The Cyclical Law of the Stock Market – Wall Street Insights

Core conclusion:① The valuation level of A-shares fluctuates periodically, and the current PE/PB, stock-to-bond return ratio, risk premium rate and other indicators are all at the bottom of the cycle. ② A-shares have a low point every 3-4 years, behind which is the cycle of the economic cycle. The current economy is heading towards the early stage of recovery, and the trend of A-shares is improving. ③The policy of stabilizing growth is continuing to increase, and the second wave of growth will start slowly within the year, giving priority to high economic growth, such as digital economy + new energy.

The cyclical laws of the stock market

The recent market has experienced some ups and downs due to the epidemic, but we believe that the current policy of stabilizing growth is still overweight, and the second wave of market prices within the year since October is still on the way. Looking at it longer, the current price/performance ratio of A shares from a cyclical perspective is very high.

1.The Cycle of A-Share Valuation

The valuation level of A shares fluctuates periodically and is currently at a historical low.From a historical point of view, there are obvious cyclical characteristics in the valuation level of A shares. Since 2005, all A-share PE (TTM, the same below) and PB (LF, the same below) valuations have fluctuated greatly, and from a mid-to-long-term perspective, the overall trend of A-share valuations has declined. The stock valuation is still mean-reverted. Since 2005, the PE and PB centers have been 21.4 times and 2.4 times respectively. For now, as of 2022/11/25, the valuation of all A-shares has fallen back to a historically low position, PE/from bottom to top in 2005 is only 16.8 times/28.8%, and PB/from 2005 to The bottom-up quantile is only 1.6 times/8.0%. At the industry level, most A-share industries have relatively low valuations. From the perspective of PE valuation, among the 31 SWS first-tier industries, the PE quantiles of 24 industries have been lower than 50% since 2005, and 17 of them are even lower than 30%. Among the 10,000-level industries, the PB quantiles of 27 industries have been lower than 50% since 2005, and 21 of them are even lower than 30%. Therefore, the current valuation of A-shares is already low. Under the cyclical law, the valuations of A-shares and most industries will have a large room for improvement in the future.

The relative valuation of A shares will also revert to the mean, and they are currently at the bottom of history.In addition to PE/PB absolute valuation, the two important relative valuation indicators of A-share risk premium and stock-to-bond return ratio are also mean-reverting. First of all, from the perspective of stock-bond yield ratio, as of 2022/11/25, the dividend rate of CSI 300 is 2.8%, and the yield to maturity of 10-year treasury bonds is 2.83%. The ratio between the two is 0.99, which has far exceeded the historical average level 0.63, which is in the 1% percentile of the ratio since 2006 from high to low, indicating that the current A-share dividend rate is relatively attractive, and from the perspective of asset allocation of major categories, equity assets are more cost-effective. Secondly, from the perspective of risk premium, we use 1/all A-share PE-10-year treasury bond yield to maturity as a measure of stock market risk premium. Historical data since 2005 shows that this indicator has obvious mean reversion characteristics. Currently, A The stock risk premium rate is 3.13%, which is much higher than the average value of 1.81% since 2005. It is in the 24% quantile from high to low since 2005, and it is very close to the historical average + 1 standard deviation, which is 3.45%.

The valuation differentiation of A shares is also cyclical, and the current valuation of state-owned enterprises is relatively low.In addition to absolute and relative valuations, the market has recently paid more attention to the valuation structure of A shares, especially the valuation differentiation of state-owned and private enterprises. The valuation logic of different types of listed companies, explore the establishment of a valuation system with Chinese characteristics, and promote the market’s resource allocation function to better play”, which triggered discussions in the market that the valuation of state-owned listed companies is generally low. We use the China Securities State-owned Enterprise Index and the China Securities Private Enterprise Index to represent the two groups. The current PE/quantile of the China Securities State-owned Enterprise Index since its establishment is only 11.0 times/16.4%, while the CSI Private Enterprise Index is 38.3 times/44.8%. From the perspective of relative changes, in the medium and long term, the valuation of A-share state-owned enterprises is declining relative to that of private enterprises, but this does not mean that there are no cyclical fluctuations. The current CSI State-owned Enterprise Index valuation/CSI Private Enterprise Index valuation is at the bottom of the cycle, and the valuation of A-share state-owned enterprises has a certain room for improvement. Of course, valuation is closely related to fundamentals. To boost valuation, it is necessary to improve the quality of state-owned listed companies. This is one of the main reasons why Chairman Yi mentioned that state-owned listed companies need to “practice their internal strength”.

