This article comes from the Lugang Tong Strategy Weekly report of Societe Generale Securities.
The author is Zhang Yidong
Deputy Director of Societe Generale Securities Research Institute and global chief strategist, has won the first place in the best analyst strategy research field of New Fortune, the first Grand Slam of New Fortune, Crystal Ball, Taurus, first Finance and IAMAC Award, and won the first of New Fortune Strategy three times.
Main points of investment:
With the serious differentiation between core assets and non-core assets in 2017, Chinese stocks, whether A shares, Hong Kong stocks or US stocks, all show such characteristics.
First of all, the fundamental logic that leads to the great differentiation of the market is that the aggregate economy is stable and the structural adjustment is intensified, resulting in high-quality companies with core competitiveness in various industries showing "the strong are always strong and the winners take all".
Second, the valuation and performance of core assets in 2017 are more cost-effective than other assets.Based on the global liquidity environment and China's financial regulation, the main driving force of the stock market is profitability, and cost-effective core assets become the preference for "big money".
The understanding of three levels of Core assets
Core assets refer to the high-quality listed companies with core competitiveness in China, whose profitability is highly deterministic, at least the industry leaders in all segments of China, and is expected to develop from the leader of various industries in China into a giant with global competitive advantage in the next few years.
The first requirement is to have core competitiveness and be able to adapt to the new situation in which China's economy has shifted from rapid growth to high-quality growth.
To look at the core assets at a higher level, we need to be the leader in the global benchmarking research industry.
The core asset may be a big blue chip or a "little giant". Not only the so-called "beautiful 50", but also advanced manufacturing, scientific and technological innovation, as well as new models of entertainment, culture, mobile interconnection, and so on.
The "garbage time before the year-end assessment" of Hong Kong stocks is also a "patient stage for the layout of the next year"
The medium-and long-term foundation of the bull market in Hong Kong stocks is solid.1) China's economic structure optimization, consumption and scientific and technological upgrading drive the strong Hengqiang. 2) the general trend of "big money" allocating China's core assets has only just begun.
Valuations of Hong Kong stocks have returned to levels that can be more comfortably laid out for 2018.
The gains in the two main indices of Hong Kong stocks this year have been almost entirely earnings-driven.
Investment strategy: patiently lay out the core assets that benefit from "deleveraging, cost reduction and deficiency".
Continue to be bullish on financial stocks that benefit from economic stabilization and "financial deleveraging", first insurance stocks, and continue to recommend high-quality banks.
Be optimistic about the core assets in advanced manufacturing, pharmaceuticals and other areas that benefit from the policy of "reducing costs and making up for deficiencies", and patiently increase their holdings at a more cost-effective price during the adjustment of global technology stocks.
Be optimistic about the beneficial areas related to consumption upgrading, including competitive enterprises in the media, Internet consumption, education and other industries.
Risk hint: if inflation rises higher than expected and the dollar rises higher than expected, the market will fluctuate violently.
2017 is drawing to a close, with serious differentiation between core and non-core assets
With the serious differentiation between core assets and non-core assets in 2017, Chinese stocks, whether A shares, Hong Kong stocks or US stocks, all show such characteristics.In the A-share market, there may be more discussion about the so-called serious differentiation between large and small votes, which is actually not accurate, but it is only an appearance or even an illusion. Less than 30% of A-shares have risen this year, and big stocks account for a higher proportion of rising stocks, but electronics, the "little giant" that represents a number of industries, is not also up. Therefore, a more accurate description is the differentiation between companies with core competitiveness and other companies.
1. The fundamental logic of market differentiation
First of all, the fundamental logic leading to the great differentiation of the market is that China's economy has entered a new stage of transformation, in which the aggregate economy is stable and structural adjustment intensifies. As a result, high-quality companies with core competitiveness in various industries show that "the strong are always strong and the winners take all".
