Source: Quan Shang China Author: Sun Xiangfeng

Zhang Yidong, global chief strategy analyst of Industrial Securities, Zhang Qiyao, chief A-share strategy analyst, and Duan Chao, chief macro analyst of Industrial Securities macro team, shared their latest views on domestic and foreign capital markets, and domestic macroeconomics, etc.

"We are bullish on the Hong Kong stock market in the second half of the year," said Zhang Yidong. He believes that the essence of this round of Hong Kong stock market is the core asset market of the new era, and is expected to last for several years. The key to the market lies in the sustained "Davis double-click" of core assets.

For the A-share market, Zhang Qiyao said that he is optimistic about "three high assets", which are assets with high stock dividend color, certain growth and high ROE. These assets are defined as "15+3" assets, which maintain about 15% performance growth rate and about 3% stock dividend rate.

From the perspective of macroeconomics, Duan Chao believes that the systematic risk of real estate has declined. From overseas experience, the stabilization of macroeconomics is earlier than the recovery of real estate. Overall, the driving mode of China's economic growth continues to evolve, systemic risk is under control and economic restructuring is underway. We are waiting for the confidence rebuilding after the economic restructuring.

Give core assets valuation premium that focuses on shareholder returns.

Zhang Yidong said in his speech that the logic of this round of market and 2016-2020 is fairly similar, both are core asset logic. But the difference is that future core assets should pay more attention to shareholder returns.

"We should advocate a culture of equity that emphasizes shareholder returns." Zhang Yidong said that from the perspective of overseas markets, the core of mature stock culture is "dividend + buyback", especially after the subprime mortgage crisis in 2008, the United States and Europe were stuck in a low-interest, low-growth and low-inflation "three lows pattern" for a long time, but the stock market continued to rise, and the best companies continued to rise with the constituent indexes. Behind them was the continuous dividend and buyback of the best companies. This stock culture has promoted shareholder returns and become a virtuous cycle.

Taking Apple as an example, over the past few years, Apple's dividend plus buyback has been able to maintain a level of 6% to 8% for a long time, reaching as high as more than 10% at its peak and 11.8% in 2018.

"In the next stage, whether it is A shares or Hong Kong stocks, we should give valuation premium to these core assets that focus on shareholder returns, thus forming a virtuous cycle." Zhang Yidong said.

This view seems to be reflected in the investment logic shared by Industrial Securities. For A shares, Zhang Qiyao recommends "15+3" assets, which maintain about 15% growth in performance and about 3% stock dividend rate.

According to Zhang Qiyao, the best-performing assets in the global market in the past few years are concentrated on three main themes: high prosperity, high ROE, and high stock dividends.

"If 15+3 is possessed at the same time, it is equivalent to three main lines, with a certain dividend rate, a certain growth rate and a high ROE level." Zhang Qiyao said.

Zhang Qiyao explained his core logic. From the perspective of growth stocks, companies whose performance growth rate can reach three times the nominal GDP growth rate each year account for only 10% to 20% of A shares. Achieving 15% performance growth rate is already the best. In the past, investment in growth stocks focused more on elasticity and odds, space and upper limit, but in the era of high-winning-rate investment, if there is only space and odds, but no short-term performance guarantee, stability, and dividend, there is no valuation, and may even be ST. Therefore, investment in growth stocks now needs to reduce its growth rate and raise its requirements for stability and certainty.

At the same time, some changes are needed in the perspective of dividend investment. Now more and more individual stocks are dividend-paying in A shares, and the scarcity of high-dividend stocks has decreased. It is also necessary to consider the sustainability of dividends and it is better to have a certain stock dividend rate and a certain growth rate.

"From this perspective, we ultimately gave the screening criteria of '15+3', which is equivalent to an enhanced version of the large-cap leader style and a strengthened version of the CSI 300, which can be defined as an alpha in the high-win-rate era." Zhang Qiyao said.

Regarding specific markets, Zhang Yidong said in his speech that he is optimistic about the Hong Kong stock market in the second half of the year. Starting from August, with the improvement of core asset profitability in various fields and the upward revision of performance guidance, coupled with the manifestation of China's macro policy effects, the weakening of US economic momentum and the inflow of foreign capital, the "Davis double-click" of core assets will be triggered.

