CITIC Securities Co., Ltd.: Core focus on low P/B and domestic demand recovery, waiting for price signals to confirm, ushering in a major turning point in the market

There has been a significant change in policy signals, with market expectations experiencing a major reversal. The future intensification of domestic demand policies may lead to an early arrival of price signals, ushering in a major turning point in the market. Following the expectation of a major reversal, the influx of incremental funds, mainly from retail investors, characterized by a pulse-like short-term surge, is expected to continue. Currently, we are in a transitional phase from the expectation of a major reversal to a market turning point. With a focus on low P/B and domestic demand recovery, once price signals are confirmed, the market turning point will mark the beginning of an annual bull market characterized by the resurgence of the credit cycle. Institutional investors will find a better entry opportunity.

Firstly, from the perspective of policy and price signals, the innovation of monetary tools at the end of September and the statements on real estate at the political meeting far exceeded market expectations. The scale of incremental fiscal policy for the year may be relatively moderate, but the direction of use may significantly expand. Under the influence of incremental policies, the turning point of price signals is expected to arrive earlier.

Secondly, in terms of market characteristics, institutional investors have significantly increased their positions in A-shares recently, but the entry of retail investors has been more rapid. This round of market rally combines the two features of expected sharp reversal and concentrated influx of incremental funds from retail investors. The pulse-like rise is still mainly driven by expectations and the fund side, with fundamental verification as a secondary factor.

Lastly, in terms of allocation strategy, there are two main themes in the transitional phase of the market: revaluation of low P/B style and valuation recovery of the domestic demand sector. It is recommended to reduce emphasis on dividends and going global. Once price signals are confirmed and the market turning point arrives, the market led by institutions is expected to gradually return. At that time, high-quality growth and domestic demand sectors are expected to continue to outperform.

Significant Changes in Policy Signals, Market Expects Major Reversal

1) The innovation of monetary tools at the end of September and the statements on real estate at the political meeting far exceeded market expectations.

On the monetary policy front, this round of widespread interest rate cuts is very rare in history. At the same time, the central bank's introduction of collateralized interbank lending facilities, stock repurchases, and special re-lending for increased holdings significantly exceeded market expectations. Investors widely interpret this as the central bank providing downside protection options for the stock market, making investors more confident in the market bottom expectations.

In addition, the political meeting in September, which analyzed and studied the economic situation, reflected the decision-making level's emphasis on increasing macro-control efforts and strengthening countercyclical adjustments. The meeting first proposed to "stabilize and consolidate" the real estate market, which is the first time since the adjustment of the positioning of real estate at the political meeting in July last year that policy goals have been clearly defined. It also first clearly stated that reducing supply should also be one of the control measures.

2) The scale of incremental fiscal policy for the year may be relatively moderate, but the direction of use has significantly expanded.

In terms of fiscal policy, which is most concerned by the market, the scale of incremental fiscal policy in the short term may be relatively moderate, but the adjustment of the direction of use may be more critical. The macro group of CITIC Securities Research Department believes that the focus of future fiscal policy may tilt towards benefiting people's livelihoods and promoting consumption, which will help improve the efficiency of fiscal stability and growth.

In terms of the direction of incremental fiscal policy, the focus may shift from previous infrastructure and industrial subsidies to subsidizing low-income groups, fertility subsidies, and stimulating consumption. In terms of the scale of policy, the new special treasury bonds and special refinancing bond quotas may be around 2 trillion yuan or more. Considering the fiscal revenue and expenditure data so far this year, there is significant pressure on the revenue side, but the expenditure side is relatively rigid. It is not ruled out that incremental fiscal tools may be introduced in the future to supplement the revenue and expenditure gap to ensure the strength of fiscal expenditure 3) Under the influence of incremental policies, the inflection point of price signals is expected to arrive earlier.

