Why hasn't the “group” of core assets been dissolved yet?

First, in recent years, we have followed the analytical framework for the differentiation of old and new economic structures to track and analyze China's economic restructuring and its impact on capital market opportunities and risks.

Since this year, whether in A-shares or Hong Kong stocks, the main investment line in the market is to buy new economy stocks representing the trend of consumption upgrading and industrial upgrading in China at more attractive valuation levels against the backdrop of a sharp pullback in both old and new economic sectors in 2018. The so-called “core asset clustering” since this year is just a reflection of investors re-entering and continuing to hold this group of leading companies in the new economy in categories such as high-quality consumption in the context of economic restructuring, after individual stocks in the new and old economies generally fell last year.

It should be said that the centralized ownership of this group of companies is ostensibly a “group”; in fact, it is in line with the “transformation of the old and new” of the Chinese economic structure and represents the trend of new economic sectors or companies in the consumption, medicine, technology, etc., continuing to outperform the old economy and the overall market in the medium to long term.

Second, it is clearly different from previous institutional “groupings”. The gains from the current increase in core asset “groupings” are not mainly due to valuation expansion, but profit growth.

We have broken down the cumulative increase of the top 100 foreign-held individual stocks since 2016 (about 105%), of which about 70% of the earnings came from profit growth. We also pointed out in the “Atypical “Grouping” report that the “Grouped” stocks this time, looking at the 5-year cycle, 10-year cycle, and 15-year cycle, are also the best performing batch of stocks in A-share history. However, most of the profits obtained from the group rise in institutional groups the previous few times came from valuation expansion; when the groups were disbanded, individual stocks also often experienced a significant decline and valuation compression, so long-term performance was usually not outstanding.

Third, so far, white horse and blue-chip consumption have led individual stocks since the beginning of the year. Although valuations have expanded and the valuations of some individual stocks seem high, the overall valuation has not been greatly overvalued. Compared to comparable international companies, the overall valuation is basically similar, but the growth is superior.

The price-earnings ratio of leading companies in the A-share industry has a valuation premium of about 16% compared to internationally comparable companies, but it is still below the historical average; while leading A-share industry companies in the 2020E market unanimously expect a growth rate of about 23% vs. about 15% for internationally comparable companies. At the same time, judging from the interim results and subsequent tracking of business conditions, the fundamentals of most individual stocks in this batch of leading white horse blue chip stocks are still relatively stable, and there are no obvious signs of deterioration in fundamentals.

Fourthly, from the perspective of incremental capital, the Shanghai-Shenzhen-Hong Kong link to the north had a large inflow of capital in the first quarter (net inflow of 125.4 billion yuan) and a large outflow in the second quarter (net outflow of 29.1 billion yuan), and continued to increase in the third quarter (net inflow of 68.4 billion yuan). Especially after August, it also supported the performance of this group of white horse blue chip stocks, which are relatively favored by foreign investors, to a certain extent.

With the opening up of A-shares and the continuous inclusion of international indices, and the continuing increase in the institutionalization ratio of the domestic market, most of the relatively stable incremental capital in the A-share market comes from foreign investors and domestic institutions. This also provides financial support for this type of white horse blue chip stock with relatively high quality, large market capitalization, and obvious competitive advantages.

Looking ahead, we think:

1) At present, China's policy has begun to gain momentum for steady growth, but the policy is too strong and the pace is slow, and growth is still under pressure. The overall market trend in the fourth quarter may still be lackluster.

2) Leading high-quality new economy companies representing the trend of consumption upgrading and industrial upgrading in China are promising directions in the medium to long term.Although the current valuation of this group of high-quality targets is rising, it is still not significantly overestimated compared to comparable international companies, and overall performance is still stable. In the fourth quarter, there is also potential capital inflow support from the international index's increase in the A-share inclusion ratio (we statically estimate that MSCI's increase in the A-share inclusion ratio at the end of November will bring about 300 billion yuan in active and passive capital inflows), so it is recommended that they be absorbed on dips.

3) Opportunities in the technology sector are still worth paying attention to.Although some individual stocks in the A-share sector have accumulated large gains recently, and short-term fluctuations may increase, the 5G cycle has just begun to deepen, and some Chinese technology companies will continue to adjust their industrial chains. China will play a more leading and central role in the technology field in the 5G era than in the 3G/4G era. The opportunities in the A-share and Hong Kong stock technology sectors are still very certain and still deserve attention.