Dialogue with Shenwan Hongyuan's Wang Sheng: "Flash Bull" Yuren still exists, no need to be pessimistic, the fourth quarter may sound the charge for "core assets"

Just a month ago, the "lightning bull" market suddenly arrived, driven by policy measures beyond expectations, causing stock market sentiment to soar. However, after the National Day holiday, the market quickly entered the next phase, shifting from an explosive rise to a volatile pullback that continues to this day.

Faced with such huge fluctuations, investors are feeling confused at the crossroads, focusing on the exact direction for the next step.

In a recent conversation with Wall Street View, Wang Sheng, Deputy Director and Chief Strategic Analyst of Shenwan Hongyuan Research Institute, stated that although the short-term "lightning bull" market has clearly cooled down, the market has entered the second phase with lingering effects, so there is no need to be pessimistic. Currently, focusing on thematic rotation opportunities, looking ahead to 2025, there is a high probability of ushering in the third phase where core assets dominate the market, which may also show early signs in the fourth quarter of 2024.

In addition to the outlook for the future market, Wang Sheng also provided in-depth insights on several key issues of market concern during the interview:

1. Focus of Subsequent Fiscal Policies: Local government bonds may play an important role in fiscal deployment. The implementation of "distinguishing three aspects" deserves special attention, and how to motivate the enthusiasm and initiative of local government grassroots officials may be a key issue.

From a secondary market investment perspective, the direct impact of bond conversion is the resolution of arrears in construction company project payments, which is beneficial for construction and environmental protection companies; at the same time, PB<1 central enterprises are also required to manage market value, and bond conversion has become an important investment theme.

2. Impact of the Fed's Rate Cut Cycle: Domestic easing policies are expected to further intensify, enhancing the effect of stabilizing growth. However, the sustainability of overseas easing remains uncertain.

3. Significance of Real Estate Industry Recovery for Assets: Property prices are a core variable in domestic asset allocation. If property prices stop falling and stabilize, it can effectively support the rebound in risk appetite.

4. Diversified Asset Allocation: Gold is a variety worth paying attention to. In addition, the subsequent increase in silver may exceed that of gold, and attention should be paid to long-term allocation opportunities for oil after pricing supply risks.

5. Key Focus of Hong Kong Stocks: Leading companies in Hong Kong stocks may be a beacon of the current round of rising risk appetite for Chinese assets. Compared to A-shares, allocating high dividend stocks in Hong Kong stocks during a pullback also holds more investment value.

The following is a summary of Wang Sheng's interview compiled by Wall Street View:

The market has entered the second phase, and the third phase where core assets dominate the market may arrive early

Host: Recently, A-shares and Hong Kong stocks have experienced explosive rises followed by volatile pullbacks, making the market environment quite complex. What is the logical main line that the current market is facing? What are the key points of the game?

Wang Sheng: We divide this round of market trends into three stages based on driving forces and market characteristics, and we are currently in the second stage.

The first stage was the "lightning bull" market driven by policy measures beyond expectations and accelerated inflow of incremental funds into A-shares. The policies announced during the meetings on September 24th and 26th were beyond expectations, especially the policies for developing the capital market, which led to a rapid rise in A-shares before the holiday. With the index rising, the difficulty of policies released after the holiday exceeding market expectations is bound to increase. The press conference held by the Ministry of Finance on October 12th saw the most unexpected bond conversion policy, further strengthening the stabilization policies for the mid-term real estate industry, laying the groundwork for further efforts in 2025, but the support for the short-term demand inflection point may be relatively limited The second stage is a flexible thematic rotation market. The incremental funds flowing in will not withdraw immediately, and the A-share volatility will not narrow immediately. Although the market is cooling down, there is still residual heat. Currently, it is a flexible thematic rotation market. In the short term, the market expects securities firms to quickly use central bank swap tools to bring in incremental funds and allocate high dividend assets. Therefore, central bank swap tools are favorable for high dividends, and the fiscal layout is favorable for construction decoration, real estate development, which are the current thematic clues in rotation. Growth themes are more directly reflected in the rapid rise in prices of various technology ETFs.

