Dong Chengfei: Real estate is likely to hit bottom around 2024, and small-cap stocks may shine in the future.

Key Points:

1. We predict that the real estate market may face its final shockwave.

The adjustment in the Chinese real estate market follows a pattern of declining in a bearish manner. From a quantitative perspective, the market has already declined by over 40% in 2022 and 2023. There is a possibility of further decline in 2024, and if there is even a slight decrease in that year, the market will essentially be cut in half.

1. Real estate sales are likely to hit bottom in 2024.

When comparing the proportion of real estate investment to GDP in the United States, it is highly likely that in 2024, China's proportion will resemble the low points of Japan and the United States.

Compared to the situation in Northeast China, since the region has stabilized at around half of its previous position, the national total in 2024 will have already dropped by 49%, possibly reaching around half of its previous level. This will provide some support.

1. Real estate in 2024 may have a greater negative impact on the real economy compared to 2023.

2. Our assessment of the industry's prosperity in 2024 is that consumer and technology sectors have already started to rebound in the second half of 2023. In 2024, their prosperity cycle will continue to rise, while new energy may experience a decline from its peak.

3. There will be a shift in market style in the near future. Once the market stabilizes, the most prominent stocks may change.

After comparing the "Nifty Fifty" stocks in the US stock market in the 1970s and the A-share market from 2005 to 2007, we have reached the same conclusion. During a market downturn, small-cap stocks experience larger declines. However, once the market stabilizes, a shift in style towards small-cap stocks will be observed.

1. For low-risk investors, I believe that the dividend sector still holds promise. It has performed well in the past two years and is still worth looking forward to.

On the afternoon of January 30th, Dong Chengfei, a partner and chief researcher at Ruichun Asset Management, made the above analysis and judgments on real estate, future market style, and high dividend strategies during the 2024 Ruichun Asset Annual Thinking and Communication Conference.

Dong Chengfei holds a master's degree in mathematics from Shanghai Jiao Tong University and has 21 years of experience in the securities industry and 17 years of investment experience. He has served as the deputy general manager, director of research, and fund manager at Xingzheng Global Fund Management Co., Ltd. During his tenure, 10 funds under his management received the Golden Bull Fund Award, and he won the Morningstar Award twice. The largest scale of the public funds he managed reached 70 billion.

The last time Dong Chengfei made a statement was in the latest monthly report in January, where he described the trend of the A-share market in 2023 as "strange." He pointed out that the market in 2023 was a rather peculiar one. The mainstream indices were declining, equity funds were mostly in decline, and the sentiment of various types of investors was not high. However, when looking at the statistics for the whole year, 55% of individual stocks had risen.

Regarding the judgment on future market style, it aligns with the view that the market will shift towards small-cap stocks. He believes that after the market stabilizes, some mid and small-cap stocks that represent the future direction will perform well. Here is a summary of the highlights from Dong Chengfei's sharing session, compiled by the representative of the Investment Workbook (WeChat ID: touzizuoyeben), for everyone to share:

Today, I will report and discuss three topics with you. The first topic is about the outlook for the real estate market. The second topic is about the future market style. The third topic is about the view on the high dividend strategy that is currently being discussed in the market.

Real Estate Will Face the Final Shockwave

First, let's discuss the first topic, which is the real estate market.

We have a relatively optimistic attitude towards the real estate market, using the term "the final shockwave of real estate" to imply that we predict that the real estate market may face the final shockwave.

In fact, all asset prices, whether stocks or other types, have two adjustment modes: one is a downward adjustment mode, and the other is a rapid downward adjustment mode.

When comparing the history of real estate horizontally, we will also find two adjustment modes.

One occurred in Japan, which is a very typical downward adjustment mode. Its time span is very long, both in terms of quantity and price, lasting for nearly 20 years.

What is a downward adjustment mode? The amplitude is not large each time, and the adjustment amplitude each year is not large, but each year is in a downward channel. This mode is relatively grinding.

The other mode occurred in the United States in 2008. The adjustment of real estate triggered the subprime crisis in the United States. Therefore, this mode is very intense.

Due to the derivatives turning the entire U.S. financial market upside down, the sales volume of new houses in the United States may have fallen by nearly 50-60% in about three to four years.

What kind of adjustment is happening in China this time? I tend to think it is the former. We should adjust in a fast liquidation manner in the second mode.

From the perspective of quantity, it has basically declined by more than 40% in 2022 and 2023. It is possible that it will continue to decline in 2024, so it is difficult to judge the magnitude.

But as long as there is a further decline in 2024, from the perspective of the overall quantity, it has basically been cut in half.

That is to say, in about 2 to 3 years, the sales of commercial housing will basically be only half of the peak.

Real Estate Sales Likely to Bottom Out in 2024

So how much area will stabilize? In fact, the sellers have done a lot of research, and it is basically around 900 million to 1 billion square meters or 800 million to 1 billion square meters.

Because in 2023, it is basically a little over 1 billion square meters, and in 2024, it may fall to this central area or even fall below it.

