Source: Broker China
Author: Shi Qian

On the morning of January 23, the A-share market fell sharply, but then there was a counterattack, and major indices quickly turned red.$Chinext Price Index (399006.SZ)$The increase extended to more than 1%. The Hong Kong stock market is also rising rapidly.$Hang Seng Index (800000.HK)$The increase was extended to 3%,$Hang Seng TECH Index (800700.HK)$Up more than 5%. What are the benefits and incentives?

According to Bloomberg news this morning, China is currently considering adopting a package of measures to stabilize the stock market. The amount involved is quite large. However, the above information has not been officially confirmed. Last night, the executive meeting of the State Council stated that “strong” measures should be taken to stabilize the capital market.

On the Hong Kong side, the Chief Executive of the Hong Kong Special Administrative Region, Li Jiachao, said that they are closely monitoring the stock market fluctuations. The regulators are watching the changes very carefully. For the time being, they believe that the market is operating in an orderly manner, and there are no unusual phenomena. So, can the market be stabilized this time around?

The Great Counterattack

Just now, the stock market's big counterattack has arrived! After a sharp drop in early trading, after 10 o'clock, capital to go long suddenly entered the market.$SSE Composite Index (000001.SH)$It turned red. At one point, it fell by more than 1% in early trading; the GEM index surged 2%.$Sungrow Power Supply (300274.SZ)$It surged nearly 8%,$Ginlong Technologies (300763.SZ)$,$Risen Energy (300118.SZ)$,$Wuhan DR Laser Technology Corp., (300776.SZ)$,$Suzhou Maxwell Technologies (300751.SZ)$Wait until the new energy weighted stocks explode across the board.

At the same time, the Hong Kong stock market also exploded collectively. In the morning, the Hang Seng Index opened 0.52% higher. Technology stocks led the way, and the Hang Seng Technology Index rose 0.88%.$TENCENT (00700.HK)$,$BABA-SW (09988.HK)$Up nearly 2%. However, after 10 o'clock, the Hang Seng Index launched a major counterattack. The increase rapidly expanded to 3%, and the Hang Seng Technology Index rose more than 5%.

It is worth noting that the capital from North China suddenly changed its normal state and went long. The net purchase in the morning was over 2 billion yuan. Meanwhile, the A50 index is also rising in a straight line. Even the RMB was driven to appreciate rapidly.

So, what are the benefits and incentives? News from Bloomberg this morning indicates that China is considering providing offshore funding for stabilization funds. These policies may be introduced in the near future, and the amount involved may be quite large.

In the last two days, the A-share market has continued to decline.$CSI 300 Index (399300.SZ)$It fell to a five-year low this week.$CSI 1000 Index (399852.SZ)$It also hit a new low yesterday. Against this background, the executive meeting of the State Council held yesterday pointed out that it is necessary to further improve and improve the basic system of the capital market, pay more attention to the dynamic balance of investment and financing, vigorously improve the quality and investment value of listed companies, increase the entry of medium- and long-term capital into the market, and enhance the internal stability of the market. It is necessary to strengthen capital market supervision, have “zero tolerance” for illegal acts, and create a standardized and transparent market environment. Stronger and more effective measures should be taken to stabilize the market and stabilize confidence. It is necessary to enhance the consistency of macroeconomic policy orientation, strengthen innovation and coordination of policy instruments, consolidate and enhance the positive trend of economic recovery, and promote the steady and healthy development of the capital market.

In terms of valuation, data from Debon Securities shows that as of January 20, 2024, the overall PE (TTM) of A-shares was 15.51 times, 30% since 2012; the GEM index PE (TTM) valuation was 25.28 times, 0% since 2012; from the perspective of consistent expectations, the overall PE (2023E) for all A was 14.66 times, and the overall PE (2024E) was 12.39 times, respectively, since 2012. Currently, the valuation level of A-shares is at an all-time low, while the valuation level of Hong Kong stocks is even lower; it is unreasonable to fall to the current level.

Can the market stabilize?

The valuation is so low, why does no one dare to buy it?

Cinda Securities said that taking the previous market as an example, at the end of 2012, the PE (TTM) of the Shanghai Composite Index was lower than the 2008 low, but since investment in the manufacturing industry continued to decline, the steady growth rate was less intense than at the end of 2008, so investors were reluctant to make big purchases. Because most of the previous bull markets were driven by a sharp economic recovery, the 2013-2015 bull market hardly relied on a recovery in investment, and investment in manufacturing continued to decline during this period. Therefore, facing the bottom of the valuation at the end of 2012 or mid-2014, if you simply focus on economic data, it is difficult to imagine the height of the future bull market.

Every time there is a bear market, there are many big concerns. Some are wrong, and the bear market will end when mistakes are gradually falsified (such as the 2008 bear market). Some of the big fears are right, but the bear market will still end because stock market valuations will absorb long-term concerns ahead of time. After that, even if long-term concerns still exist, the stock market may end the bear market under a completely different profiteering logic.

GF Securities conducted research on the stock market in the context of debt cycles. They pointed out that under the debt cycle, the formation of a large bottom in overseas stock markets depends on a decline in the trend of enterprises/residents' leverage ratios. ① Thailand 1994-2002: The economic bubble reached its peak in 1997. The stock market experienced a major reversal in the third quarter of 2002 after sufficient deleveraging, and the GDP growth rate only returned to its pre-crisis peak around 2004. ② US financial crisis 2007-2009: From the fourth quarter of 2007 to the third quarter of 2008, resident/corporate leverage ratio peaked and fell one after another. The stock market bottomed out in the first quarter of 2009 and began a major reversal.

Furthermore, the degree of debt risk absorption determines whether the bottom of the market is solid or not. Large-scale reversals require significant debt risk clearance: ① Japan's early-mid-1990s: early debt risk was slowly cleared, corporate leverage ratios did not peak or fall until the fourth quarter of 1993, and the stock market bottoms of 1990.9, 1992.7, and 1995.6 were all broken through successively; ② Germany's 1999-2009: the first stage of deleveraging from 2000 to 2003 was insufficient; the second stage debt risk from 2008 to 2009 was significantly digested, 2009 1 The German stock market ushered in a major inflection point during the quarter.

Editor/jayden