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morgan stanley believes thatif retail investor sentiment remains high,there is room for further gains in chinese stocks.

recently, morgan stanley’s chiyao huang analyst team released a research report stating that,the current trading volume and trading speed of the a-share market have exceeded the levels of 2020-2021, and have many similarities with the retail bull market in 2015.they observed,new retail investors are the main driver of stock market gains, the number of accounts opened by new investors increased significantly, indicating that retail investor participation is rising.

analysts estimate that if retail investors continue to remain optimistic,up to 2-3 trillion yuan of chinese household financial assets will be reallocated to the stock market，brokerage stocks are expected to benefit from this. in addition, the current relatively low margin financing balance also shows that there is room for future growth.

will the bull market return in 2015? new retail investors become the biggest driver of the stock market’s rise

morgan stanley summarized the key driving forces of china's stock market in different cycles: 2015 was a bull market driven by retail investors and leverage, 2020-2021 was driven by institutions, and september 2024 reappeared as a rally driven by retail investors.

the data shows,in september 2024, the average daily trading volume and turnover rate of the chinese stock market exceeded the levels of 2020-2021 and approached the high point in 2015.on september 30, a-share trading volume hit a record high, reaching 2.59 trillion yuan, with a turnover rate of 751%, significantly higher than the same period last year.

from a plate perspective,china’s “bull market flag bearer” securities firms have shown an obvious upward trend driven by retail investors, which has many similarities with the 2015 bull market.the morgan stanley report states:

volume and velocity have exceeded 2020-2021 levels, similar to the retail-driven bull market of 2015.

according to our channel checks, new account openings at brokerages have also increased significantly.

so far, demand for margin loans has lagged, suggesting the rally is more likely to be driven by money from new investors.

despite gains in stocks, major broker-dealer etfs, whose investors are mostly institutions, saw outflows last week. retail investors often prefer to buy brokerage stocks directly to chase market returns.

morgan stanley believes that the growth of household financial assets has provided sufficient potential liquidity for the chinese stock market, so retail investors have sufficient ability to maintain the current rally.

in 2022 and 2023, china's household financial assets will grow by about 18 trillion yuan annually on average, but the stock allocation ratio continues to be low.

we estimate that if stock allocations (in chinese household assets) return to 2020-2021 levels, there could be rmb 2-3 trillion of capital flowing into the stock market.

the low interest rate environment in the past two years has limited households’ investment options.at present, there is still room for increase in margin financing, reaching 1.39 trillion yuan.in 2021, it will be approximately 1.9 trillion yuan.

morgan stanley estimates that if the stock market rises by 25%, the value of the stocks in the hands of investors will increase accordingly. in such a market environment, investor demand for stocks may increase,the scale of capital inflows may reach 2.6 trillion yuan.

the over-rising potential of brokerage stocks

the report also mentioned that in a market driven by retail investors,brokerage stocks tend to overshoot. valuations for hong kong brokerage stocks are now higher than they were in 2020 and 2021, but momentum from retail investors could still push them higher.

morgan stanley believes that based on the current valuation of hong kong brokerage stocks, the market may have considered an average daily trading volume (adt) of approximately 1.4 trillion yuan as a running rate, and the industry return on equity (roe) rebounded to low double-digit levels .

analysts believe that if investors view recent high daily trading volumes as the norm, brokerage stocks may overshoot in the short term.

if the momentum is strong enough, we believe retail investors may view rmb 2 trillion (adt two days before the a-share market closes) as a run rate,this could increase earnings (for brokerage stocks) by another 30%, and roe could reach about 13%.

nonetheless, taking into account the reduced contribution from the brokerage business, falling commission rates and increasing capital intensity, morgan stanley believes that the valuation of brokerage stocks is unlikely to reach the level of more than 2 times the price-to-book ratio in 2015.