Since the beginning of 2018, big-cap blue-chip stocks continued to strengthen; while medium and small-cap stocks are weakening. Gigantic funds recently issued are expected to continue to big-cap blue-chips. Industry insiders said that as the capital market opens up, institutional investors and foreign capital are improving. Value stocks and big-cap blue-chips show better performance. The increasing proportion of institutional investors’ holdings will make leading stocks to strengthen further.
Big funds prop up blue-chips
Since January, a number of more than 10 billion private and public funds were issued. There are even funds with 30 billion yuan.
GF Securities strategist Dai Kang believes that some 10 billion yuan new funds were favored by the market, reflecting the trend of a rise in the proportion of institutional investors and long-term funds’ participation into the market. This will strengthen the current market style and promote the rise of the large cycle sectors. Driven by the 80/20 differentiation and profit-making effect, the rising proportion of institutional investors will help the market to identify more quickly the investment opportunities arising from the reshaping of the valuation framework for large-cycle sectors. At the same time, non-standard assets are squeezed out as regulations ramped up. Financial institutions' demand for standardized high-yielding assets will increase. The market's preference for long-term closed equity funds will enhance. This will bring stable incremental capital to the market in the long term. This kind of capital tend to allocate stocks with high cost performance. Large cycle sectors (with sustainable profitability, valuation discount) will be favored.
"The emergence of large-scale funds means more investment targets need to be tapped to achieve a fully decentralized effect. It is hard for them to get involved in investing in small and mid-cap stocks, so large fund will mainly allocate more to large cap stocks." A private equity fund manager based in Shanghai said that based on this expectation, capital favors blue chip stocks recently. At the same time, overseas funds are piling into Chinese stock market. Compared with domestic capital that has more investment model options, overseas capital only has unitary investment model. They usually prefer the leading stocks with high liquidity.
Xun Yugen, chief strategist at Haitong Securities, pointed out that the A-share market to be dominated by institutional investors in the future will be more moderate. Meanwhile based on historical experience of overseas markets, as the capital market gradually opens to the outside, the proportion of institutional investors and foreign funds is on the rise. Value stocks and big-cap blue-chips show better performance. The increasing proportion of institutional investors’ holdings will enhance the leading effect of leading stocks.
Market style rotation raises dispute
Since 2018, the differentiation between small-cap stocks and big-cap stocks has intensified and has become one of the key issues in the market. Institutions are mixed on whether and when the market style rotation will form. Some institutions believe that as the structural direction of the market is determined by incremental fund, the market style is difficult to switch. The dominance by large-cap blue-chips may remain the trend. Others argue that the diversion is hard to sustain.
Guodu Securities said in its strategy report said that after the differentiation between small-cap stocks and big-cap stocks continues, there may be a short-term power of convergence or reversal. And a reversal requires several conditions. Firstly, the economic growth slows faster than expected, and the macro-economy weakens; Secondly, if the economy slows down more than expected, the monetary policy is modestly loose. Thirdly, the earnings of listed companies indicate that the performance of large and small-cap stocks is growing at a fast pace, and the profitability is weakening. Fourthly, the expectation for inflation recovery will cool down. Considering the macro-fundamentals and policy at home and abroad, it is expected to small and mid-cap stocks will see a window opportunity for reversal phase, and may wait until the second quarter. Specifically, some fund managers said that in 2018 they will dilute style factors and seek underlying assets bottom-up.
Translated by Coral Zhong
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