Shenwan Hongyuan's Wang Sheng: The current market does not need pessimism, it is time to "build strong fortifications and fight tough battles"

Recently, Wang Sheng, Deputy General Manager of Shenwan Hongyuan Securities Research Institute, shared his latest views at a strategy meeting of Fuguo Fund.

He summarized his current views as "building a strong fort and fighting a tough battle". Whether it is for investment or policy, one must have confidence, patience, and be well-prepared.

In two key aspects of the market, he believes that even changes in real estate are more worthy of attention than fiscal policy. Wang Sheng stated that if the condition of stabilizing house prices can be achieved, it is worth looking forward to the increase in market risk appetite.

Furthermore, he observed the possibility of incremental funds from both domestic and foreign sources.

Based on various considerations, he believes that there is no need to be pessimistic at the moment, and he shared several thoughts on opportunities.

Don't Rush into Battle

Wang Sheng's attitude towards the capital market is to "build a strong fort and fight a tough battle".

His explanation is twofold. Firstly, despite the significant upward movement of the short-term index and high volatility, for future medium to long-term equity investments and the allocation of various asset classes, one must be more systematically prepared, like preparing for a battle, rather than rushing into it.

Secondly, he also hopes that investors will maintain sufficient confidence and patience in the introduction of policies, without being hasty. There will be an important press conference on fiscal policy over the weekend, but if one understands it with the mindset of "building a strong fort and fighting a tough battle", there will be more calmness within.

Two Key Aspects

In Wang Sheng's view, there are two key aspects.

One key aspect is how to actively implement the central government's fiscal policies at the local level, where local governments dare to take action and be proactive.

The second very important aspect is real estate. While real estate issues may seem to be about real estate, in reality, they also challenge the financial strength of local governments.

However, he also noted that changes have occurred as house prices have driven the downward trend in risk-free interest rates.

Firstly, at an important meeting in September, a crucial statement was made to promote the stabilization of the real estate market. Stabilization may have many implications, but the word "stabilization" is likely aimed at house prices.

Currently, the house price index has returned to the range when the concept of "housing is for living, not for speculation" was proposed in 2016.

Policies have been actively implemented, and he also shared research findings on market forces.

In Beijing, Shanghai, Guangzhou, and Shenzhen, some houses are referred to as "old and dilapidated", and the absolute total prices have entered a very controllable and relatively low range. From the perspective of actual cash outflows each month, the monthly cash outflow for buying a house (considering provident fund) may be slightly lower than renting. At this point, some families may seriously consider whether to buy or rent. The supply and demand situation for these houses may undergo some minor changes.

The stabilization of house prices provides a natural foundation for the market economy. If the rate of decline in house prices slows down, it will have a significant impact on the rebalancing between equity and fixed income, the two major asset classes.

Wang Sheng stated, "If the condition of stabilizing house prices can be achieved, it is worth looking forward to the increase in market risk appetite." He believes that the anticipation of this point is even more in line with some natural laws of market economy operation than the need for specific fiscal stimuli

The current market should not be too pessimistic

He also explains from a probabilistic perspective why the current market should not be overly pessimistic.

It is really rare for major global indices to have consecutive negative K-lines for more than 3 years, reaching 4 years. The Hang Seng Index experienced this in 2023, and the index did not perform well in the first half of 2024. He is certain that if the performance in the second half of the year is still mediocre, the index in 2025 will definitely look better. However, before reaching 2025, everything started in September. Therefore, it is not appropriate to assume that just because major indices rarely have 5 consecutive negative K-lines, they will definitely rise. What can be confirmed is that in relatively extreme and extreme situations, the probability of further market rise is significantly increased, which has undoubtedly been preliminarily verified.

Internet platform economy companies may need to be revalued

So, are there opportunities for leading companies to support (rise)?

When talking about leading companies, everyone will first think of Maotai Index, Ning Index, and other high ROE leading companies that were active in the past. However, Wang Sheng reminds that besides real estate, another very prominent industry in China over the years is the internet. Internet platform companies have been a very important success example in the Chinese economy over the past few decades.

He observed that recently, these platform economy companies have been given a new historical mission. The platform economy is defined as an important representative and carrier of new productive forces.

Traditional economy transformation is called new productive forces; artificial intelligence is new productive forces; new energy, new energy vehicles are new productive forces; and finally, it was discovered that the platform economy is an important representative.

Moreover, it is also the source and experimental field of cutting-edge technology, a key force driving the transformation of cutting-edge technologies such as general artificial intelligence.

Some well-known platform economy companies, in addition to innovation, have also provided new channels for employment and entrepreneurship, new space for expanding demand, new support for public services, and many historical missions.

Therefore, he concludes that the platform economy has been given many new historical missions and tasks, and its valuation will naturally increase. Some leading internet platform companies have been included in the Hong Kong Stock Connect in the early stage, allowing northbound funds to buy in; at the same time, these companies have also announced that they have completed a three-year rectification and have released large language models for artificial intelligence.