The third stage is a market where core assets dominate in 2025. This time may truly be a "policy bottom" because there may be a "performance bottom" in the second half of 2025. The period from 2021 to 2022 is a peak period of excess supply in some key industries, while the period from 2025 to 2026 is the corresponding trough period of supply, with supply pressure easing in 2025. On the demand side, there may be a weak improvement in the second half of 2025, and the Fed's rate cut is likely to be a preventive measure. External demand may improve, and the stimulus effect on domestic demand will also increase. In the second half of 2025, A-share profitability may improve, so the "performance bottom" may appear earlier, and the "market bottom" may come even earlier. Looking ahead to 2025, it is highly probable that core assets will dominate, and the fourth quarter of 2024 may also show early performance. This includes the investment opportunity in the new energy vehicle battery chain at the turning point of the economy in 2025, which may subsequently spread to the entire new energy and advanced manufacturing industry.

In conclusion, the mid-term A-share policy bottom has been confirmed. Although the short-term "lightning bull" market has cooled significantly, the market has entered the second stage, with residual heat remaining, so there is no need to be pessimistic. Currently, focus on thematic rotation opportunities, and the market where core assets dominate in the third stage is also expected to arrive early.

From a fund perspective, the global allocation of investors to A-shares and Hong Kong stocks is still below the 10th percentile of the past ten years' history, with huge room for replenishment, especially for long-term actively managed foreign products, which need time to study the latest changes in the Chinese market. On the domestic institutional investor side, position replenishment is underway, and cross-border allocation of leading quality companies in A-shares and Hong Kong stocks is becoming an important feature of this round of increasing positions. From the perspective of domestic individual investors, we have felt the enthusiasm of new investors opening accounts, the more active trading volume, but the growth of margin balance is still in a rational range, showing that leveraged behaviors are still under control.

Of course, in the long run, we still look forward to more policies that can boost the fundamentals, such as whether more structural fiscal policies will be introduced? How to effectively implement the "three distinctions"? Are there more policies to stabilize the real estate market? We believe that as the effects of relevant policies continue to show, the market fundamentals will become more solid, and the bull market can proceed more steadily and last longer.

Convertible bonds will be an important focus of future fiscal policies with three key points to watch

Host: Since the beginning of this year, the impact of policy risks on the market seems to be gradually increasing. Where do you think the focus of future fiscal policies may lie? Wang Sheng: On September 24th, the People's Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission held a press conference, with policy expectations heating up. The financial policy of the Political Bureau meeting on September 26th received much attention, emphasizing counter-cyclical adjustments, special national bonds, and special bonds. Both the real estate and capital markets were key focuses of this policy, with the first mention of the work requirement to "promote the stabilization of the real estate market". At the press conference held by the Ministry of Finance on October 12th, positive expectations were managed in the market, hinting that more incremental policies may still be on the way. Debt-to-equity swaps are positioned as a key element in this fiscal deployment, potentially becoming an important lever in the future.

Debt-to-equity swaps maintain a foundation of high-quality development and risk prevention, while also freeing up future fiscal operating space for local governments, preparing to make contributions in areas such as safeguarding people's livelihoods and promoting consumption. From a secondary market investment perspective, the direct impact of debt-to-equity swaps is the resolution of arrears in construction company project payments, benefiting construction and environmental protection companies; at the same time, PB<1 central enterprises are also required to manage market value, making debt-to-equity swaps an important investment theme.

Furthermore, the market believes that the key variable affecting the future trend of A-shares lies in the strength of fiscal policy stimulus. We believe that this "agenda setting" may not have captured the main contradictions. We are particularly focused on the implementation of the "three distinctions", such as how to mobilize the enthusiasm and initiative of local government grassroots officials, which may be a key issue.

