Control the proportion of the position, and wait patiently for going long signals
⊙Goldlark Investment Consultation Co., Ltd Qin Hong
During the first trading week of 2016, Shanghai and Shenzhen stock exchanges experienced abnormal trend. On the one hand, thousands of stocks again plummeted by the daily limit of 10 percent; on the other hand, some sectors went through long-term stagnation showed signs of recovery, with iron and steel, coal and nonferrous metal stocks all soared to the daily limit of 10 percent. Whether hike of such sectors is a new signal of going long for A shares?
Lack of continuous growth expectations
Some market participants believe that A-share market is expected to enter the cycle when traditional industry stocks will rally, primarily because valuation of traditional industry stocks such as coal and iron and steel stocks have fallen back to reasonable levels after continuous correction. Moreover, there is strong logic for going long at present, as the supply-side structural reform will eliminate plenty of outdated production capacity, which provides impetus for leading enterprises in relevant industries to gain profitability.
However, two factors restrict the continuous rebound of traditional industry stocks. Firstly, it lacks of power that drives the recovery of industry profitability. After all, it is the expansion of demand side, instead of the contraction of supply side that brings continuous growth to enterprises. Take dye and vitamin industries for instances, the shrink of supply side led to merely temporary prosperity, and long-term downturn is what has followed. That is to say, such stocks has overdrawn power for long position resulted from temporary bull run coming after the surge last week.
Secondly, the market trend won’t keep such stocks to continue going up. Traditional industry stocks are mostly large cap stocks with huge market capitalization. After continuous rebound, active markets of such shares gradually come into being, thus further gain of such stocks require the support of higher trading volume. But the current trading volume can’t be effectively increased easily, or we can say, the market won’t see huge capital inflow in the short term. The fluctuations of exchange rate make a large number of new capitals sideliners. The possibility that large amount of capital will flow into the market is low until obvious signs show that exchange rate has stabilized. In that case, stock funds in the current market can hardly support continuous active trading of such stocks.
Market basis of the spring to form in fluctuations
Therefore, traditional industry stocks are likely to soar at the beginning of the week and then fall after the prices are near the resistance. The price hike of traditional industry stocks, in particular iron and steel and coal stocks is probably a flash in the pan, for the cleaning out of excessive production capacity in such sectors will see many difficulties and the gain of such stocks is just an uprush in the short term. Therefore, after continuous hike last week, such stocks are likely to pull back amidst fluctuations this week and pressure on the market.
But pull backs on the other hand means the basis of the spring gain is forming. Historic trends show that low points at the turn of the year are usually not the lowest points of the year. In other words, the peak of a year could be much higher. While in the spring, especially during March and April, the market always goes up.
It is believed that this year will not be an exception. After all, there are more highlights in A-share market than previous years. China Securities Finance Corporation Limited and China Central Huijin Investment Ltd. are among the ten biggest shareholders of a number of listed companies with considerable capital input. Relevant regulators also aim to maintain a healthy market, for example, the circuit breaker was halted after it was implemented for just four trading days. It shows the regulators’ courage to face the appeal of the market and actively improve trading system. From this point of view, the valuation and premium of A shares should be improved.
As the ChiNext Board fell below the support, and traditional industry stocks may pull back at the beginning of the week after meet resistance during the surge and put much pressure on the market, the trend of A shares in the near term will undoubtedly be complicated, and the current stock index is unlikely to soar immediately. Possibly, Shanghai Composite Index will fluctuate around 3,100 points or even 3,000 points, and form the market basis for the spring of 2016.
Investors are advised to reduce holdings in the trading, and set reasonable withdraw points for short-swing trading. Meanwhile, in the fluctuations during trading sessions, more attentions could be paid to stocks whose substantial shareholders actively increase holdings or prolong lock-up period. Besides, investors are suggested to track two categories of stocks. Firstly, small cap stocks slumped. If the outlook of the industry is optimistic and the PE ratio is expected to drop below 60 times, investors could look for an entry. Secondly, stocks of scarce industries. If the PE ratio is also below 60 times, relevant stocks could also be tracked, which include blood products sector, nuclide medicine stocks, medical service stocks, etc. These stocks are likely to lead the spring gain.
Risk preferences reduce, and sentiment for going long may continue to weaken
⊙ Manager of wealth management center of China Minzu Securities Xu Yiding
During the first trading week, strong cyclical sectors surged among the plummet. But the Shanghai Composite Index and the ChiNext Index still dropped 9.97 percent and 17.14 percent, respectively. The Shanghai Composite index fell below 3,500 points, a level kept for almost three months, and back to the fluctuation range from 2,850 to 3,250 points. Meanwhile, dramatic pull back has been seen on European stock market, and international oil price and London nonferrous metals continued downtrend. On Jan. 4, Shanghai Composite index deviated from the upward cycle started from 2,850 points, indicating the rebound based on 2,850 points has ended. Adjustment is a keynote for a future period of time. The loss of the ChiNext Indext is more stunning. It seems like this index has entered a large scale adjustment cycle, i.e. the adjustment for the hike from 585 points in2012 to 4,037 in 2015.
