2015 Bull Market Reappearing? Morgan Stanley: Another 2-3 trillion yuan of retail funds may enter the market

Morgan Stanley believes that if retail investors' sentiment remains high, there is further room for the Chinese stock market to rise.

Recently, Morgan Stanley's analyst team led by Chiyao Huang released a research report pointing out that the trading volume and speed in the current A-share market have exceeded the levels of 2020-2021, bearing many similarities to the retail investor bull market of 2015. They observed that new retail investors are the main driving force behind the market's rise, with a significant increase in the number of new investors opening accounts indicating a rising level of retail participation.

Analysts estimate that if retail investors continue to maintain optimistic sentiment, as much as 2-3 trillion RMB could be reallocated from Chinese household financial assets to the stock market, benefiting brokerage stocks. In addition, the relatively low balance of margin financing currently also indicates potential growth in the future.

A Repeat of the 2015 Bull Market? New Retail Investors Driving the Market Up

Morgan Stanley summarized the key drivers of the Chinese stock market in different periods: 2015 was a bull market driven by retail investors and leverage, 2020-2021 was institution-driven, and in September 2024, a rise driven by retail investors reappeared.

Data shows that in September 2024, the average daily trading volume and turnover rate in the Chinese stock market exceeded the levels of 2020-2021, approaching the highs of 2015. On September 30th, the A-share trading volume hit a historical high of 2.59 trillion RMB, with a turnover rate as high as 751%, significantly higher than the same period last year.

Looking at the sectors, Chinese "bull market leader" brokerage firms are showing a clear upward trend driven by retail investors, similar to the bull market of 2015. The Morgan Stanley report stated:

• The trading volume and speed have exceeded the levels of 2020-2021, similar to the retail investor-driven bull market of 2015.
• According to our channel checks, there has been a significant increase in new account openings for brokerage firms.
• So far, the demand for margin loans has lagged behind, indicating that this round of rise is more likely driven by funds from new investors.
• Despite the market rise, major brokerage ETFs (mainly institution-led) saw outflows last week. Retail investors usually prefer to directly purchase brokerage stocks to chase market returns.

Morgan Stanley believes that the growth of household financial assets provides ample potential liquidity for the Chinese stock market, giving retail investors enough capacity to sustain the current uptrend.

In 2022 and 2023, Chinese household financial assets grew by an average of about 18 trillion RMB per year, but the allocation to stocks has remained relatively low.

We estimate that if the stock allocation in Chinese household assets returns to the level of 2020-2021, there may be a capital inflow of 2-3 trillion RMB into the stock market.

The low interest rate environment in the past two years has limited the investment choices for households. Currently, there is still room for an increase in margin financing, reaching 1.39 trillion RMB, compared to around 1.9 trillion RMB in 2021.

According to Morgan Stanley, assuming a 25% increase in the stock market, the value of stocks held by investors will increase accordingly. In such a market environment, the demand for stocks by investors may increase, and the scale of capital inflow may reach 2.6 trillion RMB.

Super Overvaluation Potential of Brokerage Stocks

The report also mentioned that in a market driven by retail investors, brokerage stocks often have a tendency to be super overvalued. The valuation of Hong Kong brokerage stocks is now higher than the levels in 2020 and 2021, but the momentum of retail investors may push them even higher.

Morgan Stanley believes that based on the current valuation of Hong Kong brokerage stocks, the market may have already considered an average daily trading volume (ADT) of approximately 1.4 trillion RMB as the operating rate, and the industry's return on equity (ROE) rebounded to low double-digit levels.

Analysts believe that if investors consider the recent high daily trading volume as the norm, brokerage stocks may experience a super overvaluation in the short term.

If the momentum is strong enough, we believe that retail investors may consider 2 trillion RMB (the ADT of A-shares in the two days before the market closed) as the operating rate, which may further increase profits by 30% and ROE may reach around 13%.

Nevertheless, considering the reduced contribution of brokerage business, declining commission rates, and increased capital intensity, Morgan Stanley believes that the valuation of brokerage stocks is unlikely to reach the level of over 2 times price-to-book ratio seen in 2015