Is "ground volume" followed by "land price"?

Abstract

1. Reflecting on the meaning of "local volume" in the market.

This week (20240812-20240816), the average daily turnover rate of A-shares fell to the lowest point since Q4 2020. Behind the "local volume" of A-shares, **it is actually the result of the major trend of participant changes and the exit of speculative funds: on one hand, the main participants in the market are shifting from high turnover northbound funds and actively managed equity funds to lower turnover passive funds and insurance funds; on the other hand, the activity of speculative funds represented by margin trading and northbound trading has fallen to a temporary low.**Historically, market bottoms often come with "local volume," but more characteristics of emerging from the bottom need to be present: such as larger price fluctuations brought by unit turnover rates, an increase in the number of industries with profit upgrades, and the beginning of sentiment repair among institutional investors. The market itself is still waiting for the force to break the low volatility, similar to around February this year, we believe that the current trading confusion in the market should not overshadow the understanding of the fundamental environment.

2. Easing concerns of overseas recession and the phase tailwind of physical assets.

Since last Thursday (20240808) when the initial jobless claims data was released in the US, the market's "recession trades" have gradually receded, and this week's release of US CPI and retail data in July further alleviated recession concerns. This is not only a relief for demand itself, but also a relief for the pressure on the trading side. This is actually the other side of the vulnerability of global financial markets: recession concerns often come with liquidity shocks, and the fading of concerns also brings a double-edged process. This means that asset selection under different macro scenarios may need to be reconsidered. It is worth reminding investors that whether demand can stabilize and rebound after interest rate cuts will be a watershed for globally priced commodities. From current observations, with the easing of the impact of natural disasters in July on production activities, combined with the gradual improvement in the fiscal pace between China and the US, demand may be gradually improving. After undergoing stress tests, physical assets may be entering a favorable period. It is worth mentioning that although there are obvious differences in governing approaches between Harris and Trump, which have led to market trading fluctuations, both agree on cutting inflation and supporting middle and low-income groups: reducing taxes for middle and low-income groups, and supporting home purchases through tax incentives and expanding land supply. This means that the certainty of improving demand for middle and low-income groups, as well as marginal improvements in housing demand, is higher, and the improvement of the US real estate chain in the future is worth looking forward to.

3. After stress tests, domestic physical consumption will rebound.

In July, the domestic production side remained resilient, with the mining industry's year-on-year growth rate (mainly energy) continuing to rise; highlights on the demand side include manufacturing technological transformation investments related to equipment upgrades, and infrastructure investment demand led by the central government is still increasing. Looking ahead, it is expected that with the gradual fading of the impact of high temperatures and heavy rainfall (mainly affecting construction), coupled with the implementation of special bonds, investment demand will gradually recover. It is worth mentioning that in the State Council meeting on Friday, it was mentioned that "to expand investment, the government should play a leading role in driving investment, implement various policies to support private investment, and expand the scope, scale, and proportion of local government special bonds used as capital." Leveraging a broader social investment. This means that the stage of significant physical consumption pressure may be gradually passing, and its resilience will be reaffirmed.

4 Banks: Shifting from seemingly "trading" driven to relative fundamental advantages.

Since 2024, banks have mainly experienced two continuous outperformances against the Wind A Index. The first is a significant outperformance driven by ETFs at the beginning of the year (20240102-20240205); the second is the continuous significant outperformance of banks since 2024Q2. From a fundamental perspective, due to the fact that the decrease in asset-side yield of banks is smaller than the adjustment in liability-side costs in the past, resulting in a continuous decline in the net interest margin of banks. This is the result of the asset-side return decreasing faster than the liability-side costs + the liability-side structure becoming more regular. Under a series of central bank operations (including strict scrutiny of manual interest subsidies, irregular trading of government bonds, etc.), we see that on one hand, deposit rates are gradually falling (more so for long-term rates), funds are shifting from the liability side of banks to non-bank institutions (wealth management, public bond funds, etc.), and are returning to the liability side of banks through interbank certificates of deposit, with financing costs significantly decreasing. On the other hand, by controlling the government bond yield curve to increase the return on the asset side of banks. Ultimately, we see that the net interest margin of banks in 2024Q2 has stabilized. Changes in the distribution mechanism during the process of de-financialization will allow systemically important financial institutions to marginally gain more advantages over other financial institutions.

5 Physical assets' tailwind may have returned.

The adjustment of physical assets that began in June did not bring about a change in market sentiment, but instead saw a spiral decline in sector trading enthusiasm. While A-shares are still entangled in trading structures, the path of fundamentals is becoming clearer, and the tailwind of physical assets is slowly picking up.

