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both morgan stanley and jpmorgan chase believe that individual investors are the main force driving the rebound of a-shares. morgan stanley believes that if market sentiment continues to be high, it may bring in 2-3 trillion in incremental funds. xiaomo said that the leverage ratio of the a-share market has dropped from about 8% at the peak in 2015 to about 2.0% at the end of september. with an above-trend growth household deposit surplus of rmb 8 trillion, any marginal asset allocation shift from deposits to the stock market will be dramatic.

china's retail investors are driving the stock market rebound, and a-shares' low leverage and high household savings indicate there is huge potential for household asset allocation to shift to the stock market.

on thursday, october 3, morgan stanley strategist chiyao huang and his team issued an article saying that if market sentiment continues to be high, nearly 6 trillion yuan of household assets may enter the stock market. on wednesday, jpmorgan securities analyst katherine lei and her team wrote that the stock market rebound has just begun. both teams believe that retail investors are the main force driving the rebound of a-shares. currently, the leverage ratio of a-shares is low, household savings are increasing, and asset allocation in the stock market is low. if household assets further pour into the stock market, the a-share market will continue to rebound.

morgan stanley also pointed out that brokerage stocks may be overvalued in this round of rebound, while jpmorgan chase said that there is room for a 37% increase in earnings per share of brokerage stocks.

since the people's bank of china press conference on september 24, the msci china and csi 300 indexes have risen by 21% and 25% respectively, with transaction volume reaching a record 2.6 trillion yuan on september 30, and transaction speeds soaring to 751%.

retail investors, not leverage, drive this rally

both morgan stanley and jpmorgan chase believe that retail investors have driven the rebound, similar to what happened during the last retail bull market in 2015. jpmorgan chase additionally pointed out that the rebound in the offshore market was mainly driven by institutional investors, but onshore retail investors were the key driver of onshore performance.

first of all, the average trading speed in 2015 was 495%, with a peak of more than 700%; and this rebound, the average trading speed of a shares in the past week was 465%.

secondly, in the bull market of 2015, retail investors accounted for as much as 90% of the trading volume; in the current stock market rebound, retail investors played an important role, accounting for about 60% of the trading volume.

it should be noted that unlike 2015, when capital inflows were mainly driven by retail investors and leverage, this stock market rebound is not driven by leverage.

jpmorgan chase pointed out that the leverage ratio of the a-share market has dropped from about 8% at the peak in 2015 to about 2.0% at the end of september.

morgan stanley noted that margin financing activity lags rising trading participation. as of september 27, the balance of margin loans was 1.38 trillion yuan, almost unchanged from the beginning of the month. as a result, as the market rebounded, margin financing fell to 1.79% of market capitalization from about 2% before the rebound.

this suggests that the current phase of the stock market rally and increased trading activity is not driven by leverage, as overall investor risk appetite has not yet increased to a level that would require the use of more leverage.

on the other hand, new investors, who typically use less leverage, may be the main contributors to this inflow. data shows that the number of new accounts opened in the past week has increased 5-6 times compared with previous weeks.

in addition, brokerage etfs experienced outflows during the rebound. the major brokerage etfs tracked by morgan stanley had a net outflow of about 1.9 billion units in the past week. this may once again indicate that the buying of brokerage stocks is mainly driven by retail investors, because retail investors tend to be more inclined to buy directly. stocks, rather than investing through etfs.

retail investors have enough power to push the stock market to continue its rebound

morgan stanley believes that chinese retail investors have sufficient power to push the stock market to continue to rebound. jpmorgan chase also said that the rebound of the a-share market has just begun.

morgan stanley pointed out that chinese household financial assets will increase by 14.8 trillion yuan in 2022 and 21.3 trillion yuan in 2023, of which bank deposits will increase by 17-18 trillion yuan annually. in household asset allocation, the proportion of deposits will increase from 48% in 2021 to 55% in the first half of 2024.

this suggests that household assets are under-allocated to equity investments due to poor stock and mutual fund return performance.

recently, the dramatic changes in a-share market sentiment and the rapid return of capital may be driving household funds to quickly return to the stock market. however, compared with the bull market of 2015, the speed of capital inflows this time may be slower, because the leverage was greater at that time, which often resulted in more concentrated capital inflows.

morgan stanley also pointed out that if market sentiment continues to be high, it may bring in 2-3 trillion in incremental funds. the calculation method is as follows:

direct equity investments accounted for about 4.8% of household financial assets as of the first half of 2024, having averaged 7.1% during the bull market years of 2020 and 2021. household financial assets in the first half of 2024 were 264.7 trillion yuan. calculated based on the 2.2% gap, the potential funds flowing into the stock market were approximately 264.7 × 2.2% = 5.9 trillion yuan.

assuming that the market rises by 25% and promotes the appreciation of stocks, households may invest assets in the stock market again. this potential fund is approximately 2.6 trillion yuan.

jpmorgan chase also believes that the capital pool of retail investors is considerable.

as of august 2024, retail demand deposits will be 39 trillion yuan, approximately twice the direct stock investment of 20 trillion yuan. equity investment accounts for only 6% of household financial assets.

in addition, the average annual growth rate of retail deposits from 2021 to the first half of 2024 is about 14%, which is much higher than the 11.6% between 2010 and 2020. assuming the normal growth rate of retail deposits from 2021 to august 2024 is 11.6%, jpmorgan chase expects the retail excess deposit balance to reach 8 trillion yuan by the end of august 2024.

brokerage stocks may be overvalued in this rebound

morgan stanley pointed out that retail trading often leads to overreaction. the price-to-book (p/b) ratios of many h-share brokerage stocks are 10-20% higher than 2020-2021 levels, but retail investors may still push them higher. however, given the changes in business structure and the relatively small scale of capital inflows, morgan stanley believes that brokerage stocks are unlikely to reach a valuation of more than 2 times the price-to-book ratio in 2015.

morgan stanley said that after the rebound of h-share brokerage stocks on wednesday, october 3, investors may use the average daily trading volume (adt) priced at about 1.4 trillion yuan as a running benchmark. if market sentiment is high enough, morgan stanley may even it is believed that retail investors may also regard 2 trillion yuan as an operating benchmark.

when average daily trading volume cools, stocks often pull back sharply - morgan stanley said it is difficult to predict how long high sentiment and average daily trading volume can be maintained, and to what level retail investors can push the valuation of brokerage stocks.

jpmorgan chase believes that the monetary support measures and potential fiscal easing announced by china are positive for capital flows and macro prospects, and there is room for a 37% increase in earnings per share of brokerage stocks. among h-shares, the overall price-to-book ratio of chinese financial stocks is at a 39% discount compared to the peaks in 2020 and 2021, and a 65% discount compared to the peak in 2015.