What Conditions are Needed for a Bull Market in A-Shares?
Since reaching a peak of 3723 points before the Chinese New Year in 2021, the A-share market has entered a prolonged downward trend, struggling to maintain the 3000-point mark. Investors, both in stocks and ETFs, find themselves in a waiting game, eager for the emergence of the next bull market.
What exactly is needed for A-shares to experience a bull run? At the forefront, we have policy support. The market can only hope for a bullish scenario if there is backing from the government. An analysis of policies introduced over the past year shows a clear inclination towards fostering a positive market environment. Measures like lowering transaction stamp duty, significantly slowing down IPOs and refinancing pace, regulating large shareholder stock reductions, and increasing the costs of quantitative trading have all been deployed. While these initiatives are aimed at boosting investor sentiment, the current stagnation of the stock market suggests that other factors are keeping investors at bay.
Next in line is the fundamentals of the companies involved. Growth in earnings for listed firms has been disappointing due to the slower-than-expected pace of economic recovery. In general, revenues and net profits for publicly traded companies in 2023 have remained relatively static compared to 2022. The first quarter saw company revenues dip by 1.15%, with net profits falling by 4.29%. While the mid-year reports are pending, initial indicators do not promise a substantial upside for the market, even with a low overall valuation offering limited downside. However, weak earnings do not support the emergence of a bullish market.
The most crucial aspect, however, remains the funding environment. For the stock market to gear up for a bull run, a continuous influx of new capital is crucial. Regrettably, this is where the market currently falters, as a significant shortage of new investments is evident. The main sources of new funding can be categorized into a few groups: firstly, we have the national team, which has played a pivotal role in propping up the market this year. State-owned firms and companies like Central Huijin have engaged in actions such as accumulating broad-based ETFs, injecting tens of billions into the market. Secondly, though there was an initial inflow of foreign funds at the start of the year, this has recently flipped into an outflow. Thirdly, industrial capital, which includes share buybacks and increased holdings by shareholders, is limited in scope. Lastly, we see individual investors, who have exhibited a trend of pulling out funds from the market throughout the year. This scarcity of new capital not only hinders a robust market recovery but makes it increasingly difficult to even hold above the 3000-point threshold.
Where then, is the new capital?
Many investors are pinning their hopes on the government establishing stabilization funds to buoy the stock market. However, as it stands, there seems to be more chatter than action. In order to launch such stabilization funds, the government would need to issue special bonds dedicated to stock market investments; otherwise, where will the funds come from?
Additionally, there is speculation that following interest rate cuts by the Federal Reserve, USD assets might flow back into A-shares and Hong Kong stocks. While this outcome is conceivable, the current geopolitical climate—with China now viewed as a significant competitor by the United States—raises concerns about capital movement towards other markets. This has led to a peculiar situation where global stock markets are rallying while A-shares decline.
Industrial capital faces its own constraints, as limited self-funding makes it challenging to initiate significant buybacks or accumulate more shares—much less replicate the buyback boom seen in the U.S. markets.
Ironically, the most viable source of incremental capital lies with the average citizen. With China boasting one of the highest savings rates globally, households consistently amass significant annual surpluses. These surpluses are poised for investment and represent an essential source of new funding for the investment market.
In 2023, the average disposable income per capita in China stands at 39,218 yuan, with average consumption spending at 26,796 yuan, leading to an average savings of 12,422 yuan (39,218 - 26,796). This means that with a rough estimate across 1.4 billion people, the collective surplus amounts to 173,908 billion yuan.
Investments must naturally be made from this pool of unspent funds, which can generally be categorized into four types: bank savings, bonds (including money market funds, bank financial products, government bonds, bond funds, and savings insurance), real estate, and equities (including equity funds).
This year, newly added household deposits hit 166,700 billion yuan, which consumed most of the surplus. After factoring out deposits, the net inflow to bond markets, real estate, and stock markets stands only at 7,208 billion yuan. Hence, it is apparent that neither the stock market nor the real estate sector can expect any positive performance this year.
A grim image unfolds when we take a look at 2022; it was a year where we not only faced the trials of the pandemic but also witnessed a downturn in the stock market, a peak followed by decline in the real estate sector, and a bear market in bonds. Statistical data reveals that overall household savings in 2022 were around 172,834.3 billion yuan, with new deposits at 178,400 billion yuan, outpacing overall savings. This signifies that households did not invest a single yuan in the stock, bond, or real estate markets and even withdrew 5,565.7 billion yuan from these arenas, opting for savings instead.
Looking back from 2018 to 2021, despite periodic influences from the pandemic, general investment confidence remained relatively high during these times. Each year, households withdrew between 31.4 trillion to 56.4 trillion yuan from their surpluses for investments outside of savings. This pattern resulted in a consistent influx of new capital into one or more fields, thus driving prices up in the stock, bond, or housing markets.
For example, when the stock market was underperforming in 2018, funds primarily flowed into real estate. Between 2019 to 2021, both the stock market and real estate benefitted from fresh funding, notably in 2021, when not only were there peak highs in the stock market but also historic pricing in the real estate sector.
Fast forward to the first half of 2023, the average disposable income per capita reached 20,733 yuan, with an average consumer expenditure of 13,601 yuan, leaving an average reserve of 7,132 yuan. This equates to a total savings of 99,848 billion yuan across the 1.4 billion populace. New deposits amount to 92,700 billion yuan, resulting in a remaining balance of 7,148 billion yuan. This situation mirrors the outcomes for the full year of 2023, providing clarity to why both the stock and real estate markets continue to struggle.
Compounded by the ongoing popularity of the bond market, which has drawn investments away from stocks and real estate, both markets find themselves in a precarious position.
When can we expect new capital to enter the arena?
If this trend continues, are we not destined for prolonged sluggishness in our markets? The reasoning leads us down that path, yet it’s important to recognize that conditions are starting to shift. High deposit rates are tapering off, leading to a relative slowing down in bank deposits. Concurrently, due to the bond market's bull run, bank financial products and bond funds have seen a surge. It is inevitable that declining return rates will shift investors away. Should returns align more closely with deposit rates, the attractiveness of investments for new funds will decrease, prompting a search for fresh avenues. This scenario could open up opportunities for the stock and real estate markets to attract new capital inflows.
Since per capita disposable income and consumption are released quarterly, we can tentatively predict trends for July based on first-half averages. With an accumulated surplus of 99,848 billion yuan over the first half, averaging 16,641 billion yuan per month, assuming July mirrors the same, alongside a net outflow from deposits of 3,300 billion yuan, the potential monthly inflow into non-savings products might hover around 20 trillion yuan. This represents a significant jump in inflows against the first half's numbers, primarily directed towards the bond market.
Nevertheless, with fluctuations in bonds recently, the prospect for bank financial products' yield may drop sharply in the latter half of the year. It remains to be seen whether more funds will shift from deposits and residual savings into the stock and real estate markets. A careful watch on fund flow directions will yield better insights into predicting when a bull market might finally arrive.