers are injecting confidence into the market, which is expected to have a positive impact on the entire market and create long-term buying opportunities. We hope to see a combination of favorable policies, currencies, and finances in the future. In addition, historical data shows that foreign capital flowing into the Chinese stock market is inversely linked to the US dollar interest rate. As the signal of US interest rate cuts becomes stronger, if the US dollar interest rate goes down in the future, it will be conducive to the return of funds to the Chinese stock market.

Galaxy Securities said that overall, the current A-share market valuation is still at a historically low level, and the expectation of fundamental improvement is gradually rising, and the investment value is still high. In terms of allocation, it is recommended to focus on three types of industry fields: first, industries where the prosperity is improving, such as the consumer industry that benefits from favorable policies such as large-scale equipment renewal and consumer goods trade-in, and related industries that benefit from the increase in summer travel; second, industries whose mid-term performance exceeded expectations; third, themes or industries with strong policy expectations, such as new quality productivity-related themes.