From supply-side structural reform to mixed ownership reform, the joint force formed by reform and innovative growth causes great tailwind in the capital market. Along with constant inflow of incremental capital, the main board now targets at 3,300-3,500 points, at which the circuit-breaker mechanism was triggered in early 2016.
Apparently, the stock indexes are in upward trend in recent period. After effectively breaking through the 60-day and 250-day moving averages, the SSE Composite Index tended to rise from end October and its target is 3,300-3,500 points. The driving force behind is the transformation and upgrading of traditional industries. The SSE Composite Index will be under pressure when it reaches target. In terms of fundamentals, this round of surge is not effectively supported by earnings growth but by expectation on reform. In other words, the upward momentum of stock prices will diminish as expected reform measures are taken. Technically, complicated large fluctuation is usually seen when 60-day and 120-day moving averages completely go higher than 250-day moving average. Though space for indexes growth is limited and fluctuation is expected, there will be lots of investment opportunities.
The most important investment opportunities come from the changes of economic development thoughts. Viewed from global market environment, the brand-new administration ideas of just-elected US President Donald Trump will bring new opportunities to global economy. The 8-year long super easing monetary policy is ending, and focus will be shifted to fiscal policies and reform. Though such changes mean risks, they suggest great opportunities too. Facts prove that super easing monetary policy no longer stimulates economic growth and instead exacerbates financial risks. In terms of driving economic growth, innovative breakthroughs have also been bottlenecked. Traditional industries are the weak part impeding healthy economic development, while the future of traditional industries is decided by reform, transformation and upgrading. The Dow Jones Industrial Average surged since last week and hit historical new high. The drivers behind were traditional industrial stocks with finance and infrastructure included, showing market’s strong expectation on Trump’s administration.
A shares keep similar pace. During the 2014-2015 period, stocks listed on the Small and Medium Enterprise (SME) Board and the ChiNext Board, driven by innovation, demonstrated outstanding performance, but stock valuation pressure lingered on. At present, the P/E (price/earnings) ratio of the SME Board and the ChiNext Board still stays around 50-70 times on the whole. Apparently, a new round of surge can hardly be seen, and time is needed to digest valuation bubbles. The P/E ratio of CSI300 Index on the whole records only 12-15 times, staying at historical low levels and waiting for breakthroughs. The breakthrough has been created since July, and it is the reform, transformation and upgrading. In other words, the core driving force will be replaced by the transformation and upgrading of traditional industries during the 2016-2017 period.
Based on comparison of valuation, the reform theme, oriented in traditional industries, will see rising flexibility in stock prices. The supply-side structural reform, Public-Private Partnership (PPP), mixed-ownership reform and debt-to-equity swap will integrate with development strategies like the “Belt and Road” initiatives, the integration of central SOEs and “Made in China 2025”. Meanwhile, valuation advantage of relevant leading varieties is still quite prominent. At present, the P/B (price/book) ratio of companies like China Shenhua Energy Company Limited (601088.SH), China State Construction Engineering Corporation Limited (601688.SH), China Communications Construction Company Limited (601800.SH), China Railway Construction Corporation Limited (601186.SH) and China United Network Communications Limited (600050.SH) still stays at 1-2 times. Their stock prices also start to get rid of the suppression of middle and long-term moving averages and tend to rise. At present, the market is waiting and verifying whether the darkest moment of traditional industries has gone. The process of verification is also a process for the resonance effect of “low valuation + reform expectation” to play its role. Foreseeably, stocks related to finance, iron & steel, petroleum and petrochemical, whose P/B ratio stays around 1 times, now will reverse again. While the prospects are bright, the road has twists and turns.
Generally speaking, the rising trend driven by theme investment has been confirmed. New expectations have been raised on innovation, reform and global economic development environment. The low valuation of middle and large-cap leading stocks resonates with reform, and the upward force generated will be constantly released. Meanwhile, signals sent by macro-economic indexes like PPI and PMI also attract more capital into the stock market and thus stock indexes are pushed up.
Translated by Jennifer
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