Three areas to focus on for future policy expectations: First, short-term attention to the convening of the 12th NPC Standing Committee. Second, medium-term attention to the confirmation of the 2025 economic targets at the end-of-year Central Economic Work Conference, especially the expectations for fiscal deficits. Third, long-term attention to the planning of the "14th Five-Year Plan". 2025 is also the year for formulating the "14th Five-Year Plan", with a large number of major projects, initiatives, and policies set to be launched in the next five-year plan.

Fed rate cuts may drive simultaneous improvement in the Chinese and American economies

Host: The Fed's rate cut cycle has officially begun. What kind of easing pace do you think they will adopt next? From a historical perspective, what kind of disturbances might it cause in the domestic market?

Wang Sheng: In September, the Fed officially entered a rate cut cycle. The impact on the A-share market can be analyzed from three aspects: First, after the rate cut, overseas liquidity loosens, U.S. bond yields decline, the U.S. dollar index falls, pressure on RMB depreciation eases, and foreign capital will flow back to emerging markets, including A-shares seeing some foreign capital inflow. Second, in the context of overseas easing, there are fewer domestic policy constraints, further easing policies can be intensified, and the effect of stabilizing growth will also be enhanced. Third, the market currently expects two more rate cuts by the Fed this year, most likely as "preventive rate cuts", and the U.S. economy may stabilize and rebound early. In this way, simultaneous implementation of easing policies by China and the U.S. may lead to simultaneous improvement in the Chinese and American economies.

However, it is also important to note the uncertainty of the sustainability of overseas easing, the specific impact of U.S. trade policies, and the uncertainty of their impact on A-shares, which may lead to some foreign investors hesitating to buy Chinese assets after the rate cut.

As Long as House Prices Slow Down, Risk Appetite Can Rise

Host: What stage do you think the real estate industry is currently in? How do you view the status and role of real estate in the economy in the future?

Wang Sheng: In the first half of 2024, although residential prices in 70 large and medium-sized cities are still generally declining, the price decline of second-hand residential properties in some core cities is narrowing. House prices are the core variable in domestic asset allocation, dominating the trends of stocks, bonds, and commodities since 2022, and even affecting the asset-liability expectations of some individuals. With policy support to "stabilize the real estate market and prevent further decline" along with the natural recovery force after price adjustments, the speed of house price decline will slow down.

At this point, there is no need for house prices to rise, just a slowdown in the rate of decline can increase risk appetite, change the core logic of asset allocation since 2022, and promote the rebalancing of stocks and bonds.

In the past two years, bonds and high-dividend assets have performed well, essentially pricing in the real estate market, especially house prices. As long as the rate of house price decline starts to slow down (second derivative), there will be a change in everyone's psychology in finance. There was a similar situation during the period of 2012-2015 when GDP growth stabilized in the 7%-8% range, the pace of growth decline slowed down, and risk appetite improved significantly. However, this time, the main contradiction is not GDP but house prices. The stabilization of house prices directly affects the rise in risk appetite, especially increasing the probability of valuation improvement for leading companies with relatively stable profits.

Not Just Gold, Silver and Crude Oil Also Play a Role in Asset Allocation

Host: You have mentioned before that diversified asset allocation is crucial nowadays, and gold is a commodity worth paying attention to. Besides gold, what other commodities do you think have great potential?

Wang Sheng: In the precious metals market, gold prices continue to hit new highs due to expectations of fiscal expansion in China and the United States, coupled with escalating geopolitical conflicts, leading to a rapid rise in gold prices recently. However, we have observed that due to the weak global manufacturing sector, the increase in silver prices is weaker than that of gold. With China's fiscal stimulus to boost the economy and global economic recovery under the preemptive rate cuts by the United States, supported by its industrial properties, silver prices are expected to rise more than gold in the future.

In the crude oil market, oil prices have dropped significantly, while volatility continues to rise. The August Middle East conflict, especially the tensions between Israel and Iran, has led the market to price in supply risks for oil, causing volatility to continue to increase. After focusing on fully pricing in supply risks, oil prices will seek a new equilibrium range, bringing long-term allocation opportunities.