2.The cyclical cycle of A-share trends

The overall cyclical cycle of A-shares: There is a low point every 3-4 years, behind which is the economic cycle.Looking back at the history of A shares since 2005, we can find that A shares have a big bottom every 3-4 years. Taking the Shanghai Composite Index, which is most familiar to investors, since 2005, there have been five historical bottoms in June 2005, October 2008, December 2012, January 16 and January 19. If the Shanghai-Shenzhen 300 or Wind Quan A Index is used instead, the time of the five bottoms is basically the same as the result of the Shanghai Composite Index. This 3-4 year market cycle coincides with the 3-4 year inventory cycle of the real economy, and stock prices tend to bottom out at the same time or slightly ahead of the inventory cycle. We use the indicator of finished product inventory of industrial enterprises to describe the inventory cycle. Since 2000, the Chinese economy has experienced five complete inventory cycles. The five inventory bottoms were in June 2006, July 2009, and December December 2016, July 2016 and November 2009. Historically, the average inventory cycle lasted 39 months, of which the rising and falling cycles lasted 21 months and 18 months on average. This round of inventory cycle began in November 2019, and the high point appeared in April 2022. According to the average duration of historical inventory cycle, this round of inventory cycle may bottom out in 23Q1.

From the perspective of the investment clock, the economy is heading towards the early stage of recovery, and the trend of A shares is improving.We use the investment clock theory when applying the economic cycle judgment to asset allocation (explained in detail in the book “Xun Yugen Talks About Strategy: Less Is More”). According to the improved version of the investment clock analysis, it takes about three and a half years for the investment clock to complete a circle. The rotation order of major asset classes is debt bulls-stock bulls-commodity bulls-cash bulls. Among them, the stock market often enters the period of stagflation and the early recession of the economy. fell from time to time and began to stabilize in the later stages of the recession. The sign of the post-recession period is that the macro policy turns loose. At this time, although the fundamentals are still down, the policy is gradually increased, investors begin to regain confidence in the economic recovery, and the stock market enters a bull market. In the early stage of recovery, the bond bull market tends to end, and the stock bull market continues.

For this round of bull-bear cycle, we have made qualitative judgments as early as “The Quest is Complete, and the Vain is Straight – 2022 Outlook for China’s Capital Market – 20211211” and “22 Years of Outlook: Our Three Special Judgments – 20211219″: ” 2022 is a break in the long bull”, “If the stock fund index returns to the historical average next year, the fund index will increase by about -6% from now to the end of next year.” These cautious inferences are based on the deduction of the economic cycle and the bull-bear law of the stock market.

Looking back at the changes in the investment clock since 2020: In March 2020, the real GDP growth rate bottomed out, and inflation was still at a low level. The two-year annualized growth rate of actual GDP picked up compared with the first quarter, and the first half of 21 was in an overheating period as a whole; then the economic growth rate fell, inflation rose to a high point, and the investment clock entered a period of stagflation in the second half of 21; The downturn has entered the late stage, and inflation has begun to go down, which belongs to the pre-recession period in the investment clock. The reason behind the continuous adjustment of the stock market since the second half of 21 is that the investment clock has entered the stagflation period and the pre-recession period.