Risk warning: Domestic economy underperforms expectations; real estate policies exceed expectations; significant overseas economic downturn.

1 Reflection: The significance of a "low-volume" market. This week (20240812-20240816), the trading activity in A-shares significantly declined, with the weekly average turnover rate dropping to the lowest point since 2020Q4, and the daily turnover also hitting a new low since 2020. Behind the "low-volume" A-share market is actually the result of the overall trend of changing participants and the exit of short-term trading funds: on one hand, as mentioned in our mid-term strategy "Middle Stream" (https://mp.weixin.qq.com/s?__biz=MzI2MDkzOTc3Nw==&mid=2247538737&idx=1&sn=fb5f41d1e2d51fce713bb44639ac0fba&chksm=ea60115fdd1798497c7a6054c1dd59b409fbe925ba4b211d47f9868a763e094df9f159487df2&scene=21#wechat_redirect), since 2022, the main participants in the market have been shifting from high-turnover northbound funds + actively managed equity funds to low-turnover passive funds + insurance funds. This is also the main reason behind the seemingly declining daily turnover this year, which is actually an incremental market On the other hand, if we look at margin trading and northbound trading as tracking indicators for trading funds, the current activity of trading funds is at a low point. Historically, the market often experiences "light volume" before coming out of the bottom, but there needs to be more characteristics of coming out of the bottom: 1) The bottom of A-shares often accompanies a significant weakening of liquidity, meaning that turnover rates can trigger higher market fluctuations, which is also often the moment when market volatility begins to rise; 2) The number of industries with upward profit forecasts begins to rebound from the bottom; 3) Institutional investors' sentiment starts to recover. Looking at the current situation, apart from the significant decrease in turnover, the above three characteristics may still not have appeared, and the broad-based ETF around the CSI 300 index remains the main buying force in the current market. This means that the market characteristics are still waiting for the force to break the low volatility, similar to around February this year, we believe that the current trading confusion in the market should not overshadow the understanding of the fundamental environment. Overseas Recession Concerns Eased and Phase Tailwinds for Physical Assets

Since last Thursday (20240808) when the initial jobless claims data in the United States was disclosed, market concerns about a recession in the U.S. have gradually eased. The U.S. CPI and retail data for July released this week (20240812-20240816) further alleviated market worries about a recession. This is not only a relief for demand concerns but also a reduction in pressure at the trading level: both industrial metals, which were heavily impacted by recession concerns, and gold, which was heavily affected by liquidity, saw significant rebounds this week. This actually reflects another aspect of the fragility of global financial markets: recession concerns often come with liquidity shocks, and the fading of concerns also brings a double impact in stages. This means that asset selection under different macro situations may need to be reconsidered. It is worth reminding investors that whether demand can stabilize and rebound after rate cuts will be a watershed for globally priced commodities. From current observations, the impact of natural disasters in July on production activities may be gradually easing, combined with the gradual improvement in the fiscal pace between China and the U.S. discussed in our weekly report "Even if a million obstacles block the way", this implies that demand may be gradually improving. After undergoing stress tests, physical assets may be entering a favorable period. The upcoming Jackson Hole meeting and August non-farm payroll data will provide a clearer economic/monetary path.