The first week of 2016 saw poor performance, fluctuation of exchange rate beyond expectation
Entering 2016, the U.S. gained a nice nonfarm payrolls report after rates hike. In December 2015, nonfarm employments increased by 292,000, which has beat expectations. But the U.S. stock market experienced the worst first-week performance in history. At the same time, strong sentiment of risk aversion arises rapidly around the globe, and risky assets worldwide generally slumped. A few days ago, George Soros warned that a financial crisis might happen. He also pointed out that the first U.S. rates hike in nearly a decade may bring difficulties for the economic growth of developing countries. Looking back, during the post subprime crisis period, earnings of U.S. enterprises has experienced a rapid upward period from 2009 to 2011, a slow-down period from 2012 to 2014, and a plateau since last year. The whole process is highly similar to that before 2008. And the start of Fed rates hike cycle will probably lead the global capital to flow back to the U.S., and lower the premium level of the valuation of global risky assets.
RMB suffered unexpected depreciation in the first week of 2016, medial rate of RMB/USD dropped to 6.5646 last Thursday, setting a new low since March 2011. During the first four trading days of 2016, onshore closing price declined by 1,003 points to 6.5939. Offshore market experienced a larger decreasing range, and touched 6.75 during the trading hour. CNH/CNY spread once exceeded 1,600 points, setting a historic record. The central bank previously indicated that there was no basis for RMB to depreciate, but it has greatly depreciated by around 3 percentage points since one month before, arousing panic sentiment in the market.
Reform speeds up, pains hard to avoid
The Premier of the State Council Li Keqiang hosted a work discussion in Taiyuan City on Jan. 4 regarding the defusion of surplus capacity of steel and coal industries, and realization of profits. Li pointed out that defusing surplus capacity should be “forced by the market, organized by local governments, supported by the central government with enterprises as main players and the help of comprehensive policies”; structure adjustment should not only focus on traditional industries, but also develop new-pattern industries and commercial activities to build up “twin engines” to provide conditions for staff reduction and efficiency improvement of traditional industries, and incent new vigor through innovative expansion and labor productivity improvement.
Last week, China Federation of Logistics & Purchasing (CFLP) and Service Industry Investigation Center of National Bureau of Statistics issued Purchasing Manager's Index (PMI) of China’s manufacturing industry for December 2015, which recorded 49.7 percent, up by 0.1 percent compared to last month, which has been under critical value for a successive five month. Among the five indexes that forming PMI, production index, new order index and supplier delivery time index were higher than critical values, but employee index and material inventory index were under critical values. Data released at last weekend showed that CPI increased in December 2015, up by 0.5 percent on month-on-month basis and 1.6 percent year on year; PPI slightly declined by 0.6 percent on month-on-month basis and 5.9 percent year on year. On the whole, manufacturing business index of December 2015 shows that economy starts to stabilize but not solid; due to impact of national monetary policies, expectation of financial growth rate will constantly decline. Therefore, overall economy will not suffer a risk only when real economy keeps a higher growth rate. We believed that China’s economy will take a long time to bear pains for transformation in the future; and there is no time to delay supply side reform to adjust supply and demand structure, as traditional drives for growth constantly weak and emerging ones are still in process.
Risk preference reduces, valuation likely to further decline
No matter growth stocks or value stocks, they have greatly increased with favorable gains since repairable rebound of the market in the fourth quarter of last year. Meanwhile, many institutions stabilized the net value at the end of last year to strive for a high rank, not obviously dumping. But it has passed, and a large number of stocks were intensively sold off to gain profits, making A-share market suffer dramatic fluctuation. Last Friday, China Securities Regulatory Commission decided to suspend the circuit breaker mechanism, RMB exchange rate rebounded, and medial rate of RMB initially appreciated after depreciating for a continuous eight trading day, which make A shares stop dropping and rebound with non-ferrous metals, steel and coal becoming main forces for rebound. We believed that rise of strong periodical sectors lacks of support from fundamentals, at the same time, it also shows the weakness of current market, and capital cannot find better investment orientation.
Capital factor has not improved obviously, but expansion expectation greatly improves. During the last trading week of 2015, net outflow of securities margin recorded 590.5 billion yuan, setting a new high since June 23, 2015; meanwhile, that for margin trading and short selling recorded 58.4 billion yuan. Data of China Securities Depository and Clearing Co., Ltd shows that, newly-added investors of last week (from Dec. 28 to 31, 2015) were 193,700, down by 37 percent on month-on-month basis, and it has declined for a successive three week, and investors participating in A-share trading recorded 192,000 in that week, accounting for 19.6 percent of investors holding A-share accounts, down by 22.8 percent compared to previous week. Up to Jan. 8, financing balance of Shanghai Stock Exchange reported 642,738 million yuan, and Shenzhen Stock Exchange reported 466,443 million yuan, both totaled at 1.11 trillion yuan, down by 7.5 percent when compared to previous high of 1.2 trillion yuan. Based on statistics of China International Capital Corporation Limited, potential scale of non-tradable stocks, which may be unlocked by shareholders in January, reaches around 1.1 trillion yuan, taking up 5.2 percent of A-share free flow market value, and that may be unlocked by substantial shareholders and senior managers even reaches a high of 1.5 trillion yuan. Meanwhile, new shares under examination to be issued exceed 700, but companies with the demands are far more than such number. Registration-based IPO system is also accelerated and promoted, out of expectation, forcing down the valuation of current A-share market.
Along with great adjustment of the market, long buying intention further weakens, and market risk preference obviously reduces when money-making effect weakens. There are some supports at the points of 2,850 and -3,250, but chips greatly accumulated above 3,500 points, 3,300 points are too close to upper intensive lockup range, domestic economy lacks of highlights, expansion expectation of A-share market speeds up, RMB exchange rate dramatically fluctuates, and top-shape trend of U.S. shares gradually becomes clear. Therefore, Shanghai composite index will be tested at 2,850 points sooner or later.
Translated by Adam Zhang and Jelly Yi
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