Driven by building materials, non-ferrous metals, iron & steel and other cyclical sectors, SSE Composite Index increased amid fluctuation and even hit 3,250 points after the Spring Festival. However, the ChiNext Board with various growth stocks was overshadowed and the market saw different investment styles. Analysts from Haitong Securities Company Limited (06837.HK; 600837.SH) and Shenwan & Hongyuan Securities Co., Ltd. recently estimated that as the liquidity is expected to improve, the market will shift from cyclical sectors to growth style in the short term.
Spring bullish run to enter second half
As a result of the declining petroleum, chemical engineering, construction and other hot cyclical sectors, three major stock indices closed slightly lower. The SSE Composite Index fell below the 10-day average. Will the spring bullish run come to an end? Chief strategy analysts from securities companies are not pessimistic about it.
The spring bullish run is under progress and investors can remain positive, indicated Wang Sheng from Shenwan & Hongyuan Securities. Wang believed that more signs show that the economy is recovering. Although the sustainability of economic recovery is yet proved by statistics, it is not reasonable to have pessimistic expectations.
On the other hand, the improved liquidity under expectation will bring new momentums to the stock market. Statistics show that the margin trading balance on Shenzhen and Shanghai stock exchanges climbed to over 600 billion yuan as at Feb. 24, representing an increase of over 36 billion yuan from that before the Spring Festival. Meanwhile, the turnover also recovered significantly after the Spring Festival. The total average intraday turnover on Shenzhen and Shanghai stock exchanges exceeded 400 billion yuan.
Wang indicated that the surging margin balance shows that the liquidity in the stock market is improving. Meanwhile, due to the new policies on refinancing and the IPO slowing down during the releasing of annual reports, the A-share market will see improved capital supply and demand.
The strategy team of Haitong Securities, which was awarded the best strategy study team on new wealth last year, also believed that the spring bullish run is under progress. As previous bearish factors are gradually digested, it will see more policies, indicated Xun Yugen, chief strategy analyst from Haitong Securities. Meanwhile, the bullish U.S. and Hong Kong stock markets will boost the risk preference of investors. The fluctuation will maintain in the medium term.
After studying the spring sessions in the past seven years, the strategy team of Changjiang Securities Company Limited (000783.SZ) pointed out that the spring bullish run will end when the economic expectation is proved false or the liquidity turns tight or regulation policies and overseas risk events affect the preference for risks. Changjiang Securities believes that as the expectation on economic recovery is improved, the market is expected to maintain the spring bullish run.
Analysts turn bullish to growth stocks
It is noteworthy that while remaining a bullish attitude towards the future market, several analysts also hold the same position in market style. Analysts from Haitong Securities and Shenwan & Hongyuan Securities said that their short-term investment focus is expected to shift to growth stocks.
After a study of the stock market trend in recent springs, the strategy team of Haitong Securities made a research report which elaborates its judgement to the recent market trend. Haitong Securities employee Xun Yugen said that the recent three bullish runs among fluctuations occurred in the spring were in 2012, 2013 and 2016, respectively. And all the bullish runs witnessed a rotation from value or cyclical stocks to growth stocks. This indicates that a bullish run amid fluctuations is usually characterized by sector rotation.
Meanwhile, Xun also pointed out that the SME Board and the ChiNext Board have continuously underperformed the Main Board since mid-2016. But as its earnings have increased, the ChiNext Board sees less pressure on high valuation and becomes more attractive. If based on the growth rate in the last year’s annual report, it is estimated that the relative valuation of the SSE 50 Index to the SME Board Index and the ChiNext Board Index will fall back to where it was in earlier 2013 after the first quarterly reports are released.
Wang Sheng, chief strategic analyst with Shenwan & Hongyuan Securities, pointed out that with an optimistic expectation for economic growth, the cyclical sector has performed better since the beginning of the year. Meanwhile, value-oriented investment again dominates the market. It becomes a consensus in the market to focus on industry leaders. Therefore, to invest first-class leading stocks will bring large among of returns. But afterwards, the bullish run may enter its latter half with fewer returns where growth stocks will become the first beneficiary.
Wang explained that cost performance will become a key word for the latter half of this round of bullish run. “Compared with cyclical stocks and industry leading stocks with limited flexibility, some growth stocks with excellent performance and low valuation are expected to gradually show high flexibility.” He suggested investors to wait patiently for a shift in the market’s systemic style while focusing on quality growth stocks.
The strategy team from Industrial Securities also pointed out that after a period of adjustment, some growth stocks saw their valuations close to a reasonable level. For example, game companies led the market during last week’s rebound. Some of them saw their PEG ratio close to 1, indicating that growth companies whose valuation is within reasonable range and which are worth investment have caught attention from investors.
In fact, based on the market performance last week (from Feb. 20-25), the ChiNext Board where growth stocks gathered went upward, with a weekly gain of nearly 3 percent. And its turnover climbed back to where it was at the end of 2016. In contrast, the SSE Composite Index only added 1.6 percent last week.
Translated by Star Zhang and Coral Zhong
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