The uncertainty of the U.S. presidential election also implies uncertainty in the future structure of demand: Harris tends to continue with loose fiscal policies + increasing taxes on businesses + reducing the burden on the working class (such as canceling tip taxes) After taking measures, Trump correspondingly adopted constraints on government spending + tax cuts (including corporate tax cuts + significant tax cuts for workers and no tax on tips) + restrictions on illegal immigration + tariffs + expanding energy production (including nuclear energy). Both of these are aimed at cutting inflation and supporting middle and low-income groups as one of the main governance goals, reducing taxes for middle and low-income groups, and there is a consensus on supporting home purchases through tax incentives, expanding land supply, etc., which means that the marginal improvement in demand for middle and low-income groups and the marginal improvement in housing demand are relatively more certain. From the consumption structure of middle and low-income groups: by the end of 2022, housing, transportation, and food are the three major expenditures for middle and low-income groups in the United States, accounting for over 70%, which means that the improvement of the U.S. real estate chain is worth looking forward to, and a more broad-based increase in physical consumption will gradually emerge. After 3 stress tests, domestic physical consumption will rebound. Economic data in July shows that the domestic production side remains resilient, with a 5.1% year-on-year increase in industrial added value in July, stronger than the consensus expectation of 5.0% from Wind. The mining industry's year-on-year growth rate (mainly energy) continued to rise. The bright spot on the demand side is that manufacturing industry technological transformation investment related to equipment updates and infrastructure investment demand led by the central government are still rising: the year-on-year growth rate of social retail sales in July has rebounded but remains relatively low, while fixed asset investment continues to decline, with 1) manufacturing investment still at a high level, and the growth rate of manufacturing industry technological transformation investment related to equipment updates is still rising; 2) narrow infrastructure investment (excluding electricity, heat, gas, and water production and supply) and broad infrastructure investment show a clear deviation, with infrastructure investment demand related to central government leadership being more vigorous. Looking ahead, it is expected that with the gradual fading of the impact of high temperatures and heavy rainfall (mainly affecting construction), coupled with the landing of special bonds, investment demand will gradually recover. It is worth mentioning that the State Council meeting on Friday mentioned "to play the role of government investment driving investment expansion well, implement various policies supporting private investment, expand the scope, scale, and proportion of local government special bonds used as capital, and leverage a broader range of social investment." This means that the stage where the pressure of physical consumption is relatively high may be gradually passing, and its resilience will be confirmed once again 4 Banks: From seemingly "trading" driven to relative fundamental advantage Since 2024, banks have experienced two rounds of continuous outperformance compared to the Wind A index: first, a significant outperformance driven by ETFs at the beginning of the year (20240102-20240205). Based on our analysis in the 2024 Q1 fund report "Ignition, Momentum is Strong" link, the banking sector was the most bought sector by passive funds in the first quarter; second, since 2024 Q2, under a series of operations by the central bank (including strict scrutiny of manual interest adjustments, illegal trading of government bonds, etc.), the banking sector has continued to significantly outperform the Wind A index. From a fundamental perspective, due to the decrease in the yield of bank assets being smaller than the adjustment in the cost of liabilities, leading to a continuous decline in the net interest margin of banks: 1) Compared to loans, the proportion of government bond allocation on the bank's asset side is increasing, and accordingly, the yield of both has significantly declined; 2) The rate of deposit rate reduction on the liability side is slower than the loan and government bond yield, and structurally, it is significantly skewed towards fixed-term deposits. Therefore, on one hand, the central bank strictly scrutinizes "manual interest adjustments" while pushing for a reduction in deposit rates, especially a greater reduction in long-term deposit rates. Correspondingly, under strict scrutiny of "manual interest adjustments," we see funds shifting from the liability side of banks towards non-bank institutions (wealth management, public offering bond funds, etc.), and returning to the liability side of banks through interbank certificates of deposit and the financing cost has significantly declined; on the other hand, by controlling the government bond yield curve to increase the return on the bank's asset side. Ultimately, we see the net interest margin of banks stabilizing in 2024 Q2. Changes in the distribution mechanism during the process of de-financialization will allow systemically important financial institutions to marginally gain more advantages over other financial institutions 5. Physical assets are back in favor or have returned. The adjustment of physical assets that began in June did not bring about a change in market style, but instead saw a spiral decline in sector trading enthusiasm. While A-shares are still entangled in trading structures, the path of fundamentals is becoming clearer, and the tailwind of physical assets is slowly blowing: First, upstream resource assets: non-ferrous metals, energy, shipping; Second, relatively advantageous assets with declining capital returns, benefiting from the gradual stabilization of interest rate differentials: banks, as well as physical consumption-resilient assets in the infrastructure sector such as ports, railways; Third, industries in the manufacturing sector with a relatively good supply-demand structure or improvement expectations: rail transit equipment, refrigeration and air conditioning equipment, power grid equipment, and home appliances. 6. Risk Warning 1) Domestic economy underperforms expectations. If subsequent domestic economic data continues to underperform expectations, the baseline assumption in the article regarding domestic demand recovery will be invalidated. 2) Real estate policy exceeds expectations. If real estate policies are relaxed beyond expectations, the domestic economy will return to a debt-driven model centered around real estate, which is unfavorable for physical consumption. 3) Sharp decline in overseas economies. If overseas economies experience a sharp decline beyond expectations, expectations for overseas demand will plummet under recessionary conditions.

Source: Yiling Strategy Research (ID:gh_756 861d1544f) Title "After '地量', Seeking Future Trends | Minsheng Strategy" Author: Minsheng Strategy Team Contact: Mu Yiling/Mei Kai External Release Date: August 18, 2024 Report Writing: Mu Yiling SAC Number S0100521120002 | Mei Kai SAC Number S0100522070001