With external factors fading away gradually, major stock indexes of A shares rebounded significantly last week. Kinetic energy for going long of long side is further released and short side begins to shift. Both long and short sides go long. SSE Composite Index has rebounded by over 20 percent from 2,638 points. Historically, rebound with over 20 percent is an important symbol of reversal of market trend. We think that SSE Composite Index is expected to see rapid rebound under the background that macro-fundamentals keep improving, state-owned enterprises (SOEs) reform sees faster promotion and market fund is recovering.
Firstly, economic stabilization drives performance of listed companies to recover. Based on the latest statistics, purchase management index (PMI) recorded 51.2 percent in October, up by 0.8 percentage point from the previous month. It is the first time for PMI to pick up to above 51 percent since October 2014. Due to increasing industrial product prices and low base number, producer price index (PPI) hiked by 0.7 percent in October when compared with that in September, presenting 0.2 percentage point up from September. The year-on-year growth in PPI expanded remarkably. According to high frequency data, six major power generation groups consumed 547,100 tons of coal per day in October, up by 13.16 percent from a year earlier, and the growth kept enlarging since June. Daily output of crude steel was 1,742,900 tons, keeping flat with that in September but increasing by 4.21 percent when compared with that at the same period of last year. As of closing hours on Nov. 10, 1,138 listed companies in Shanghai and Shenzhen bourses had disclosed performance outlook for 2016, 807 or 71 percent of which predicted promising performance.
Secondly, SOEs reform speeds up continuously. De-capacity in iron & steel and coal industries have completed 80 percent of annual target and the target is expected to be over-fulfilled ahead of schedule. The release of Opinions on Actively and Prudently Lowering Enterprise Leverage Ratio symbolized that the reform enters the second stage of lowering leverage and cutting cost. Relevant tasks and targets will be set before year end. Recently, no matter local SOEs reform or merger & organization of central SOEs are proceeding orderly. A total of 18 supporting documents related to SOEs reform have been introduced since Guidelines on Deepening State-owned Enterprises Reform was unveiled on Sept. 13. This indicates that supply-side reform and SOEs reform are quickening continuously, which will improve risk preference.
Finally, leverage and expectation on incremental capital entering stock market are strengthened. As of Nov. 15, balance of margin trading and securities lending in Shanghai and Shenzhen stock exchanges posted 945.971 billion yuan, which has hiked for seven consecutive trading days to hit a nine-and-a-half-month high. Financing balance has added by 110 billion yuan from 834 billion yuan in late September, up by more than 13 percent, which shows that investors’ intention for leverage gets higher. China Banking Regulatory Commission issued a circular in last weekend that it would carry out special inspection on banking financial institutions in 16 hotspot cities including Beijing. The inspection will cover a wide range of fields, including that whether personal housing mortgage loans, real estate development loans and wealth management capitals enter real estate industry illegally and compliance operation of trust business in real estate industry. Funds in real estate industry may turn to invest in A-share market, which will ease the tension of existing funds.
Sub-new stocks and equity transfer keep active, representing the strongest funds going long. The strong growth of leading individual stocks also shows that major funds tend to go long. Currently, this kind of force is spreading. Most sectors which were strong previously experience adjustment. Market hotspots are related to financial and infrastructure construction. Some small-cap stocks also show good performance. Market hotspots are repeating the trend which happened after Nov. 20, 2014.
SSE Composite Index is expected to stay at the upper part between 2,800 points and 3,600 points after it is consolidated around 3,200 points. Along with the two bourses seeing increasing turnover, pressure at the range between 2,800 points and 3,600 points will be removed easily and SSE Composite Index may see rapid rebound. Investors can focus on three major sectors, including financial sector represented by banks, insurance and securities companies, infrastructure construction sector represented by high-speed rail, nuclear power and engineering machinery, and theme opportunity represented by agriculture, environmental protection and military engineering.
Translated by Vanesse
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