In an environment where the market remains largely divided, the Chinese stock market, or A-shares, has come back to life after a period of stagnationThis shift compels various investors to rethink their strategies, taking into account their individual circumstances and risk appetites.
For aggressive investors, a dual focus on brokerage firms and real estate seems prudentHistorical data from past bull markets—spanning the years 2005-2007, 2008-2009, 2014-2015, and 2019-2021—shows that brokerage stocks tend to exhibit the most significant upward momentum, acting as key propellers of market growthWith the current bull market beginning to take shape, many are left wondering just how far brokerage stocks can soar this timeHistorical patterns suggest that there is still considerable room for growth.
The recent surge in brokerage stocks has been attributed largely to valuation correctionsAs we approached early 2024, the sector's price-to-earnings (P/E) ratio dipped below 20 times earningsBy mid-October, this ratio rebounded to 26.9 times, which, while exceeding the 10-year median of 21.9 times by nearly 25%, remains significantly below the P/E ratio of 59.2 times recorded in December 2014. Additionally, the market-to-book (P/B) ratio for brokerage firms has shown a similar trendIt reached 1.47 times as of October 16, markedly low compared to the high of 5.25 times recorded in April 2015. Such statistical information highlights the potential upside these stocks may have going forward.
Moreover, past bull markets often create favorable conditions for speculating on mergers and acquisitionsAbundant liquidity frequently provides a much-needed financial backboneThis time around, the new policy initiatives explicitly endorse mergers and acquisitions, including cross-industry ventures, aimed at fortifying listed companiesThe sensational news of Guotai Junan's plan to absorb Haitong Securities has ushered in a new wave of consolidation within the Chinese securities sector, promising to uplift the entire brokerage industry.
Industry experts assert that this merger will wield a significance in the capital markets far exceeding that of past consolidations, such as Citic Securities' merger with Guangzhou Securities and Shenyin Wanguo's merger with Hongyuan Securities
Advertisements
Reports indicate that financial consultants and intermediaries from both parties have already mobilized, with formal plans anticipated by the end of this year—or at the latest, by March of the following year.
An analyst from Kaiyuan Securities noted a sharp rise in investor interest following the State Council's press conferenceAppointment numbers for opening brokerage accounts increased substantially, seeing a bump of approximately 150% compared to average figures from the previous monthThe firm foresees three main categories of investment opportunities: internet brokerages benefitting from retail investor influx, financial service providers targeting consumers, and leading brokerage firms that stand to gain from the boom in exchange-traded funds (ETFs) and cross-border business advantages in Hong Kong and other overseas markets.
Turning our attention to the real estate sector, there have been significant policy shifts recentlyOn September 24, the People's Bank of China indicated a push to lower interest rates and consider acquiring idle landJust days later, on September 26, an aggressive rate cut was implementedBy October 12, the Ministry of Finance introduced a comprehensive set of policies explicitly aimed at stabilizing the real estate marketThis included tax policy optimizations and special bond utilizations aimed at charting a path toward recoveryMoreover, various cities have begun implementing measures to decrease down payments and lift purchase restrictions, ultimately boosting market confidence.
Guotai Junan posits that after the flurry of policy shifts, the real estate chain could see an anticipated turning point, with the core catalysts being a shift in policy-driven expectationsHowever, improvements in the data will naturally take time.
Thus, the brokerage and real estate sectors emerge as two industries likely to benefit extensively from current policy changes, both showcasing clear signs of performance inflectionThis has drawn a considerable amount of market capital towards them
Advertisements
Yet it is crucial to recognize that both sectors may experience substantial fluctuations and possess a high sensitivity to policy changes.
For more conservative investors, a balanced portfolio strategy focusing on technology and consumer staples can be an effective approachCompanies within the high-tech sector demonstrate clear industry trends, while the consumer goods segment caters to essential market demands.
According to researchers at Zhao Shang Securities, once market uptrends are confirmed as mid-term trends, and provided the policies remain supportive with a clearer economic recovery, what's more pivotal than the industry itself is the leading firms across various sectors aligned with economic growthCurrently, artificial intelligence (AI) and the increasing demand for healthcare due to an aging population are two notable trends that stand out.
