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1. in most cases, the stock market rebounds temporarily after the a-share trading volume decreases.looking back at the past six times since 2020, after the a-share turnover dropped significantly from the previous high, the shanghai composite index rose five times, with the largest rebound after may 2020. only after the turnover bottomed out in september 2023, the shanghai composite index fell during 5, 10, 30 and 60 trading days. looking back, whether a-shares can rebound with a good profit effect after shrinking depends on whether the micro liquidity of the stock market is loose (such as shrinking turnover in may and september 2020, but fund issuance remains high) and whether the strength of macroeconomic policies can improve investors' pessimistic expectations (such as the relaxation of epidemic prevention and control in november 2022). in terms of style, growth style is better than value style in the market expansion stage.

2. characteristics of this round of a-share volume reduction:1) a-share trading volume and turnover rate have declined significantly and are currently higher than the lows in 2018.since august this year, the volume of a-shares has shrunk significantly. the daily trading volume of the two markets once fell below 500 billion yuan, and the turnover rate fell below 0.8%, hitting a new low since 2020, but still higher than the low in 2018. in addition, the total a-share trading volume/circulating market value and the total a-share trading volume/number of listed companies have fallen to the lowest level since 2019. from the perspective of major style indexes, compared with the high point of trading on april 29, the trading volume of low valuation and financial styles has declined the most;2) institutional behavior: public fund issuance is still at a freezing point, the proportion of passive funds has increased, and private equity positions have fallen to a historical low.at present, fund issuance has not yet rebounded significantly. structurally, the proportion of passive investment fund issuance has increased significantly: the number and share of index funds issued this year accounted for 57% and 57% of equity fund issuance, respectively, while this proportion was only 19% and 8% in 2020;3) etf net subscription is an important source of incremental funds. in the first half of the year, the scale of etf investment by the “national team” increased significantly.

3. on the numerator side, the a-share revenue and net profit in the interim report showed negative growth, and the "performance bottom" needs to be further confirmed.in the 2024 interim report, the cumulative growth rates of revenue and non-net profit of all a-shares (non-financial three oil companies) were -1.0% and -5.3%, respectively. the performance growth rate of a-shares has been declining for 13 consecutive quarters. historically, the bottoming out of a-shares is usually in a period of declining corporate profits, and the probability of a bear market in the upward cycle of corporate profits is relatively small. in addition, historical rules show that corporate profits of non-financial a-shares are positively correlated with ppi. in august, the year-on-year growth rate of ppi fell again to -1.8%, and it has been negative for 23 consecutive months. among them, the sharp drop in international oil prices is a factor, and there is also the impact of overcapacity in some industries. in a low inflation environment, a-share earnings are likely to continue to bottom out, and the turning point of earnings may need to wait for price factors to return to an upward trend.

4. investment strategy: valuation provides a safety margin, and the recovery of risk appetite depends on the implementation of incremental policies.the current csi 300 price-to-earnings ratio (ttm) is lower than 11 times, which is close to the low point in february, and more than half of the listed companies are valued lower than the low point in february this year. we should not be overly pessimistic at the current position. looking ahead, incremental macro policies are an important driving force for the valuation repair of a-shares. we believe that, for example, lowering the reserve requirement ratio and interest rates, reducing the interest rates of existing mortgage loans, and accelerating the issuance of special bonds can all be expected. if incremental policies can effectively boost confidence in fundamentals (such as november 2022), a-shares are expected to shift from the current shrinking bottoming out to a large-volume market.

■risk warning:sharp fluctuations in overseas markets, domestic economic performance falling short of expectations, changes in the geopolitical situation, etc.

table of contents

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01 reviewing history, what will happen to a-shares after the trading volume shrinks?

in most cases, the stock market rebounds temporarily after the a-share trading volume decreases.looking back at the past six times since 2020, after the a-share turnover dropped significantly from the previous highs, the shanghai composite index rose five times, with the largest rebound after may 2020. only after the turnover bottomed out in september 2023, the shanghai composite index fell during 5, 10, 30 and 60 trading days. looking back, whether a-shares can rebound with a good profit effect after shrinking depends on whether the micro-liquidity of the stock market is loose (such as shrinking turnover in may and september 2020, but fund issuance remains high) and whether the strength of macroeconomic policies can significantly improve investors' pessimistic expectations (such as the relaxation of epidemic prevention and control in november 2022). in terms of style, in the stage of market expansion, the performance of growth style is better than that of value style.

in may 2020, the turnover of a-shares fell 60% from the previous high. the market experienced a panic phase due to the global outbreak, and the domestic economy was recovering. the loose liquidity of the stock market supported the a-share index to rise again in the future. from may to july, northbound funds flowed in against the trend, equity funds were issued hotly, and financing funds returned to net buying after a short-term net outflow. the valuation of blue chip stocks represented by the mao index continued to hit new highs.

in september 2020, the turnover of a-shares fell 49% from the previous high. in the fourth quarter of 2020, after the impact of the epidemic at home and abroad, enterprises resumed business, operations improved, the cumulative growth rate of retail sales and exports turned positive, and the real estate sales boom was relatively high. at the same time, the issuance of equity funds remained high, and the entry of institutional funds drove the valuation of core assets to rise. the a-share index fluctuated upward in the fourth quarter.

in april 2021, the turnover of a-shares fell 50% from the previous high. after the spring festival in 2021, blue-chip stocks with concentrated fund holdings saw adjustments, but the decline in the scale of new fund issuance throughout the year was not large. northbound funds and financing funds continued to buy, supporting the core assets with high profit expectations to strengthen again. on the numerator side, the manufacturing pmi continued to be above the boom-bust line from april to august 2021, real estate sales were still at a high level, and exports grew rapidly, indicating that the economic fundamentals were stable.

