A-Share Opportunities in Volatile Markets
The global markets are in a state of flux, and the A-share market is no exception. On August 5, the three major indices in China experienced a collective decline. The day began with a notable dip, but there was a momentary recovery shortly after the opening bell; however, this upward trend was short-lived as the indices soon returned to negative territory. By the end of the trading session, the Shanghai Composite Index had fallen by 1.54%, closing at 2860.70 points, while the Shenzhen Component Index and the ChiNext Index dropped 1.85% and 1.89%, settling at 8395.05 points and 1607.29 points, respectively.
Many stocks followed the downward trend, with only 507 stocks registering gains compared to a staggering 4753 that declined. The combined turnover on both the Shanghai and Shenzhen exchanges was around 790.5 billion yuan, reflecting an increase from the previous week's turnover of 682 billion yuan.
Several analysts interviewed suggested that even though the short-term outlook appears bleak, there is a potential for the A-share market to break away from its current stagnant phase in the long run. They noted that the fluctuations in international markets might actually encourage global capital to flow back into Chinese assets.
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Early in the day's trading, the A-share indices momentarily shifted to positive territory, with the ChiNext Index seeing a rise of over 1%. However, by the afternoon, influenced by the external market fluctuations, the indices weakened significantly. The Shanghai Composite Index finished down by 1.54%, with the ChiNext Index trailing closely behind.
In particular, technology stocks suffered considerable losses, which included significant declines in subsectors such as high-speed copper cable connections, storage chips, optical modules, printed circuit boards (PCBs), and automotive chips, all of which saw drops exceeding 5%. For instance, stocks like ShenYu Co. (300563.SZ) and ShengLan Co. (300843.SZ) fell by 15.13% and 14.12%, respectively, while Woer Co. (002130.SZ) hit its trading limit down. The leading players in the optical modules sector, such as Tianfu Communication (300394.SZ), Xinyi Si (300502.SZ), and Zhongji Xuchuang (300308.SZ), each experienced declines of over 7%, with their latest closing prices showing a retreat of around 30% from their yearly highs.
However, not all segments of the market followed the downward trend. Certain sectors, including food and beverages, social services, gaming, and retail emerged relatively unscathed. For example, many educational stocks surged despite the broader market decline, with companies like Kevin Education (002659.SZ), Angli Education (600661.SH), Action Education (605098.SH), and Zhonggong Education (002607.SZ) all hitting their upper trading limit.
In the food and beverage sector, firms such as Huangshi Group (002329.SZ) and Rock Co. (600696.SH) also reached their limits, while others like Huangtai Winery (000995.SZ), Shanxi Fenjiu (600809.SH), Luzhou Laojiao (000568.SZ), Qianwei Yangchu (001215.SZ), Zhongjing Food (300908.SZ), and Yingjia Gongjiu (603198.SH) all recorded increases exceeding 2%.
According to Xing Shi Investment, changes in the overseas markets may not significantly impact A-shares compared to other Asian markets, but they could induce structural changes in investment strategies. They recommend adjusting investment strategies in light of notable structural developments in the economy.
Over the past two years, the correlation between Chinese assets and overseas assets has weakened, and the transmission effect of overseas market fluctuations on A-shares has diminished as well. The domestic policy enhancements and marginal economic improvements have helped reduce external pressures on the market. Following a significant meeting in July, the introduction of new policies has started to revitalize economic expectations, bolstered further by a rapid appreciation of the RMB. Presently, the foreign capital allocation in A-shares is lower than that in Japanese and Korean markets, aiding in the insulation from external market shocks.
However, it's crucial to monitor that the overall trend of A-shares may primarily be influenced by domestic policy expectations and economic performance. Should an economic recession occur abroad, Chinese exports could face some pressure, necessitating further policy actions. Concurrently, the approach of the Fed towards interest rate cuts opens up more space for expansive monetary policy, which is likely to increase in intensity, although the intrinsic momentum of the economy may require further observation.
Some institutions believe that the volatility in external markets could lead to a resurgence of northbound capital flowing back into A-shares. Liu Youhua, deputy director of the wealth research department at Paipa Network, mentioned that, in the long run, the A-share market exhibits strong independence driven primarily by domestic fundamentals and policy environments. On the other hand, extreme fluctuations in the external markets may accelerate the return of northbound funds to the A-share market, particularly benefiting sectors like liquor that attract such investments.
Furthermore, Chen Xingwen, chief strategy officer at Heisaki Capital, anticipates that northbound funds are likely to return to A-shares, especially favoring high-dividend banking stocks, which could provide stability for the market.
When it comes to the implications of external market volatility on institutional investment strategies in A-shares, Xing Shi Investment suggested they would maintain a focus on assets linked to domestic demand and sectors with ample long-term growth potential, particularly high-quality assets that are undervalued. They would also avoid sectors considered to have risks with low returns.
In light of recession risks in Europe and America, short-term export figures may demonstrate resilience, but expectations for export performance moving forward are comparatively low, potentially dampening the performance of export-related assets. On the flip side, domestic demand could benefit from anticipated policy boosts, with many domestic demand-oriented assets currently showing relatively low valuations in industries such as the internet, transportation, and retail.
Moreover, there is also a strong focus on long-term investment opportunities, as China’s advanced manufacturing sector has witnessed continual breakthroughs over recent years. Technological progress and market expansion are expected to act as significant growth engines for the domestic economy, and technology-related assets are currently valued lower historically. Numerous investment opportunities in sectors like biotechnology and electronics need to be thoroughly explored.
From a sector perspective, Morgan Stanley Funds expresses a preference for areas benefiting from Fed interest rate cuts, such as innovative pharmaceuticals and gold, while also highlighting the relative stability and policy backing of household appliances and utilities as having good potential returns. In the medium term, they continue to favor sectors like semiconductors and military industries that are showing improved performance.
Chen Xingwen emphasizes a watchful eye on sectors and enterprises positioned to benefit from China’s economic transition and policy advantages, prudently managing risks while aspiring for stable investment returns.
He pointed out that the recent extremely unstable geopolitical landscape, coupled with the prospect of the dollar nearing a historical threshold for interest rate cuts and the move of the yen towards increasing rates, marks a significant shift in global capital returning to Asia. It symbolizes a collective anticipation of capital flowing back to Asia amid turbulent conditions. Given this backdrop, China emerges as a prime destination for such inflows, standing out not only for its undervalued assets but also as a safe haven amidst poor geopolitical climates.
Nevertheless, Chen also voiced caution regarding high-valuation stocks lacking performance support, warning against potential risks caused by market sentiment volatility.
Furthermore, Industrial Securities suggests that, akin to late April, the market sentiment may begin to recover gradually from an overly pessimistic state, with August serving as a potential turning point. The market dynamics may shift to adopt a balanced approach between offense and defense, and expand from focusing on high dividends to sectors characterized by high prosperity and high return on equity (ROE).