New Money Magnet: "20cm" Sectors Dominate

2024-09-26 99 Comments

On the first trading day after the holiday, A-shares continued to make history with the three major indices opening at an epic level, with a total transaction volume of 3.45 trillion yuan throughout the day, setting a new historical record.

The STAR Market and ChiNext led the broad-based index gains, with the STAR 100 ETF Huaxia (588800), ChiNext 100 ETF Huaxia (159957), and ChiNext Growth ETF (159967) all hitting the 20CM limit-up mark.

Although there was a significant pullback in the overseas markets, and many stocks had their limit-up boards opened, with gains gradually diminishing, some even briefly turning negative, the ChiNext index and the STAR 100 maintained their strength throughout the day, ultimately closing up by 17% and 16%, respectively.

The two boards also accounted for many of the "20cm" stocks, such as SMIC, National Technology, Shanghai Silicon Industry, Cambricon, Fu Man Microelectronics, and Taiji Shares, among others. Today's surging concept sectors like semiconductors, HarmonyOS, data security, and power batteries are also largely concentrated in the "two boards."

It is evident that funds are flowing into the ChiNext and STAR markets in a significant manner.

Does this mean that the ChiNext and STAR markets are becoming the new hotspots for capital attraction?

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01

Regular pullback or the end?

Before answering this question, it is important to address a concern that everyone is very interested in: the significant drop in today's overseas markets, will it be a signal that this round of significant rebound is over?

Firstly, it should be clear that today's pullback in the Hong Kong stock market is based on the crazy rise during the holiday. During the National Day holiday, the Hong Kong stock market had four trading days, with the Hang Seng Index and Hang Seng Tech Index cumulatively rising by 9.3% and 13.36%, respectively.Taking today's significant declines in real estate and securities firms as examples, China Merchants Securities alone rose by 81% on October 2nd, and Vanke Enterprises increased by 61%. Over the entire holiday, China Merchants Securities surged by 185%, and Vanke Enterprises climbed by 88%.

Since A-shares do not trade during the holiday and the Hong Kong Stock Connect is also suspended, some funds preemptively rushed in, planning to exit after the domestic market reopens, relying on the mismatch in trading hours between the two markets to make arbitrage.

In 2018, there was a similar case, but it was during a period of market decline, leading to the saying "The people are on vacation, but the funds are fleeing." However, this time it's the opposite, occurring during a period of frantic growth.

In other words, this is also a conventional tactic, and from the perspective of results, the profits are indeed quite substantial.

Nevertheless, comparing the previous surge with today's decline, the magnitude is not as pessimistic as people imagine. After all, even after doubling and then falling by 30%, the overall trend is still upward.

Additionally, the YINN and YANG, which are often mentioned in the overseas market, refer to the 3x Leveraged FTSE China ETF and the 3x Inverse FTSE China ETF. Today's fluctuations are also very large, spreading pessimistic sentiments among some investors.

Let me explain, these two ETFs track the FTSE China 50 Index, not the well-known FTSE China A50 Index. It selects the 50 largest and most liquid Chinese companies listed on the Hong Kong Stock Exchange.

Coincidentally, these companies' Hong Kong stock prices have experienced significant pullbacks, and since the ETFs themselves are leveraged, the fluctuations are quite large. If the Hong Kong stock market rebounds tomorrow, the trend of these ETFs will reverse.

Furthermore, looking at every historical surge, after significant gains, there will always be some substantial pullbacks.

As the saying goes, "Bear markets often have sharp rises, and bull markets often have sharp falls."Occasionally, a significant market pullback doesn't need to be a cause for too much concern, as declines can be seen as the market's way of self-correcting, cooling down overly exuberant sentiments, and releasing high valuations. After reorganizing, a new uptrend can be initiated.

If the market only goes up without any pullbacks, that's truly terrifying. Once the tension breaks, it could lead to a massive sell-off.

Today's selling in the Hong Kong stock market includes some funds that had been positioned earlier and had made good profits, as well as some funds focused on taking advantage of the holiday rush. After these funds have been cleared out, the market may be able to restart a new uptrend.

02

The Momentum for Upward Movement Remains

At present, the driving force behind the stock market's upward movement has not disappeared.

Firstly, looking at the economic fundamentals, the stock market is a barometer of the economy. The fundamental reason for the poor market performance in recent years is the significant downward pressure on the economy, especially in the real estate sector.

There is a piece of data that underscores the importance of real estate. We talk about the three engines of China's economy—investment, exports, and consumption.

Although data for exports and investment also face pressure, neither has been halved in the past few years. Only housing prices have been halved, and real estate is the largest component of investment.

It can be said that real estate is currently the biggest pressure on China's economy. Only by effectively resolving the real estate issue, or more bluntly, by stabilizing and even reversing the decline in housing prices, and allowing them to rise again, can the downward pressure on China's economy be effectively alleviated. At least in the short term, no one can deny this point.So, the biggest difference between this economic stimulus policy and previous ones is that it targets the problem, especially in terms of real estate stimulus policies, such as lowering reserve requirements, interest rates, down payments, and the interest rates on second mortgages, which can be said to hit the bullseye. During the National Day holiday, there have also been many encouraging news about the recovery of real estate sales in key cities.

The economic fundamentals are highly correlated with corporate earnings, and they complement each other. When the economy picks up, the overall profitability of companies will also pick up, and the market driven by EPS will have sustainability.

Secondly, in terms of liquidity, the Federal Reserve has now started a rate-cutting cycle, removing the last obstacle to our liquidity easing. More importantly, in addition to the conventional reserve requirement ratio cuts and interest rate cuts, the central bank also mentioned the stabilization fund and the injection of 500 billion + 300 billion yuan of liquidity into the stock market.