Comparing the proportion of real estate investment to GDP with the United States, I think it is very likely that it will approach the low points of Japan and the United States in 2024.

Another point is also inspired by Dr. Gao Shenwen.

At that time, [in his recent speech](http://mp.weixin.qq.com/s?__biz=MzI0OTU4MTM3NQ==&mid=2247493578&idx=1&sn=6543e486fbcbdcc048c29e369aa185ab&chksm=e98dfd9adefa748c2d8c03772bfd5e84ee589a51cbd431216fac382d2b2d2b35e914d903e688 In 2024, the real estate market is expected to stabilize and reach its bottom, both in comparison to foreign markets and the Northeast region. The decline in certain regions across the country in 2023 will be significant, but the Northeast region will only experience a slight decline. Therefore, the Northeast region is likely to stabilize earlier and with a greater magnitude.

If the Northeast region stabilizes at around half of its previous sales volume, it indicates that the national total sales volume in 2024 will have declined by 49%. It is possible that the national sales volume will stabilize at around half of its previous level, but the exact quantity is uncertain.

In 2024, the real estate sector may continue to have a significant impact on the economy, primarily due to investment. New home sales serve as a leading indicator, while investment is a lagging indicator. The downstream applications of flat glass are mainly in the construction industry, which simulates the overall consumption of materials in the real estate sector. If new home sales and construction starts have already declined significantly, the decline in material consumption in the real estate sector may expand in 2024, resulting in a greater drag on the real economy compared to 2023.

However, forward-looking indicators are more important. If forward-looking indicators can stabilize and reach their bottom, the overall improvement in the upstream and downstream sectors will only be a matter of time.

It is highly likely that real estate sales will reach their bottom in 2024. However, due to the lagging nature of investment, the drag of the real estate sector on the upstream and downstream sectors will still exist.

Once the largest negative factor of the real estate sector's drag on the economy comes to an end, there will be macroeconomic expectations of stabilization.

In terms of industry prosperity in 2024, the consumer technology sector is expected to enter an upswing in the business cycle, while the new energy sector will continue to decline from its peak.

Expectations play a crucial role in the capital market and can lead to significant fundamental changes. The performance of stock prices in the capital market depends on risk variables. The chart illustrates our judgment on the industry prosperity in 2024. In our opinion, the consumer and technology sectors may have already hit bottom and started to recover in the second half of 2023. However, this recovery may be relatively weak. Therefore, in different situations, it is said that this round of technology is a relatively long cycle of prosperity. But no matter what, the prosperity cycle of technology in 2024 is on the rise.

As for the real estate industry, as mentioned earlier, it will still be in a forward-looking stabilization phase in 2024. However, it is still relatively weak in terms of its drag. New energy may still decline from its peak, as it will deteriorate in the second half of 2023 and will take some time to digest the oversupply caused by the mismatch between supply and demand.

As for the cyclical sectors, represented by commodities, they have been in a relatively high level of prosperity since 2015. For example, the demand for copper prices is still relatively high, so no judgment is made in this regard.

Comparison between the two stages of the US and A-share markets, the market style may shift to small-cap stocks

The second topic returns to the capital market, focusing on the judgment of market style.

Currently, the index is at a low level, and the valuation multiple is at its historical lowest point. However, from the perspective of risk premium, it is at a historically high level.

In other words, everyone has high expectations for uncertainty.

The entire market trend started from 2017, when the A-share market went from a bull market in core assets to a bear market.

Intuitively, there are two stages in history that are very comparable, especially the first stage, which is the beautiful 50 market in the early 1970s in the United States.

The second stage is the A-share market from 2005 to 2007 in China.

Then, by comparing with these two stages (editor's note: comparing the A-share market trend from 2017 to 2023 with the beautiful 50 market in the United States and the A-share market trend from 2005 to 2007), surprisingly, the same conclusion is reached. I dare to present this to everyone.

First, compared with the beautiful 50 market, as I mentioned earlier, if we dare to say that this market trend from 2017 to 2023 is a complete cycle of China's core assets from the beginning to the appearance of a bubble, and then slowly declining until now, it is a relatively unimaginable low point.

What can be compared is the market trend in the United States from 1970 to 1975, where the period from 1972 to 1973 produced the highest quality 50 companies - the "beautiful 50", and also experienced the bubble and the subsequent collapse.

These years (2017-2023 in the A-share market) and those years in the United States (the appearance and collapse of the "beautiful 50" bubble in the 1970s) may have more than 90% similarity.

The first similarity is that the target stocks are basically the same, all of which are very high-quality listed companies.

Using the core indicator ROE to measure, companies with high ROE have strong profitability, and their ROE is much higher than the market average in the long term.

The left chart compares the ROE of the Beautiful 50 with the S&P 500 ROE. On the right, the ROE of the Maotai Index and the CSI 300 are used. It is found that these companies are all excellent, with a long history and large market capitalization, so they have a large number of fans.

The second similarity is the similar macro background.

After the recession in the United States in 1970-1971, there was basically a round of economic growth from 1971 to 1973, and corporate profits were relatively strong.