Specifically, China's economy has entered the stage of stabilization after the deceleration, or the "horizontal" stage of L-shaped adjustment. On the one hand, the cyclical fluctuations of the macro-economy are more convergent than before, and systemic risks are controlled. On the other hand, the background of economic transformation and consumption upgrading, superimposing the "supply-side structural reform" with "three cuts, one drop and one subsidy" as the core, as well as neutral tight monetary policy, approaching financial supervision policy, strict environmental protection policy, and so on, makes China's various industries in the fields of cycle, consumption, finance and even the new economy present a new competitive pattern of survival of the fittest and permanent strength of the strong.
In the past, China's economy was accustomed to cyclical ups and downs. Once the "new cycle" started, every industry prospered, and all types of companies in various industries followed the trend. Therefore, corresponding to the "emerging + transition" market that has been highly volatile in China's A-share market for many years, various industries and companies in the industry will take turns to rise, and even small companies and ST companies will rise more than the industry leaders. therefore,Investors are used to "rotation" and habitually label "big stocks" and "small stocks" to make so-called investments. This kind of investment thinking should be adjusted as soon as possible, we should look at the essence through the phenomenon, and in the future, we should grasp that in the new era of China's economy, "the total amount is stable, the structure is differentiated, and the strong are always strong." the profits of core assets with core competitiveness have entered a new upward cycle. corresponding to the capital market is the structural differentiation of the market, and the core assets are relatively strong.
2. performance-to-price ratio promotes the market of core assets.
The valuation and performance of core assets are better than those of other assets in 2017. Monetary policy is neutral and tight in 2017, and risk-free returns continue to rise, so companies with expensive valuations and questionable growth continue to adjust. On the other hand, the core assets are both the valuation hub and the rise of profits, and the valuation of some core assets has changed from undervalued repair to a reasonable or even expensive level.
We believe that based on the current global liquidity environment and China's financial regulatory environment, the main driving force of the stock market is still profitability.It is difficult for valuation levels to repeat a full-scale bubble similar to the downward trend of risk-free returns in 2012-2015. Therefore, the core assets with high performance-to-price ratio have become the preference of long-term configuration "big money" such as banks, insurance and even foreign capital. In the next few years, it is still highly probable that quality companies with core competitiveness will maintain the good performance of their stock prices by virtue of their performance growth.
The understanding of three levels of Core assets
Core assets are not equal to big stocks, and core assets may be big blue chips or "small giants", which cannot be labeled according to the size of market capitalization.Core assets refer to the high-quality listed companies with core competitiveness in China, whose profitability has a strong certainty, at least the industry leaders in various fields in China, and is expected to develop from the leader of various industries in China into a giant with global competitive advantage in the next few years.
1. The first level of understanding of core assets: having core competitiveness.
The first requirement of core assets is to have core competitiveness, to adapt to the new situation of China's economy changing from high-speed growth to high-quality growth, to win in the survival of the fittest in the industry, and to achieve the permanent strength of the strong, guaranteed profitability and even sustained growth.
Usually, either the product is unique or the profit model is innovative, so as to upgrade the new demand for consumption. Guizhou Moutai and Tencent are outstanding representatives this year, or they have unique advantages such as cost, capital, management, technology, and so on. can adapt to the adjustment of the industrial structure. For example, in the raw material industry, enterprises at the bottom of the cost curve can seize market share; enterprises with brand power and channel ability in traditional consumer industries can better meet the needs of consumption upgrading; even in emerging industries, leading enterprises can also rely on technology, platforms and other barriers to achieve higher growth than the industry.
2. The second level of understanding: being competitive in the world.
To look at the core assets at a higher level, we need to be the leader in the global benchmarking research industry.First of all, the demand for consumption upgrading of China's 1.4 billion people is competitive in the world, and the enterprises that can meet the trend of consumption upgrading in China can be called core assets. Second, China's manufacturing industry is in the stage of accumulating abruptly. Enterprises that have technological breakthroughs, import substitution advantages and gradually go out to expand globally in the fields of machinery, chemical industry, automobile, TMT, electromechanical and other fields can be called core assets. Third, China's core assets will emerge from companies with global leadership in the field of scientific and technological innovation, such as Internet giants represented by BAT, as well as 5G, artificial intelligence, military science and technology, biomedicine and other fields.
3. the third level of understanding: you can't simply label it, not just beautiful 50.