At present, the investment clock is entering the late stage of recession. The Central Economic Work Conference in December last year marked a positive policy turn. The April 29 meeting of the Political Bureau of the Central Committee further clarified that policies are being overweighted. The positive policy turn marks the beginning of a recession in the economic cycle. later stage. In 22Q3, the year-on-year GDP growth rate rebounded to 3.9%, but it was still lower than the central level in the past 19 years. With the continuous optimization of the epidemic prevention policy and the positive real estate policy, the Chinese economy is moving from the late recession to the early recovery, and the stock market trend is positive.

Corresponding to the stock market cycle, there is also mean regression in the return on investment of A shares.The cyclical fluctuations of the stock market are reflected in the return on equity assets, which is the mean regression of the investment rate of return. We describe the return rate of A-share equity assets by calculating the annualized rate of return from the two perspectives of stock index and stock fund. As shown in Figures 12 and 13, the 3-year rolling annualized returns of the Shanghai and Shenzhen 300 Index and the stock fund index also fluctuate around a central upward cycle. If we take 2005 as the starting point, as of 2022/11/25, the average three-year rolling annualized rate of return of the Shanghai and Shenzhen 300 Index is 9.1%, while the latest three-year rolling rate of return of the Shanghai and Shenzhen 300 is only -1.1%; The data history of the fund index began in 2004, so the calculated 3-year rolling annualized return data began in 2007. Since the data is available, the average 3-year rolling annualized return rate of the stock fund index is 15.2%, while the common stock fund index The latest 3-year rolling yield is only 8.6%. Looking back, from the perspective of mean regression of the return on equity assets, A shares also have a large room for growth in the future.

3.The second wave of market is still on the way

At present, the valuation of A shares is at the bottom, and the policy is continuously increasing, and the second wave of rising within the year is slowly unfolding.In “Meeting the Second Wave of Opportunities-Stock Market Outlook for the Fourth Quarter of 2022-20221008”, we analyzed the market from the dimensions of bull-bear cycle, valuation, and fundamentals, and proposed that A-shares are expected to usher in a second opportunity within the year . In terms of valuation, compared with the big bottoms of the past five rounds of bull-bear cycles, A-share valuations, risk premiums, stock-to-bond earnings ratios, and net-loss ratios at the end of April and the end of October were all in the bottom area. For details, see Table 1. From the perspective of fundamental indicators, we have concluded based on the experience of five market bottoms in 2005, 08, 12, 16, and 19. The bottom reversal is accompanied by the stabilization of three or more of the five leading indicators. The current monetary policy and fiscal policy Four indicators, namely, the prosperity of the manufacturing industry and automobile sales, have rebounded. In recent months, the cumulative area of ​​real estate sales has also flattened year-on-year.

At present, monetary, real estate, and epidemic policies are improving. First, the policy of stabilizing growth continued to be implemented. On November 25, the central bank announced a comprehensive RRR cut of 0.25 percentage points, releasing a total of about 500 billion yuan of long-term funds. On November 8, the China Interbank Market Dealers Association issued “The Second Arrow” Defers and Expands to Support Private Enterprise Bond Financing and Reinforcement”, which will help private real estate companies restore their financing functions and is expected to support about 250 billion yuan The bond financing of private enterprises can be further expanded depending on the situation; on November 23, the central bank and the China Banking and Insurance Regulatory Commission announced the “Notice on Doing a Good Job in the Current Financial Support for the Stable and Healthy Development of the Real Estate Market”, focusing on real estate financing, “guaranteed housing”, and trapped Sixteen measures have been put forward in six aspects including risk management of real estate enterprises. On November 11, 20 measures to optimize prevention and control work were announced to improve the scientificity and precision of prevention and control, and minimize the impact of the epidemic on the economy. We believe that as the policy of stabilizing growth takes effect, it is expected to promote the recovery of domestic macro and micro fundamentals, and the second wave of market prices within the year is slowly unfolding.

Prioritize growth in high prosperity, such as digital economy + new energy.In terms of industry structure, the 20th National Congress of the Communist Party of my country has pointed out the long-term direction for the future development of our country. We believe that low-carbonization, digitalization and safety will be the focus of future industrial development in my country. For now, the digital economy and low-carbon economy are growing in a high boom more worthy of attention.