Incremental Funds

Therefore, Wang Sheng believes that the strong performance of the Hang Seng Tech Index in this round is certainly backed by its deep-seated policy background and logic. If these excellent leading companies in the platform economy, after experiencing several years of adjustment, start to turn around and rise, many foreign funds will have to reevaluate whether they are underweight in Chinese assets.

The data he presented shows that at the end of August, one month before the market started, foreign allocations to China were below the 10th percentile historically, indicating a severe underweight. If it returns to the standard allocation, it may mean "immense wealth" for this market.

Of course, China also has its own incremental funds. At a press conference held by the State Council Information Office, two monetary policy tools were very professional, fully embodying the word "professional," fully mobilizing professional institutional investors in the capital market, and the subjective initiative of long-term capital and patient capital Of course, more importantly, at the press conference, we saw the determination, the real hope for the future, and the clear goals and purposes.

Therefore, Wang Sheng believes that the entire domestic capital market has also ushered in relatively good long-term incremental funds. Of course, among the long-term incremental funds, some funds may flow to undervalued, high dividend, state-owned enterprises, central enterprises; some funds may flow to private enterprises, innovative technology companies, new quality productivity. However, no matter what, the diversified structural pattern is a reality that has been seen in the previous period.

He also reminded that there was a situation where the margin trading balance increased rapidly for a while in the past few days, and there was also a situation where the scale and pace of growth of index-related products increased rapidly. In the case of such rapid growth in stages, it is also necessary to pay attention to grasping the rhythm, maintaining objectivity and calmness, choosing the right timing to get on board, protecting one's assets, and continuously preserving and appreciating value.

New Quality Productivity 4 Chains

Wang Sheng also divided the new quality productivity into 4 chains.

The first "supplementary chain" mainly targets industries with shortcomings, which are important areas where there may be insufficient technology, production capacity, and funding.

The second is the advantage industry, "extension chain," which extends the chain. This refers to exporting the new three items, new energy, automobiles, and photovoltaic cells.

At the end of 2021, when assets in such categories were relatively hot in trading, his report pointed out the possibility of temporary overheating of related assets from three different perspectives. But now we also need to start thinking about whether there have been changes, and whether some issues with rapid capacity growth have begun to improve marginally.

For example, in 2021, it was clear that the growth rate of construction projects of relevant listed companies was very fast. According to the normal pace of converting construction in progress to fixed assets, the industry's peak growth should occur in the second half of 2022. Stocks are about expectations, so related stocks have already started to adjust significantly in the first half of 2022.

Similarly, now the growth rate of capacity in related industries has begun to peak and decline, although there has not been a significant occurrence of so-called negative growth, the growth rate has indeed started to slow down.

In this slowing situation, even though it has not reached the stage of serious capacity digestion, contraction, or negative growth, stocks are about expectations. As long as the downward trend in capacity growth is sustainable, it is very likely that related stocks will see the bottom in advance.

Extension chain involves restructuring on the industrial chain, and also means extending geographically, such as going global.

The third is upgrading the chain, which is traditional industries updating and upgrading themselves.

For example, some excellent textile and apparel companies have used various methods of artificial intelligence to make production lines more automated and intelligent, which is also a typical new quality productivity of upgrading the chain.

The fourth is creating the chain. It targets emerging future industries, which may be in the early stages of development and have not truly matured, such as artificial intelligence, quantum information, and so on The entire new productive forces cover a wide range of areas and content. In the early stage, many related stocks, with the rapid expansion of passive products, experienced rapid price increases. After reaching a certain level and experiencing a phase of decline, it will once again trigger various thematic investment opportunities that need to be highly focused on.

Focus on Equipment Upgrades and Trade-Ins

In addition, there are more traditional aspects that he believes will benefit significantly from the specific implementation and even acceleration of fiscal policies, namely equipment upgrades and trade-ins.

This may also involve some leading companies in the consumer sector and excellent companies in the manufacturing industry.

It is relatively easy to understand the excellent companies in the manufacturing industry, as encouraging new productive forces transformation requires traditional industries to upgrade their equipment.

Trade-ins involve consumer spending. If this round of fiscal policies pays more attention to the consumer sector structurally, the fundamentals of related industries will undoubtedly improve.

More importantly, many companies have adjusted, and their valuations are now showing attributes of high dividend stocks. At this point, if trade-ins are implemented and the fundamentals further improve, he believes that investment opportunities in related companies are still worth looking forward to.

Carefully Evaluate Risks

Regarding risks, he also reminds investors to carefully assess potential market risks at all times.

For example, the uncertainty of the final results of overseas elections may have an impact on energy prices, geopolitics, and other aspects.

Therefore, it is important to objectively evaluate risks at all times and then seek opportunities based on this evaluation. Regardless of how turbulent the current market may be, maintaining such a mindset, conducting thorough fundamental research, making clear judgments on the overall situation, asset allocation, industry comparisons, and closely tracking the fundamentals of companies from the bottom up may be the sustainable way to achieve long-term investment returns