Core assets cannot be equated with large-cap stocks or small-cap stocks. In addition to the Shanghai 50, there are also many "little giants" in subdivided industries, who can also become global leaders, from the leader of China's subdivided industries to global giants. Therefore, we should not just focus on the so-called "beautiful 50". Instead, we should open our mind and at least take the manufacturing industry into account. manufacturing is not only TMT, such as fine chemicals and precision manufacturing, it is also driven by technological progress and the demand for consumption upgrading. In addition, consumption is not only Maotai, Gree, but also new models in the era of entertainment, culture and mobile Internet. So the scope of core assets is relatively wide, and next year we will slowly find that more excellent companies in subdivided industries can rise.
The "garbage time before the year-end assessment" of Hong Kong stocks is also a "patient stage for the layout of the next year"
The recent Hong Kong stock market is a "garbage time before the year-end assessment" and a "patient stage for the layout of the next year". The short-term shock adjustment will continue. After all, Hong Kong stocks have accumulated a large number of profit sets for the core assets represented this year. At the end of the year, uncertainty increases, and it is normal for investors to make profit-taking. However, cheap is the last word, and the systemic risk of core assets is not great.
1. The medium-and long-term foundation of the bull market in Hong Kong stocks is solid.
First of all, the fundamental logic of Hong Kong stocks is still clear. China's economic structure optimization, consumption and technology upgrading drive the strong Hengqiang, and the new profit cycle of core assets will continue.
Second, the general trend of "big money" to allocate China's core assets has just begun, and China's banks, insurance and other large financial institutions, as well as overseas institutional investors, will continue to allocate cheap China's core assets-Hong Kong stocks.
2. After the rapid adjustment, the valuation of Hong Kong's core assets is more attractive.
After the recent rapid adjustment, the valuation of Hong Kong stocks has returned to a level that can be more comfortably laid out for 2018.
The Hang Seng AH premium index is at its highest level since early 2016. Under the trend of increasing the allocation of high-quality equity assets by China's big financial institutions, the valuation of Hong Kong stocks is more attractive than that of A-shares.1) A shares are priced at a premium of 32% over H shares, which is close to the upper limit of double the standard deviation of the historical average since 2006.
2) at a time when capital is tight at the end of the year and investors tend to be safe, Hong Kong stocks continue to buy heavily, with weekly net inflows of 6.303 billion and 9.138 billion yuan respectively from November 28 to December 1 and December 4 to December 8, which is higher than the average weekly net inflow of 6 billion since 2017.
The valuation of major weighted stocks, relative to their profitability and growth, is also attractive globally.1) in financial stocks, the PB of banking, agriculture, China and China Construction has returned to 0.86,0.75,0.63,0.84 respectively, and the PEV of insurance Ping An Insurance, China Pacific Insurance, New China Life Insurance and China Taiping (calculated in terms of the EV value reported in 2017) has returned to 1.61,1.08,0.97 and 0.71 times respectively. 2) the stocks that contributed most to the rise of the Hang Seng Index in 2017 (except financial stocks), Tencent forecast PE48.2 times in 2017, Geely Automobile 21 times, AAC Technologies Holdings Inc. 28 times, compared with its high growth, the valuation is in a reasonable range.
3. Slow bull is the correct rhythm of the "profit-driven" bull market of Hong Kong stocks.
The rising pace of rising 30,000 points of the Hang Seng Index in the early stage is not conducive to the healthy development of the market. Take a break now.After adjustment, the gains of the two major indices of Hong Kong stocks this year are almost entirely profit-driven.. The Hang Seng Index is up 30.18% year-to-date. Bloomberg's forecast for the next four quarters of the Hang Seng Index is up 23% from the beginning of the year, and the corresponding forecast PE is only 5.8% higher; the Hang Seng China Enterprises Index is up 20.17%. Bloomberg's forecast for the next four quarters of the Hang Seng Index is up 18.43% from the start of the year, and the corresponding forecast PE is up only 1.47%.
Investment strategy: patiently lay out the core assets that benefit from "deleveraging, cost reduction and deficiency".