in september 2022, the turnover of a-shares fell 50% from the previous high. in terms of micro liquidity, from september to october 2022, there was an overall net outflow of northbound funds and financing funds, and the issuance of equity funds also dropped to a freezing point, showing a stock game on the capital side. from the perspective of economic fundamentals, the manufacturing pmi in the fourth quarter of 2022 was below the boom-bust line, real estate sales were flat, domestic and foreign demand was under pressure, and the overall trend of a-shares was volatile. it was not until november when the epidemic prevention and control was relaxed that the confidence of domestic and foreign funds in china's post-epidemic recovery was significantly boosted, and northbound funds had a large net inflow, and a-shares had a round of spring market.

in september 2023, the turnover of a shares fell 49% from the previous high. in july 2023, after the political bureau meeting first proposed "active capital market", the combination of capital market policies continued to be implemented, including halving the stamp duty in august, reducing the margin ratio, standardizing share reduction, slowing down ipos, reducing the margin ratio of securities companies in september, and the "national team" entered the market to support a shares many times in november. the china securities regulatory commission tightened the securities lending system. in terms of macroeconomic policies, on october 24, the standing committee of the national people's congress approved the issuance of a trillion yuan of special treasury bonds. it is expected that the deficit ratio will increase from 3% to 3.8%, driving the market risk preference to improve in stages, and a shares have rebounded for 20 trading days. however, in late november, the main a-share indices turned downward again. the core is that in the case of insufficient incremental funds in the stock market, the fundamentals of the domestic economy are still weak due to the drag of the real estate market, so investors' cautious sentiment has not been significantly reversed.

02 characteristics of this round of a-share volume reduction

1) a-share trading volume and turnover rate have declined significantly and are currently higher than the lows in 2018.

since august this year, the volume of a-shares has shrunk significantly. the daily turnover of the two markets once fell below 500 billion yuan, and the turnover rate fell below 0.8%, hitting a new low since 2020, but still higher than the low in 2018. in addition, the total a-share turnover/circulating market value and the total a-share turnover/number of listed companies have fallen to the lowest level since 2019. from the perspective of major style indexes, compared with the high point of april 29, the volume of low-valuation and financial styles has declined the most.

2) institutional behavior: public fund issuance is still at a freezing point, the proportion of passive funds has increased, and private equity positions have fallen to a historical low.

since 2022, the issuance of equity funds has gradually cooled down, and as of now, fund issuance has not yet recovered significantly. from a structural perspective, the proportion of passive investment funds in new fund issuance has increased significantly: as of september 13, 2024, the number and share of index funds issued accounted for 57% and 57% of equity fund issuance, respectively, which was only 19% and 8% in 2020.

in terms of private equity funds, data from a china resources trust survey showed that private equity funds' stock positions were 49% in july this year, which was the lowest level since the second half of 2016, indicating that private equity risk appetite is relatively low.

3) etf net subscription is an important source of incremental funds. in the first half of the year, the scale of etf investment by the “national team” increased significantly.

as of september 13 this year, the net subscription amount of a-share stock etfs exceeded 720 billion yuan, which is one of the important sources of incremental funds for a-shares this year. under the caliber of the top ten holders, the "national team" (including central huijin investment and central huijin asset management) held etfs worth 583.9 billion yuan in the first half of this year, an increase of 466.2 billion yuan from the end of 2023. among the heavily held etfs, the csi 300 etf was the leader.

03the interim report shows that the company's revenue and net profit have negative growth, and the "performance bottom" needs to be further confirmed

in the 2024 interim report, the cumulative growth rates of a-share revenue and profit were negative, and the growth rate of a-share performance has been declining for 13 consecutive quarters. in the first half of this year, the cumulative growth rates of revenue of all a/all a (non-financial)/all a (non-financial three oil companies) were: -0.5%/-0.6%/-1.0%, and the cumulative year-on-year growth rates of non-net profit were: -0.7%/-3.1%/-5.3%. from a seasonal perspective, the quarter-on-quarter growth rates of revenue and net profit of all a (non-financial three oil companies) were significantly lower than the average level since 2010.

historically, the bottoming of a-shares is usually in the period of declining corporate profits, and the probability of a bear market in the upward cycle of corporate profits is relatively small. in addition, historical rules show that the corporate profits of non-financial a-shares are positively correlated with ppi. in august, the year-on-year growth rate of ppi fell again to -1.8%, and it has been negative for 23 consecutive months. among them, the sharp drop in international oil prices is also affected by overcapacity in some industries. in a low inflation environment, a-share earnings are likely to continue to bottom out, and the turning point of earnings may need to wait for price factors to return to an upward trend.

04 investment strategy: valuation provides a safety margin, and the recovery of risk appetite depends on the implementation of incremental policies

since the second half of this year, the main a-share indices have pulled back. the current csi 300 price-to-earnings ratio (ttm) is lower than 11 times, which is close to the low point in february. moreover, the valuations of more than half of the listed companies are lower than the low point in february this year. we should not be overly pessimistic at the current position. looking ahead, incremental macroeconomic policies are an important driving force for the valuation repair of a-shares. for example, we can expect to see reserve requirement ratio and interest rate cuts, lower interest rates on existing mortgage loans, and accelerate the issuance of special bonds. if incremental policies can effectively boost confidence in fundamentals (such as november 2022), a-shares are expected to shift from the current shrinking bottoming out to a large-volume market.

05risk warning

sharp fluctuations in overseas markets, domestic economic performance falling short of expectations, changes in the geopolitical situation, etc.