Hong Kong Stocks' High Dividends Outperform A-Shares

Host: You have previously mentioned that allocating high dividends on pullbacks is still a preferred option for relative returns. So, between high dividend stocks in Hong Kong and A-shares, which one holds more investment value?

Wang Sheng: The conclusion is that high dividend stocks in Hong Kong are superior to A-shares. A comparison and analysis can be made from the following four aspects: First, high dividend stocks in Hong Kong can also use the same methods of distinguishing stable and dynamic high dividends as in A-shares, with similar aesthetic judgments on performance stability. Second, the continuous increase in the pricing power of southbound trading is bringing investment opportunities in high-dividend stocks in Hong Kong. Third, compared to A-shares, the discount of similar companies in Hong Kong is larger, mainly due to different discount rates, which are expected to be repaired with the prospect of Fed rate cuts Fourth, even considering taxes, the dividend yield of A+H shares is still advantageous compared to A-shares. It is worth focusing on the direction where the southbound shareholding ratio of A+H shares in Hong Kong increases faster, the discount rate is lower, and the profits are more stable.

Speaking of Hong Kong stocks, everyone should not only focus on A-shares. The leading companies in Hong Kong stocks may be a flag of this round of China's asset risk preference rebound.

Every bull market has standard flagship stocks, such as Maotai in the leading stock market after 2016, China Mobile and CNOOC in the leading stock market after 2022, these stocks may not be the top, but as institutional heavyweights, they may outperform most market portfolios and become a market indicator. The change in the positioning of internet platform economy catalyzes the leading companies in Hong Kong stocks to start a market, they may have truly reversed. In 2021, due to various reasons, the stock prices of internet platform companies in Hong Kong have undergone significant adjustments. Now, according to the guidance book of the Third Plenary Session of the 19th CPC Central Committee, these companies are "important representatives and carriers of new productive forces", and expanding domestic demand, employment and entrepreneurship, and public services all rely on them. Coupled with the improvement in US bond interest rates and macroeconomic fundamentals, the investment logic of these companies has reversed upwards. When their stock prices stand out globally, it will lead foreign capital to reevaluate the investment value of China from a global perspective, increase the allocation to China, and benefit domestic leading stocks.

Therefore, whether it is Hong Kong stocks or A-shares, the truly high-quality leading companies that can provide returns to shareholders are the foundation of our "hard fortification, tough battles".

Developing new productive forces, layout of the industrial chain (filling gaps in the chain, continuing advantages, upgrading traditional chains, and building emerging chains) is definitely a policy direction. Unfortunately, innovative chain leaders such as Huawei and DJI are not listed. Investors need to keep their eyes open, distinguish between true and false, adhere to long-term investment concepts, and cautiously follow the pulse fluctuations of technology themes.

"Potential" Leading Companies: Core assets with buyback and holding capabilities/ Core assets with pessimistic expectations fully priced in

Wang Sheng: Among the leading companies, we pay special attention to those leading companies with buyback and holding capabilities. The two new monetary policy tools of the domestic central bank—swap convenience and special refinancing for buyback and holding—are the highlights of the State Council Information Office press conference. It can be inferred that once core assets strengthen dividends and buybacks with the support of relevant structural monetary policy tools, enhancing shareholder returns, the incremental funding issues that have plagued related companies in the past will be resolved. In fact, the dividend yield of the Maotai Index is above 3%, and the dividend yield of the Maotai Index excluding bank stocks is also higher than the 10-year national bond yield.

In the direction where some fundamental pessimistic expectations have been fully priced into the stock price, there are also opportunities in the future, such as new energy in core assets. The industry's supply growth rate decline will be reflected in the stabilization of stock prices in advance. The only uncertainty now lies in the demand side, which requires observation of the uncertainty brought by the US presidential election results to mid-term demand.

Subsequent bond market risks

Wang Sheng: For the bond market, it is still emphasized that as long as the decline in house prices narrows, due to the increase in stock market risk preference, the risk of net redemptions of some related products in the bond market will rise, and the prices of related assets may retreat, which requires the study of microstructures, it is a financial issue, not an economic issue