New policies on margin trading facilitate risk prevention

The A-share market presented the trend of falling after surging last week and especially dived again at the closing hours of last Friday, causing the daily K-chart of SSE Composite Index broken down. Meaningfully, news of last week such as the resumption of IPOs and the margin deposit proportion rising from 50 percent to 100 percent was also unfavorable to the short-term trend of A shares, which weakened the long selling. All these will indeed impose pressure on the market trend at the beginning of this week.

Short-term pressure cannot ignored

Currently, the short-term trend of the A shares are facing intensified pressure. On the one hand, new stocks are to be issued soon, which will withdraw liquidity from the secondary market. On the other hand, the margin deposit proportion increased from 50 percent to 100 percent, weakening the purchase power of short-term A shares accordingly.

In the meantime, there are many strengthened adverse factors at overseas markets. Each rebound of A shares is contributed by the positive factors at the domestic and overseas markets. Only the multi-good news is able to boost the long selling. However, the foreign stock markets all suffered plummets recently. Moreover, influence of the terrorist attacks in Paris, France last weekend further spread, which may affect the change in global political pattern and then exert greater influence on international economy, just as what the terrorist attacks in the United States on September 11, 2001 did. The factors will undoubtedly influence the mentality of participators of A-share market. Therefore, the A shares will bear greater pressure this Monday.

Force of long-term long selling gathering

Nevertheless, trend of the A-share market is still worthy of expecting in the medium and long run, because the logic supporting the long-term trend does not change fundamentally. The first factor is about the shift of resident asset allocation. The worsening economic data in October suggests that China’s investment scale has begun to grow slowly, which is undoubtedly a significant influence factor for price of funds. Since no huge increase in investment scale means decreasing demand for capital but capital supply is still hiking, the downward trend of price of funds (interest rate) will continue, which will surely drive the resident asset allocation to shift from deposit, immovable property and financial products to stock market. Hence, the force of long-term buy orders at the A-share market is still gathering now.

Secondly, there are new changes to the forces in A-share market. Over the years, competitive parties in A share market has been changing, which has transferred from capitals in the secondary market at the end of last century, to untradeable shares after shareholder structure reform in 2005 . Shareholders began to actively participate in the market and waves of assets M&A dominated or led by substantial shareholders or powerful institutions soon heated up. After sharp plummets experienced by A share market earlier this year, China Securities Finance Cooperation Limited (CSFC) and Central Huijin Investment Ltd. ("Central Huijin"), which are all national forces, entered the market with huge capital. This will no doubt benefit the development of A-share market in the future.

Thirdly, favorable international situation could contribute to the structural transformation of China’s economy. It is undeniable that since 9/11 attacks, there are subtle changes in international political game, such as softened ideological confrontation and intensified religious conflict, which are benefit for the evolution of China’s politics and economy. While Terrorist attacks in Paris last Friday may further shift the global focus to terrorist threat, China’s peaceful environment will boost investors’ confidence in its future economic development and attract global capitals to swarm in this country.

Capture investment opportunities in equity era

In conclusion, there will still be fluctuations in A-share market in the near term, but the medium-long term trend is optimistic. Strategies should be adopted to control the positions in response to short-term volatility, and at the same time appropriate positions should be kept to actively cope with the entry of equity era. Since bonus of new share subscription could also be enjoyed in the forthcoming equity era, investors should bear in mind the long-term investment thinking. As a result, the hot topics in the market may also change, namely shifting from high valuation and high price stocks to low valuation and high dividend stocks.

In the process of trading, high valuation and high price stocks could be sold and instead buying of low valuation, high dividend and stable growth stocks is recommended, such as pharmaceutical shares, financial shares and emerging industrial shares with strong growth potential, like new energy vehicles. Among financial stocks, financial holding platform concept shares, non-banking financial shares are still priorities. In addition, small cap shares in stagflation could also be traced, because such shares are significant target candidates for future M&A integration. Fujian Longzhou transportation Co., Ltd. (002682.SZ), Jiangxi Huawu Brake Co., Ltd. (300095.SZ) and Hubei Yichang Transportation Group Co., Ltd. (002627.SZ) are in this category.