Up to now, the A-share market has gone through a full month of correction, with the Shanghai Composite Index falling by 4.4% and the Shenzhen Component Index falling nearly 5%. In terms of sectors, medical aesthetics, steel, media, and biomedical and other sectors recorded a decline of more than 7%, while only a few industries such as electronics, utilities, and communications had positive returns.

While the market is declining, trading volume is also becoming increasingly sluggish. In the past month, A-share daily turnover has basically been at the level of 700 to 850 billion yuan, far from the trillion-level turnover seen at the beginning of the year.

In addition, the A-share market's main trading style is also at a multi-year high, indicating a lack of profit-making effects in the market, and some individual markets will choose to follow the trend. For example, public utilities, especially the leading water and electricity companies, have hit historical highs almost on a daily basis.

So, is the A-share market's current downturn coming to an end?

01

In my opinion, the core logic behind this round of downtrends lies in the market's rejection of the optimistic expectations for economic recovery made earlier.

In May, the manufacturing PMI recorded 49.5%, significantly lower than expected, and the 2013-2019 average was 50.6%. It is worth noting that new export orders in the manufacturing sector have fallen sharply, but actual exports disclosed in May are still relatively strong.

This is actually a mismatch. From historical experience, unless there is a disturbance in public health events, PMI new export orders tend to lead exports by 3 months. This also suggests that China's exports in the third quarter are likely to weaken.

Looking at financial data again, M1 has a negative year-on-year growth rate of 4.2%, hitting a new historical low. In addition to the periodic impact factors caused by the correction of high-interest conversion behaviors, it also reflects to some extent that entity confidence still needs to be further repaired.

In addition, both corporate and household loans have performed weakly. Among them, long-term loans for residents (mortgages) in May were only RMB 51.4 billion, while the corresponding amounts in the same periods in 2021, 2022 and 2023 were RMB 460 billion, RMB 280 billion and RMB 160 billion, respectively. This was data that occurred after the announcement of the heavy news of the 517 real estate market, indicating that the effect of policies to boost the real estate market was not as optimistic as expected.

This can also be seen from the market performance. From the end of April to May 17, the real estate sector rose rapidly by nearly 30%, but after the policy was implemented, it quickly entered another decline mode, with a retreat of 16% from the high point and returning to the start point of the market. Looking at the black series in the commodity market, iron ore, rebar, glass, and soda ash related to the real estate all opened a brilliant downturn around May 23.

Finally, looking at the actual economic data, social retail sales of consumer goods in May increased by 3.7% year-on-year, higher than the previous value of 2.3% and better than market expectations. However, growth in industrial added value and fixed asset investment was lower than expected.

Among them, the real estate market is still in a downward channel. In the first five months, the growth rate of national real estate development investment recorded -10.1%, still showing a month-on-month decline. During the same period, the sales area of newly-built commercial housing was 366.42 million square meters, a year-on-year decrease of 20.3%. It should be noted that the sales area in the same period in 2021 was 663.83 million square meters, which has fallen by 45% in just three years.

As for prices, the price index for new residential buildings in 70 large and medium-sized cities recorded a greater decrease in both month-on-month and year-on-year terms in May than in the previous value, and the prices of second-hand houses also saw a decline. Reflected in the context of declining house prices, it is difficult for sales and investment to substantially improve.

From February to May 20 this year, the market rebounded significantly, mainly due to the expectation of better economic recovery. However, now that the economic recovery is not as expected, the market naturally needs to adjust downward.

However, with the A-share adjustment, there may not be much room for downward movement.

The Third Plenary Session of the 19th CPC Central Committee will be held in July this year, and the market may expect a wave of policy anticipation before that. More importantly, the annual economic target has been set, and if the economy continues to weaken, fiscal and monetary policies are expected to continue to intensify efforts to stabilize economic growth. In addition, policies in the real estate sector are also expected to continue to be implemented.

In fact, on June 7th, the State Council Executive Meeting emphasized that "we need to fully understand the new changes in the supply-demand relationship in the real estate market, focus on promoting the implementation of policies and measures that have been introduced, and continue to study and reserve new policies and measures to stabilize the market and reduce inventory."

02

At the time of the market's decline, the A-share stock king, Maotai's sharp drop, has made some value investors worried that their investment logic has changed. From May 8th to June 13th, the stock price of Kweichow Moutai fell from 1770 yuan to the current 1521 yuan, with a cumulative decline of 12%. During the same period, the CSI Liquor Index fell by 15%.

Moutai's sharp drop is due to two factors. First, the batch price continuously dropped due to the disorder in the secondary market, which made some investors think that there is insufficient demand for high-end liquor, which brings worries to the long-term performance growth. Second, the continuous decline of the market and the low market sentiment except for a few sectors such as public utilities, including baijiu.