The main line in 2018 is still the core asset, and for the choice of core assets in 2018, we pay more attention to those industries that benefit from the "deleveraging, cost reduction and deficiency" policy of "three to one, one decline and one supplement".
First of all, we continue to be bullish on the leading financial stocks that have benefited from economic stabilization and "financial deleveraging", giving priority to insurance stocks and continuing to recommend high-quality banks.
Second, we should be optimistic about the core assets of advanced manufacturing industries (electronics, communications, new energy vehicles, military technology, etc.) and pharmaceuticals that benefit from the policy of "reducing costs and making up for deficiencies". Patiently take advantage of the global technology stock adjustment to increase holdings at a more cost-effective price.
Third, be optimistic about the areas related to the upgrading of consumption, including competitive enterprises in media entertainment (mobile games), Internet consumption, education and other industries.
Risk hint: if inflation rises higher than expected and the dollar rises faster than expected, the market will fluctuate sharply.
The north-south capital flow of the Shanghai-Shenzhen-Hong Kong Link
From December 4 to December 8, the weekly net inflow of southbound capital was 9.138 billion yuan. Hong Kong stocks in Shenzhen stock market had a net inflow of 1.633 billion yuan throughout the week, while Hong Kong stocks in Shanghai stock market had a net inflow of 7.505 billion yuan. Hong Kong stocks accounted for 8.09 per cent of all Hong Kong stock turnover. Since its opening, the Hong Kong Stock Exchange has a cumulative net inflow of 613.419 billion yuan.
The weekly net outflow of capital going northward is 5.225 billion yuan. Shenzhen shares had a net outflow of 121 million yuan throughout the week, while Shanghai shares had a net outflow of 5.104 billion yuan, with mainland shares accounting for 22.06 per cent of all A-share turnover. Since its opening, Lu Shitong has accumulated a net inflow of 336.969 billion yuan, of which Shanghai Stock Connect has a cumulative net inflow of 188.549 billion yuan and Shenzhen Stock Exchange has a cumulative net inflow of 148.42 billion yuan.
The direction of the allocation of funds going south
1. Changes in the flow of funds to the south
In terms of individual stocks, during the week from December 4 to December 8, the stocks with the largest net inflow of funds from the south were HSBC Holdings PLC and Tencent, while Geely Automobile had the largest net outflow.
This month, the sectors with large increases in Hong Kong stocks were banking, insurance and energy, which increased by 0.67%, 0.11% and 0.04% respectively.
2. A list of shares held by southbound funds
According to the data on Hong Kong stock holdings disclosed by the Hong Kong Stock Exchange, as of December 07, 2017, the total size of Hong Kong stock holdings reached HK $842.042 billion, and the market value of the top 20 stocks with the largest holdings reached HK $489.213 billion, accounting for 58.10% of the total market value of Hong Kong stock holdings. The top 10 are HSBC Holdings PLC, China Construction Bank Corporation, Tencent, Industrial and Commercial Bank of China, Sunac China, Geely Automobile, Ping An Insurance, New China Life Insurance, China Merchants Bank and Bank of China Ltd..
The direction of capital allocation when going northward
1. Changes in the flow of funds northward
In terms of individual stocks, the stocks with the largest net inflows of funds going northward in a week from December 4 to December 8 are Sanhua Intelligence Control and Hengrui Medicine, and the stock with the largest net outflow is Ping An Insurance.
2. go northward and have a list of capital holdings.
According to the data of land stock holdings, as of December 07, 2017, the total size of land shares reached 489.582 billion yuan, and the market value of the top 20 stocks with the largest holdings reached 303.708 billion yuan, accounting for 62.03% of the total market value of land shares. The top ten are Guizhou Moutai, Haikang Weishi, Midea, Ping An Insurance, Hengrui Medicine, Gree Electric Appliances, Changjiang Electric Power, Yili Co., Shanghai Airport and China Merchants Bank.
3. The distribution of capital holding industry northward.
Northward capital holdings are mainly distributed in the food and beverage, household appliances and electronics industries, accounting for 16.96%, 13.82% and 10.14% of the market value of Lukutong's shares, respectively.
(editor: Wang Mengyan)