Market Outlook After A-Share Big Pump

Recently, the Chinese stock market has experienced a significant rise. Positive signals from financial policies and central meetings have boosted market sentiment, leading to a strong rebound in the A-share and Hong Kong stock markets, outperforming the global markets. However, after the National Day holiday, the market saw a correction, sparking discussions about the sustainability of the trend. This article will analyze the current market trends from three dimensions: economic fundamentals, policies, and stock market valuations.

I. Economic Fundamentals

Currently, the overall fundamentals of the domestic economy still appear weak. Although there are some signs of marginal improvement, a clear turnaround has not yet occurred. During the National Day holiday, consumer activity increased, but major economic indicators have not fully reflected this change. It is expected that in the coming quarters, supported by policy, the Chinese economy may show a mild recovery trend.

In September, the manufacturing PMI was 49.8%, an increase of 0.7 percentage points from the previous month, indicating a slight recovery in manufacturing activity. The non-manufacturing business activity index was 50.0%, a slight decrease of 0.3 percentage points from the previous month.

In August, the profits of industrial enterprises above designated size fell by 17.8% year-on-year, partly affected by the high base from the same period last year.

In August, the national consumer price index rose by 0.6% year-on-year, with food prices rising by 2.8% and non-food prices rising by 0.2%. From January to August, the average national consumer price index rose by 0.2% year-on-year.

In August, the total retail sales of consumer goods reached 38,726 billion yuan, a year-on-year increase of 2.1%.

From the perspective of financial indicators, the overall financing demand in society is still insufficient. Since the second quarter, the year-on-year growth rates of M1 and M2 have slowed down, and the scissors gap between the two has risen to a historical high, reflecting insufficient demand and a certain idle state in the financial system. The transmission effect of monetary policy is hindered, and the short-term economic fundamentals still need to be improved.

2. Policy Aspect

Recently, the policy力度 has been considerable and exceeded market expectations, which is often an important condition for the A-shares to stabilize and rebound.

On September 24, the central bank announced the establishment of new monetary policy tools to support the stable development of the stock market, including:

1. The swap convenience among securities, funds, and insurance companies, with an initial operation scale of 500 billion yuan.
2. Stock buyback and special refinancing for increased holdings, with an initial quota of 300 billion yuan.

On September 26, the Central Financial Work Office and the China Securities Regulatory Commission jointly issued the "Guiding Opinions on Promoting the Entry of Medium and Long-term Funds into the Market," which involves multiple measures such as cultivating a long-term investment ecosystem, developing equity public funds, and supporting the development of private equity funds.

These policies mainly focus on reducing financing costs and boosting investment return expectations, which are targeted measures. However, to achieve medium- to long-term sustainable re-inflation, further structural fiscal stimulus and effective policy implementation are needed; otherwise, the market recovery may be difficult to sustain.

At the press conference held by the National Development and Reform Commission on October 8, no large-scale fiscal counter-cyclical adjustment policy, which was widely expected by the market, was proposed. This is also one of the important reasons for the market's correction after the National Day.

3. Valuation Level

From the perspectives of the decline time, magnitude, and valuation level, this round of market has shown bottom characteristics. As of October 9, the valuation level of A-shares has been restored to near the median.

Historical comparisons show that by the end of September, the rebound was significant, reaching the PE level seen at the beginning of 2023 when expectations for economic reopening were high. Compared to major global markets, the valuation of the Chinese market relative to emerging markets remains at a lower level within the Asia-Pacific region, close to that of South Korea.

Overall, the key to the market reversal lies in the confirmation of mid-term fundamental signals. Currently, the fundamental data has not significantly improved, and the recent rise is mainly driven by expectations and funds. High volatility markets are often accompanied by overreactions, and it is reasonable to see a pullback after a historical big pump.

Monetary policy has already been ramped up, and whether subsequent fiscal policy can follow suit is the main factor affecting the upward space of the stock market. From a long-term perspective, the recent decline appears more like an adjustment rather than a trend ending. In the medium to long term, the bottom of the A-shares may have already emerged, but the main rising trend has yet to arrive.