However, for Moutai's big drop, although there are a lot of voices that short-term pullback pressure will continue, there are also many funds that judge that more drops are opportunities rather than risks.

First of all, Guizhou Moutai is the best enterprise in the domestic baijiu industry, and perhaps there is no other one. With rising volume and price, performance can still maintain double-digit growth in the next few years, and the certainty is very strong. The recent price decline has a large buffer space with the factory price of 1169 yuan and will not actually affect Moutai's performance growth.

Secondly, from the perspective of funds, both domestic and foreign funds are heavily invested in Moutai, expressing the most distinct attitude. As of the latest, Northbound funds hold 133.3 billion yuan of Moutai (6.88% of the holding ratio), accounting for 6.24% of the total market value of Northbound holdings. Recently, the holding ratio has a small decline, but it is much higher than the panic in October 2022 within the normal range.

At present, Moutai's PE has reached 24.5 times, slightly higher than the end of 2018. It should be noted that at that time, the stock market fell from the beginning of the year to the end of the year, and the market sentiment was extremely pessimistic. and Moutai had a single-digit growth in the third quarter of that year and also encountered a limit-down. But everyone knows the rest of the story.

Regarding Moutai's decline, renowned investor Duan Yongping posted that the market is a voting machine in the short term and a weighing machine in the long term, so the market is still the market, and Moutai is still Moutai. He also replied in the comments that if our electronics industry encounters difficult sales, the consequences are very serious. When Moutai encounters difficult sales, it just passively adds some vintage liquor (earn more in the future).

03

Looking ahead, A shares are likely to still focus on structured market, and it is best not to expect a trend of bull market in the overall market.

From the current rhythm, the allocation cycle>consumption>growth (new energy, photovoltaics, semiconductors, etc.)>financial real estate may be a relatively good investment roadmap.

In the midst of its continued success, some investors are betting that the company's seemingly unstoppable rise is about to come to an end."Cyclical stocks, don't get off easily this year" In the article, it elaborates that the overall commodity bottom may be seen in 2024, and there may be a big bull market trend in the next few years. There are three main logics: first, the global inventory cycle is expected to bottom out and rebound; second, the mainstream central banks in the world will enter the interest rate cut cycle this year; third, on the supply side of commodities, there are constant disturbances from geopolitical risks.

Currently, the stock market may only have priced in high dividends and price stability, and the potential price increase in the future has not been fully priced in. This may be the driving force for future price increases.

The valuation of the current large consumer sector is at a medium-to-low level since 2010, but the previous expectation of the big logic of consumption upgrading has undergone profound changes.

Except for a few fields such as baijiu and beer, many subdivided market segments have seen a ceiling, such as pickled vegetables, pickles, and soy sauce, etc. And these racetracks have experienced a trend of lowering consumption and it is difficult to raise prices. In this case, it will impact the profitability of these companies, and the valuation will inevitably decline sharply.

Currently, there are two main investment directions in the consumer sector. On the one hand, companies that match the consumption downgrade and achieve performance growth beyond expectations. On the other hand, companies in some fields have strong dividend properties.

In the growth sector, new energy and photovoltaic tracks have experienced a sharp decline in prices due to overcapacity, which has led to a significant deterioration in the profitability of upstream and downstream, and performance has also shown obvious Waterloo. In the future, this will achieve production capacity clearance by falling below the cost, but the time will be longer. However, even if the market supply and demand reaches a relatively balanced state in the next few years, but if there is no driving force to drive prices up, then the overall investment opportunities may not be great.

In addition, the semiconductor sector is worth looking forward to. Because the industry cycle entered a downward cycle after the peak in 2021, and the price adjustment exceeded expectations and had already seen the bottom of this cycle at the end of 2023. According to past experience, once it goes up, the duration will last for two years. In this field, the focus can be on storage leaders.

Financial and real estate are ranked last. Although the real estate sector has policy hedging, the fundamentals are still in a downward cycle, and the policy will only slow down the slope of decline, and the overall fundamentals do not support a big reversal.

The banking industry's fundamentals are actually continuing to decline. On the one hand, due to the decline in the growth rate of credit, the big logic of quantity has changed somewhat. On the other hand, net interest margins have fallen to historic lows with continued rate cuts, and there is still room for further declines. But fortunately, banks have high dividend and high stock dividend characteristics, and the stock price has not fallen much, but there is insufficient momentum for sustained growth, because the fundamentals do not support it overall.

In summary, this year's cyclical stocks can first pay attention to it, and the main investment opportunities may converge here.