According to the data tracked by the Real Estate Department of CITIC Securities, looking at the lowest listing prices of active trading communities in the three core cities of Beijing, Shanghai, and Shenzhen, on October 5th, the number of projects in Shenzhen with decreased lowest listing prices was significantly less than those with increased lowest listing prices. Looking at the cities with tracked listing volumes, on October 6th, 77.5% of cities saw a decrease in listing volume compared to September 30th, with a median decrease of 0.34%. From the perspective of second-hand housing transactions in 75 major cities, the trading volume in the past 8 days (September 28th to October 5th) increased by about 82% compared to the same period in 2023, and was only about 5% lower than the peak after the "517" policy. Considering the current National Day holiday, the data after the holiday may exceed the level after the "517" new policy.

With clear policy objectives, adjustments in policy thinking, and the continuous implementation of a series of future policy combinations, the Real Estate Department of CITIC Securities predicts that starting from first-tier cities, it is expected to achieve a halt in the decline of housing prices within the year. If the policy fails to fully achieve the goal of halting the decline, there is still room for further policy measures in various regions.

The main feature is the concentration of incremental funds entering the market, mainly driven by retail investors, and the short-term pulse-like rise is expected to continue

1) Institutional investors have recently increased their positions in A-shares significantly, but retail investors have entered the market more rapidly.

Looking at the new public offering, active products in September only saw an increase of 25 billion, while passive products reached 251 billion. However, we estimate that products related to the CSI A500 ETF have not yet started to build up positions.

According to the calculations of the Quantitative and Allocation Department of CITIC Securities Research, the overall positions of public mutual funds in general equity, partial equity mixed, and flexible allocation products are 78.9%, 73.8%, and 68.5% respectively, with gaps of 9.1, 11.9, and 3.6 percentage points from their highs since 2016, indicating limited room for further increase in positions. According to research on CITIC Securities channels, the active private equity positions were 68.9% on September 20th and 71.0% on September 27th, showing a weekly increase of 2.1 percentage points, which is not considered a very large weekly increase historically.

Looking at the flow of foreign funds, according to Refinitiv data, from May 23rd to September 25th, sample funds tracking MSCI China saw net outflows for 18 consecutive weeks, with an average weekly net outflow of 580 million USD. However, from September 26th to October 2nd, active funds saw a net inflow of 610 million USD, while passive funds saw an inflow of 4.56 billion USD, totaling 5.16 billion USD, the largest weekly net inflow since 2015. The return of foreign passive funds is more pronounced, while active funds are still hesitant.

The return of foreign passive funds may not be based on fundamental analysis logic, but more on replenishing the previous underweighting of Chinese equity assets systematically. Overall, we believe that institutional buying or return flows alone cannot dominate the current pulse-like market trend, and more incremental funds come from retail investors entering the market and some idle corporate funds entering the market From our research on CITIC Securities' channels, it can be seen that there are still a large number of new account openings during the National Day holiday. In the short term, the pulse-like market may still be dominated by incremental funds entering the market, such as retail investors.

2) This round of market trends combines two characteristics: the expectation of a sharp reversal and the concentration of incremental funds from retail investors entering the market.

From an analogy perspective, the current market situation shares similarities with the market trends in November 2022 driven by the expectation of a sharp reversal and the market trends in November 2014 driven by the massive influx of funds from retail investors.

However, in addition to these two characteristics, this round of market trends also has two differences: first, in the past two years, residents' risk appetite has continued to decrease, excess savings have continued to accumulate, and in the context of asset shortage, the sudden reversal in the stock market recently will attract a large amount of excess savings to enter the market;

Second, the speed of information transmission in the Chinese mobile internet and the self-reinforcement of the same information far exceed the past. New media carriers such as short videos will exponentially promote and amplify the same information, making it easier for investors to have highly consistent expectations in a short period of time. Under this new feature, the current pulse-like rise may have a shorter duration but a greater magnitude compared to the first wave of rises in the bull markets of 2006-2007 and 2014-2015.

Taking the CSI Index as an example, the first wave of rise in the bull market of 2006-2007 lasted about 8 weeks, with a cumulative increase of 28.6%. The first wave of rise in the bull market of 2014-2015 lasted about 12 weeks, with a cumulative increase of 46.7%. As for the current pulse-like rise, it has lasted for 1 week, with a cumulative increase of 22.2% (since the press conference of the People's Bank of China on September 24th). Considering these features, and the fact that there is still a large amount of incremental funds waiting to enter the market, it is expected that the pulse-like rise will continue in the short term.