The central bank's original words:

"In the future, there can be another 500 billion yuan, or a third 500 billion yuan. The withdrawn amount is 300 billion yuan, which can be replenished with another 300 billion yuan, or even a third 300 billion yuan."

The continuous support of loose monetary policy is beneficial to the stock market.

From a valuation perspective, although A-shares have risen a lot, the stock prices and valuations of many companies are still at historical lows.

Even if we only look at the dividend yield, our risk-free rate, which is the yield on 10-year government bonds, is currently 2.2%, and the Shanghai Stock Exchange dividend yield is 3%, returning to 2.7%, which can reach around 3,380 points (already achieved). Returning to 2.5%, it can at least reach a position of 3,600.

At the same time, U.S. stocks, Japanese stocks, and other emerging markets, after experiencing significant increases, have seen their valuations soar to historical highs, and their cost-performance advantages have begun to fade.

For example, the PE ratio of the Nasdaq is 43 times, at the 82.95% historical percentile, while the PE ratio of the ChiNext Index is 33 times, at the 17.65% historical percentile.With the prevalence of geopolitical conflicts, funds flowing out of developed country markets will seek new value lows, and A-shares naturally become one of the most attractive markets.

It can be said that after a long period of "double kill," A-shares are now facing a "double click" moment with improving performance and valuations.

Today's pullback may, in fact, be an opportunity for a new round of layout.

03

What else can be bought?

Of course, the significant retreat in Hong Kong stocks today, along with the A-shares that hit the upper limit during the auction period and then quickly opened the board, still has a considerable psychological impact on investors, especially those who bought in at the auction limit and got stuck.

At this time, everyone needs to re-examine their investment strategies and make reasonable adjustments based on market trends.

Generally speaking, a major upward movement will be divided into several stages:

First, the most elastic sectors will take the lead, such as real estate and securities firms this time;

Then come the middle ranks, such as IT, semiconductors, consumer goods, and so on;Next, there are those with low valuations in the back row, such as some sectors that have been sluggish for a long time. After a rotation that touches all sectors, and after the market has been evenly soaked, it will return to embrace companies with better fundamentals. At this stage, although the upward momentum is still there, from a conservative perspective, choosing some high-quality companies with growth prospects for the future can allow them to enjoy the dividends first during the market's rise and control the drawdown well during the correction period. Being both offensive and defensive is a good strategy suitable for the current market.

But what are these companies?

Technology and innovation concepts are one of them. The reason for emphasizing these concepts is that many companies in this category not only meet the national trend of high-quality development and are the focus of policy support, but they are also the leaders in emerging industries, with significant growth potential in performance and are most likely to benefit from the current liquidity easing.

For example, CATL in the ChiNext board and SMIC on the STAR Market are leading companies in their respective fields. There are many such companies on the ChiNext and STAR Markets. However, investing in the ChiNext requires more than two years of stock investment experience and an average daily asset of 100,000 yuan in the 20 trading days before opening; investing in the STAR Market requires more than two years of stock investment experience and an average daily asset of 500,000 yuan in the 20 trading days before opening.

In addition, there are many high-priced stocks on the ChiNext and STAR Markets, with a single hand of 100 shares costing tens of thousands of yuan, which carries uncontrollable risks when betting on a single stock, and also occupies a significant position in the capital allocation.In a bull market, ETFs offer better value for money, and many experienced investors choose to invest through ETFs.

For example, the ChiNext 100 ETF Huaxia, which tracks the ChiNext Index, the STAR 50 ETF, which tracks the STAR 50 Index, and the STAR 100 ETF Huaxia, which tracks the STAR 100 Index, have a low capital threshold of just a few hundred yuan per hand.

ChiNext and STAR Market-related ETFs often hit the upper limit, and if you can't buy them in the market after they hit the limit, you can consider subscribing to ETF feeder funds outside the market. As long as there are no restrictions, you can subscribe to the feeder funds, which invest 90% of their assets in the corresponding ETFs.

For instance, the STAR 100 ETF Huaxia (588800) has feeder funds (Class A: 020291, Class C: 020292); the ChiNext 100 ETF Huaxia (159957) has feeder funds (Class A: 006248, Class C: 006249); and the ChiNext Growth ETF (159967) has feeder funds (Class A: 007475, Class C: 007475).

Conclusion

Although the external market has fallen quite a bit today, it is most likely just a routine adjustment after the holiday rush. The market's bullish capital and enthusiasm are still there, and it might be better to adjust and then move up.

History has also proven repeatedly that a slow bull market is better than a mad bull market for allowing as many investors as possible to make money.

Of course, it is also necessary to remind investors that a bull market is not only the easiest time to make money, but it can also be the easiest time to lose money.Due to the rampant rise in the market, investors may develop linear thinking, assuming that the stock market will continue to rise without end, thus ignoring the risks. When the bull market turns, they may not know when to withdraw, ultimately not only losing their profits but also their principal.

Even during the prosperous phase of a bull market with substantial profits, the fervent market sentiment and intense psychological impact can lead investors to make wrong decisions. They might miss the rhythm and miss out, sell too early because they can't hold on, or cut their losses during severe retracements due to unbearable pressure. They might also overuse leverage and derivatives, betting on the wrong direction and suffering heavy losses.

It is clearly unrealistic to expect all investors to possess high trading skills and navigate the high-risk, high-reward bull market with ease. Therefore, choosing some investment tools that are stable and capable of both offense and defense becomes particularly important.

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