However, Zhang Yidong also emphasized that although he is optimistic about Hong Kong stocks, investors still need to pay attention to strategies, and assets representing high win rate assets, core assets and high dividend assets are the way to win in Hong Kong stocks. In terms of product structure, the operating income of 10-30 billion yuan products is 401/1288/60 million yuan respectively.

Specifically, there are four revaluation directions of Hong Kong stock's core assets that are worth noting: the first is to recommend Internet leaders, especially Internet leaders with a relatively high buyback rate; second, the beneficiaries of high cost-effective consumption and technological breakthroughs, including new winners from industries such as selected consumption, services, advanced manufacturing, and pharmaceuticals; Third, the outstanding players who go out to the sea, including excellent winners in the fields of out-of-sea areas such as power tools, electronic homes, and clean energy industry chains, as well as some heavy chemical industries in China, and even winners such as construction machinery; Fourth, the outstanding players in the resource and energy sectors with certain financial attributes.

China's economic restructuring is on the right track.

Regarding the macro economy, Duan Chao said in his speech that the driving mode of China's economic growth continues to shift, systemic risks have been partially controlled, economic restructuring is underway, and confidence will be rebuilt after economic restructuring.

Duan Chao believes that whether China's downward economic risk can be stabilized depends mainly on real estate. From the current perspective, the systemic risk of real estate is decreasing. From the perspective of overseas experience, stabilizing the macro economy usually comes before stabilizing real estate, which determines that the lower limit of the economy is controllable.

Duan Chao stated that the proportion of residential investment in GDP in 2020 was 11.1%, and this proportion had dropped to 5.9% by 2023. Judging from the first quarter of this year, this ratio may further return to around 5%, already lower than the average level of Europe over the past ten years, higher than that of the United States and Japan. This means that the proportion of China's real estate investment in GDP is gradually approaching the center of overseas experience, and the situation of excessive dependence on real estate has been effectively improved.

From the perspective of new construction, comparing the experiences of various economies, although the time dimension of the impact of real estate on each economy may be different, the degree of decline in investment-part, is relatively close, whether it is Japan, which took nearly 20 years to find the bottom of real estate, or the United States, which took four years to create a pit. The decline in new construction, that is, the investment part, is generally between 70% and 80% of the peak period.

The decline in new construction in China last year was 57%, and if the first quarter of this year is considered, the decline in new construction is close to 70%, which is closer to the bottom of overseas experience. In this sense, the bottom of China's real estate investment is not too far away.

"Whether in the United States or Japan, the economic growth rate often stabilizes before the fundamentals of real estate. The bottom of real estate seems not far away. The stabilization of economic growth may be faster than that of real estate, which also means that in the period of China's economic restructuring, the risk of real estate has been partially controlled, which also lays a good foundation for the transformation of the entire economy." Duan Chao said.

Regarding how to stabilize the confidence of residents and enterprises, repair supply and demand to stabilize prices, and bring nominal GDP growth. Duan Chao believes that from the current supply and demand of China's economy, demand should stabilize at a low level, the concentration of listed companies is increasing, and the growth rate of construction in progress is gradually slowing down. The CPI and PPI in 2024 will moderately rebound in the second half of the year, which will drive the moderate recovery of nominal GDP, and this will also help restore the confidence of enterprises and residents during the entire process of economic restructuring.

Regarding foreign economics, looking ahead, according to IMF's predictions, from 2023 to 2029, the proportion of imports of ASEAN, CIS, Middle Eastern and other economies in the world is expected to grow rapidly by nearly 1.5 percentage points, and emerging markets have already provided nearly half of the demand for goods, and the potential of emerging economies is even greater.

"From these factors, China's diplomatic and external demand is now on a new path of the external circulation of surrounding rural areas. In the past, our framework focused more on the demand of developed economies such as the United States and Europe, but looking ahead, the potential space of emerging markets is more obvious for us to drive. We believe that this is a very important breakthrough factor for China's economic restructuring." Duan Chao said.

Editor/Lambor