Looking back at 2019-2020, China's economy was also very good, but due to various constraints, resources were concentrated in large enterprises. Therefore, the larger the enterprise, the better the growth rate, which is also very similar.

In addition, the driving force behind the market stocks is institutional investors. In the United States, it may be driven by pension funds, while in China, it is the development of public funds and private funds in recent years.

The third similarity is why the Beautiful 50 and core assets market appeared. The similarity lies in the fact that in the past, people speculated on themes and concepts, which caused losses. Therefore, they returned to the nature of investing in companies and returned to the source.

Then, as the recognition of this approach increased, there was first a revaluation and then a bubble.

The outcome of the Beautiful 50 and core market, regardless of the reasons or results, is very similar.

Where are the similarities? After 1973, the yellow line in this chart represents the performance of the US GDP.

It can be seen that from 1971 to 1973, the US GDP had high growth and low inflation.

But in fact, after 1971-1973, inflation in the United States began to rise, and CPI rose from less than 4% in 1973-1975 to 12%.

After high CPI, the US GDP began to turn downward and entered a recession.

Comparing it with 2022-2023, the reasons may be different, but the actual performance is that due to the pandemic and the real estate situation, there is considerable economic pressure.

Therefore, after the pursuit of high-quality assets reaches its peak, it suddenly encounters a macro downturn, which is equivalent to a sudden brake, causing a significant decline in investor sentiment.

The decline of the Beautiful 50 is also much larger than the market average. What happened afterwards? After the beautiful 50, the market stabilized and the US stock market experienced the largest round of small-cap stock market in history. The small-cap stock market has been going on for nearly ten years, and the large-cap stocks in the market may also be rising, including the beautiful 50.

However, the beautiful 50 did not show much outperformance. The outperformance comes from small-cap listed companies.

Compared with the beautiful 50, no matter in the first half (rising phase) or the second half (falling phase), the market style will basically undergo significant changes to chase new economic momentum and new forces represented by small-cap stocks.

The second comparison is somewhat similar to the core asset market from 2005 to 2007.

First, the star targets are all good companies.

From 2005 to 2007, there was a big bull market, and the Chinese economy grew rapidly.

Companies like China Merchants Bank, Vanke, and Ping An, which are closer to the macro level, are star stocks in the market and are also of very high quality.

Second, in my opinion, the funds driving the market are very similar, which is the first stage of the development of public funds.

The market share of public funds increased from less than 5% to nearly 40% of the entire market.

There are also some similarities in the second half. After the 2008 financial crisis, China also experienced a significant decline. If we exclude 2009, from 2010 to 2014, the risk premium has always been high.

It can be observed that from 2013 to 2015, the market was dominated by small and medium-sized companies represented by the ChiNext board.

The small-cap stock market in the 1970s in the United States was also like this. When the market falls, small-cap stocks fall more, but once the market stabilizes, the style also switches to small-cap stocks.

Both the beautiful 50 and 2005-2007 draw the same conclusion, that is, the market style will undergo some changes in the future for a relatively long period of time.

Since it is the old momentum that is dragging down, if the macro economy stabilizes, because the social economy needs to progress, we can only hope for new economic growth points.

Are there any new emerging industries? Are there any small companies that can grow bigger? This is very crucial for the capital market and the entire economy.

Therefore, it is speculated that the market style may undergo a transformation in the future.

As long as the market stabilizes, the most dazzling stars in the market may change to a new batch of stocks.

Dividend strategy is still worth looking forward to in the future

The third topic is the high dividend strategy.

Since the beginning of this year, only this strategy has performed well, while others have been dormant.

Everyone can clearly feel that due to the decrease in risk appetite, the entire CSI Dividend Index has performed very well.

First of all, from the perspective of relative valuation, the valuation of the dividend index is still the lowest. Whether compared with the CSI 300, CSI 500, or the ChiNext Index, it is indeed significantly lower than other indices.

Secondly, the current dividend yield of its banking stocks is still attractive and innovative.

The current dividend yield of the CSI Dividend Index is close to more than six percentage points. In the macro background where the risk-free interest rate is declining again, the dividend yield is still considerable. Thirdly, from a risk perspective, the only risk is that the weight of the cyclical industries inside is quite heavy.

The two main industries, finance and energy, together account for nearly 40% of the total.

Looking at the entire CSI 300 Index, the current dividend yield is still attractive.

Basically, the dividend yield of the CSI 300 Index is over 3%, which is quite attractive considering the current risk-free rate is around 2%.

This also confirms that in the current capital market, investors are relatively pessimistic due to various factors, and the risk premium is relatively high, resulting in relatively low valuations.

Whether it is for large institutions or many investors, if they have a preference for low-risk investments, the dividend sector still has new ideas.

From this perspective, our judgment is a dividend strategy. It has performed well in the past two years and is still worth looking forward to. The good performance at the beginning of this year also has its rationality.

Dong Chengfei's professional certificate number: F0330100010022

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Source: Investment Homework Pro Author: Zhang Shupeng, Wang Li