On the subject of sector selection, Zhao Shang Securities recommends a focused investment in areas likely to benefit from policy catalysts and improved expectations based on third-quarter report performanceThis includes territories such as food and beverages (inclusive of liquor and snacks), electronics (covering consumer gadgets and semiconductors), appliances (including white goods and spare parts), and automotive segments (spanning automotive components, passenger, and commercial vehicles). Notably, five key sectors highlighting marginal improvements in October include the consumer electronics supply chain, the smart automotive industry, AI hardware, maritime industries, and low-altitude economic ventures.
Western Securities anticipates that structural adjustments in valuations will outpace shifts in economic data, consequently lifting the valuation center within technology-oriented sectorsMany 'blue-chip' stocks in the technology arena have seen price reductions over the past two to three years; thus, their current valuations lie at historical lows, leading to enhanced investment attractiveness
Advertisements
With recent announcements concerning reserve requirements and interest rate cuts, followed by expected fiscal policies, the domestic economy may embark on a path toward growth expansion, gradually stabilizing the fundamentals of leading tech stocksFuture profit growth appears promising.
Liao Yuan, an analyst from the Smart Connectivity group at Citic Securities, believes that the current warming of the policy expectations will substantially uplift the overall market sentimentTechnology sectors possess features that balance both risk and rewardThe present market dynamic emphasizes several key areas of focus:
Firstly, the internet sector stands out with its low valuations among leading internet firms providing robust returns, consistent dividends, and share buybacksAdditionally, their initiatives in AI far surpass those of other industriesForeign investor confidence remains high, making these companies prime beneficiaries in the upcoming cycle of capital reallocation.
Secondly, software represents another undervalued area, suffering heavy price declines previouslyWith policy implementations yielding projected earnings and valuation rebounds, this sector appears highly elastic.
The third focus area is the smart automotive industry, which has swiftly become a fertile ground for AI applicationsChinese companies have made significant technological advances, bolstering their international competitiveness as they undertake large-scale industrialization.
For novice investors entering the capital market, a focus on low-valuation and high-yield sectors can prove fruitfulInvestment firm Guotou Securities maintains that a stable growth strategy for infrastructure investment will persist throughout 2024. The ongoing rollout of trillion-yuan national bonds and ultra-long-term special national bond projects, alongside local government’s accelerated special bond issuances, is expected to create substantial construction momentum for infrastructure investment growth.
Currently, the construction industry exhibits sound fundamentals
State-owned enterprise participation is rising, while ongoing initiatives to reform state-owned enterprises, promote dividends, and manage market capitalization aim to elevate market valuations.
High-dividend assets are prevalent in traditional sectors such as banking, energy (including coal and petroleum), and public utilities (water and electricity). These sectors typically enjoy stable cash flows and profit models, experiencing less volatility in earnings in response to economic cycles, thereby offering shareholders consistent high dividendsPresently, the CCSI State-Owned Enterprises Dividend Index stands at a PE ratio of 7.42 times, placing it in the 51.73 percentile of its historical data.
Recent reports from Galaxy Securities suggest that the issuance of special national bonds to supplement state-owned banks' capital will enhance their lending capabilities and risk resilienceOptimizations in real estate policies have the potential to accelerate inventory reductions, improving liquidity for real estate firms and positively impacting the banks' asset qualityConsequently, the Ministry of Finance’s latest meeting delivers a substantial advantage to bank stocks, bolstering confidence in their allocation value.
Indeed, since the beginning of 2024, high-yield sectors have captured institutional investors' attention, with the dividend index realizing an impressive peak increase of over 20% this yearGiven the anticipated fluctuations within the stock market, a high-dividend strategy emerges as particularly appealing for risk-averse novice investorsHigh-dividend stocks typically promise stable yields and relatively low valuations, making them ideal for those seeking steady returns while mitigating market risks.
Considering future allocation strategies, China International Capital Corporation points out that historical analysis indicates that sectors which remained subdued for extended periods prior to marked uplifts often yield the best performances, especially in areas benefiting from trading volume surges and increased capital inflows
Advertisements
Advertisements