In terms of digital economy, the construction of smart cities is expected to become an important catalyst. From a macro policy perspective, the digital economy has become an important starting point for reshaping economic growth. Build a solid foundation for the rapid development of the digital economy, and promote the gradual implementation of digital economy application scenarios, such as smart cities. On October 28, He Lifeng, director of the National Development and Reform Commission, proposed in the “Report of the State Council on the Development of the Digital Economy” that appropriate advance deployment of digital infrastructure should be made to improve the level of digital public services and promote the integrated development of smart cities and digital villages. Smart transportation is the primary implementation direction of smart cities. Recently, Internet giants and operators are deepening cooperation and vigorously promoting smart city applications. For example, Tencent and China Unicom have established a new joint venture to strengthen the construction of a smart society; JD.com and China Mobile have reached a strategic cooperation focusing on platform-based smart cities and digital government development. my country’s transportation infrastructure and vehicle intelligence are constantly improving, application pilots are being rolled out in many places, and a smart transportation system is gradually being built. According to 36 Krypton Research Institute, it is estimated that by 2030, the scale of my country’s smart transportation market may exceed 10 trillion. From the perspective of profit, combined with the views of Haitong industry analysts and the unanimous expectations of Wind, it is estimated that the year-on-year growth rate of net profit attributable to the parent company of the electronics industry in 22/23 is 0%/20%, that of computers is 10%/30%, and that of communications is 15/20. %. From the perspective of valuation and configuration, the current valuation of industries related to the digital economy is at a relatively low level: the current PE of electronics is 30 times, at the 12th percentile since 13 years; the computer PE is 50 times, at the 30th percentile; communications PE is 25 times, at 0.4% quantile. From the perspective of fund allocation, the over-allocation ratio of public funds to the electronics industry relative to the free market value is 1.4 percentage points, which is 29% since 13 years ago; the over-allocation ratio to computers is -1.3 percentage points, which is 3%. Quantile; the overweight ratio of electrons is -0.4 percentage points, which is at the 47% quantile.

In terms of low-carbon economy, focus on wind power photovoltaics, energy storage and intelligentization of new energy vehicles. In addition to the digital economy, my country’s low-carbon economy-related industries are still the focus of development under the “3060” dual-carbon goals. The current prosperity of the new energy industry chain is still there. According to data from the Passenger Federation, retail sales of new energy passenger vehicles reached 556,000 in October, a year-on-year increase of 75.2%. According to the National Energy Administration, the second batch of large-scale wind and solar base projects has started construction, and the third batch of projects is under review. We believe this will promote the continuous increase of photovoltaic and wind power installations. In October, the year-on-year growth rate of photovoltaic installed capacity reached 50%. With the growth of photovoltaic and wind power installed capacity, energy storage will also develop in a supporting way. Zhongguancun Energy Storage Industry Technology Alliance predicts that the CAGR of China’s cumulative installed capacity of electrochemical energy storage will reach 64% in 21-25 years. From the perspective of profit, combined with the opinions of Haitong industry analysts and the unanimous expectations of Wind, it is estimated that the net profit attributable to the parent company of the new energy vehicle segment will grow by 75%/40% year-on-year in 22/23, the photovoltaic segment will be 40%/40%, and the energy storage segment will be 40%/40%. Plates are 100%/100%. From the perspective of valuation, the current new energy sector has undergone previous adjustments, and the valuation is no longer high. The current PE (TTM) of photovoltaic wind power is 25.6 times, which is lower than the average value of 35 times since 19 years, and the PE of new energy vehicles is 21.5 times, which is low. 35 times the average value since 19 years.

Author of this article: Haitong Securities Xun Yugen, Zheng Zixun, Wang Zhenghe, source: Stock Market Xun Ce, original title: “[Haitong Strategy]The Periodic Law of the Stock Market (Zheng Zixun, Wang Zhenghe, Xun Yugen)”

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