• Savings Directions
• December 6, 2024

A-Shares Nearing Support as Bottoming Signals Emerge

Advertisements

This week, trading volumes in China's A-shares plummeted to remarkably low levels, reminiscent of a previous phenomenon where a minimal trading environment generally signals that a market bottom is in sight, raising expectations of a potential short-term rebound.

During the Forbes Global CEO Conference held in Singapore this week, Liya Zhang, the president of Franklin Templeton, a trillion-dollar asset management firm in the United States, pointed out that the prevailing pessimistic sentiments regarding investment opportunities in China might be exaggeratedShe suggested that the market could experience some turbulence over a period, but once the conditions are ripe, it could rebound robustly like a stretched rubber band.

While there has been a net outflow of funds from the northbound trading since last month, historical data shows that such consecutive net outflows of two months have only been recorded two times before, in April and May of 2019, with net outflows of 18 billion and 53.7 billion yuan, respectively

Correspondingly, the Shanghai Composite Index fell by 0.4% and 5.84% in those months, signaling a swift transition from a small rally to a period of consolidationHowever, the Shanghai Composite Index did not stop in its tracks, with annual gains between 2019 and 2021 recorded at 22.3%, 13.9%, and 4.8%.

In the author's view, this current operation by northbound capital may resemble what one investor termed “a flock of headless flies,” portraying a very poor sentimentThe underlying reason may stem from the fact that several funds are nearing the end of a five-year operational cycle, resulting in lower overall returns and substantial redemption pressures from their clients.

Looking back, foreign capital began entering the Shenzhen market after 2017. Taking December 5, 2016, the launch date of the Stock Connect as a reference, the Shenzhen Component Index closed at 10,781.3 points on that day, and as of September 15 this year, it had fallen to 10,197.6 points, totaling a decrease of 5.41%. During the same period, the yuan depreciated against the US dollar by 5.44%, leading to a combined loss of approximately 10%. In contrast, the S&P 500 index soared by 98.8% during this time frame

• Bolstering Low-Altitude Infrastructure
• Nasdaq 100 Set for Significant Breakthrough
• The Fed's Internal Rate Debate
• Oil Gains, Stocks Steady, Gold Languishes
• U.S. Stock Indices End Lower

The author posits that the significant rise of the S&P can be attributed to a mix of “capital-driven growth plus a surge in valuations,” supported by Wall Street's attractive portrayal of American economic vitality.

Since the inception of China's reform and opening-up, there have been only seven years when US GDP growth outpaced that of China when measured in US dollarsThese years were 1986, 1987, 1990, 1993, 2016, 2019, and 2022, primarily due to the faster appreciation of the dollar relative to the yuanHowever, this trend is not directly correlated with the ups and downs of the A-shares marketThe Shanghai Composite Index only debuted in late 1990, and its annual growth rates for 1993, 2016, 2019, and 2022 were +6.84%, -12.3%, +22.3%, and -15.1%, demonstrating a mixed bag of performance.

Year to date, the yuan has depreciated by 5.18% against the dollar

A retrospective glance reveals that China's economic growth this year has not experienced the same V-shaped recovery seen in 2009, primarily due to the pandemic from 2020 to 2022 adversely affecting China's short-term demographic dividends, income expectations, and wealth perspectives.

In bold speculation against this backdrop, it appears that more measures aimed at stabilizing the market will continue to be introduced, potentially accelerating the A-share recovery from its recent depthsSpecifically, on September 15, the central bank began cutting the reserve requirement ratio by 0.25 percentage points, which is anticipated to release between 500 billion to 600 billion yuan into the marketHistorical data since September 15, 2008, shows that the central bank has announced 24 cuts in reserve requirements, with the Shanghai Composite Index seeing an uplift in 54.2% of cases within five days following the announcements

This particular move impacts the A-share market mainly on a psychological level, sending signals of ongoing policy support being released.

When comparing prices to the closing values from August 25, as of September 14, the Shanghai Composite Index, the CSI 300, and the ChiNext Index recorded changes of +2.04%, +0.6%, and -0.6%, respectively, indicating that the government's attempts to stimulate the market have not fully contained the risks of overcorrection in weaker sectors, and that market confidence is still in the process of recovery.

It is noteworthy that on September 8, trading in the Shanghai market plummeted to 270 billion yuan, setting a new low for the year

On the 14th, the ChiNext Index hit another annual lowWho is aggressively shorting the market? On that day, there was a net outflow of 6.4 billion yuan from northbound capital, including a net sale of 780 million yuan of CATL stock, attributed to market speculation that orders for Chinese electric vehicles in Europe may fall short of expectations.

Compared to its peak in 2021, CATL's adjusted stock price has plummeted by 43.6%, with its dynamic price-to-earnings ratio dropping to 22.8 timesDespite a year-on-year profit growth of 154%, one wonders whether this high-growth blue-chip stock has been unfairly punished by institutionsThe persistent new lows for similar “China's version of the Beautiful 50” may indicate that a market bottom is indeed near.

Recently, some prominent international investment banks have begun expressing optimism about bottom-fishing in the A-share market