We are currently in a transitional phase from the expected major reversal to the turning point of the market, focusing on low P/B and domestic demand recovery

1) The first theme is the revaluation of low P/B style. After the requirement of "stabilizing and rebounding" in the real estate sector was put forward at the September Politburo meeting, it has actually signaled the need to curb or even reverse the downward trend of collateral values and the debt deflation cycle. We believe that at least in the short term, the elasticity of repair for low P/B companies is far greater than the expected repair of income, profits, etc. The industries where low P/B companies are concentrated, such as real estate, banks, non-bank financial institutions, and construction materials, are one of the most clear themes.

In addition, actively managed institutions are currently significantly over-allocated to high P/B companies and under-allocated to low P/B companies. Among all A-shares, the lowest 20% of P/B stocks account for 28.3% of the market capitalization, but only 25.0% in the holdings of major institutional investors, with an under-allocation of 3.3 percentage points; the highest 20% of P/B stocks account for 27.7% of the market capitalization, but major institutional investors hold 36.1%, with an over-allocation of 8.4 percentage points Against the backdrop of the widening performance gap between active and index products, coupled with a significant rebound in net asset value in a short period of time, we expect to see a significant increase in redemptions of active products, shifting towards various broad-based ETF products. This reallocation is expected to benefit low P/B style investments.

2) The second theme is the valuation repair of the domestic demand sector.

This round of policies unprecedentedly emphasizes boosting domestic demand, which will greatly change the way investors evaluate the valuation of domestic demand varieties. Looking ahead, the post-consumption cycle features are significant, and the economic recovery expectations following clear policy attitudes will actively drive the recovery expectations of consumption scenarios. After the release of early pessimism in the consumption sector, valuations are still at historically low levels. Starting from Q4 2024, most segmented sectors are at a turning point of stabilization due to the easing of base pressure. It is recommended to actively seize the consumption recovery opportunities under the policy shift.

It is recommended to focus on the consumer internet sector that combines offense and defense, the essential sectors of dairy products and mass catering with low valuations, high returns, and expected early stabilization, as well as the pro-cyclical sectors such as alcohol, human resources, and hotels driven by economic recovery expectations. The sustainability and upside potential of the market depend on the specific effectiveness of subsequent policy implementation, but it is currently at a clear turning point driven by policy changes.

Institutional investors are expected to have a better entry opportunity after the confirmation of the price signal turning point, with a continued preference for high-quality growth and domestic demand

The current market is in a transitional phase from the expected major turning point to the market's major turning point. The initial stage of the market is characterized by retail investors entering in concentration, with a pulse-like market driven by expectations and funding. For investors who are already heavily invested, it is advisable to adjust their portfolio structure, reduce holdings in high-valuation sectors, align overall with weighted indexes, avoid significant deviations from the index, especially by increasing allocations to low P/B industries and domestic demand sectors that are currently significantly underweighted by institutions.

For investors who still have the need to increase positions and funds that have previously "missed out," it is recommended to prioritize increasing positions in low P/B industries and domestic demand sectors, or to use broad-based index ETF tools such as 300ETF, A500ETF, etc., as the preferred options for increasing positions.

After the pulse-like uptrend market ends, with the continuous implementation of incremental policies, price signals represented by housing prices may confirm a turning point within the year. At that time, it is expected to kick off an annual-level bull market characterized by the resumption of the credit cycle. Institutional investors are expected to have a better entry opportunity, and it is recommended to formally switch allocations to domestic demand and high-quality growth, initially prioritizing increased allocations to domestic demand while downplaying dividends and overseas investments.

Article Author: Qiu Xiang (S1010518080002), Qin Peijing, Yang Fan, Maxigova, Yu Xiang, Li Shihao, Yang Jiaji, Lian Yixi, Cui Rong, Xu Guanghong, Source: CITIC Securities Research, Original Title: "Strategic Focus | Expecting a Major Reversal, Market Turning Point"