Chinese individual investors are driving the stock market rebound, with low leverage and high household savings in A shares indicating the huge potential for household asset allocation to shift towards the stock market.

On Thursday, October 3, Morgan Stanley's strategy analyst Chiyao Huang and his team stated that if market sentiment remains high, nearly 6 trillion yuan of household assets may enter the stock market. On Wednesday, JPMorgan Securities analyst Katherine Lei and her team stated that the stock market rebound has just begun. Both teams believe that individual investors are the main force driving the rebound of A shares this time. Currently, the leverage ratio of A shares is low, household savings have increased, and assets are under-allocated in the stock market. If household assets further flow into the stock market, it will continue to drive the rebound of the A-share market.

Morgan Stanley also pointed out that brokerage stocks may be overvalued in this round of rebound, while JPMorgan stated that there is a 37% upside potential in brokerage stocks' EPS.

Since the press conference held by the People's Bank of China on September 24, the MSCI China and CSI 300 indices have risen by 21% and 25% respectively. The trading volume on September 30 reached a record high of 2.6 trillion yuan, with trading speed soaring to 751%.

Individual investors, not leverage, are driving this round of rebound.

Both Morgan Stanley and JPMorgan believe that individual investors have driven this rebound, similar to the situation during the last bull market for individual investors in 2015. JPMorgan additionally points out that the rebound in offshore markets is mainly driven by institutional investors, but domestic individual investors are the key driving force for domestic performance.

Firstly, in 2015, the average trading speed was 495%, with peaks exceeding 700%; whereas in this rebound, the average trading speed for A-shares over the past week has been 465%.

Secondly, in the bull market of 2015, individual investors accounted for as much as 90% of the trading volume; while in the current stock market rebound, individual investors play an important role, accounting for about 60% of the trading volume.

It is worth noting that, unlike the capital inflows driven mainly by individual investors and leverage in 2015, this stock market rebound is not driven by leverage.

JPMorgan pointed out that the leverage ratio of the A-share market has decreased from the peak of about 8% in 2015 to around 2.0% by the end of September.

JPMorgan stated that margin financing activities lag behind the continuously increasing trading participation. As of September 27, the balance of margin loans was 1.38 trillion yuan, almost unchanged from the beginning of the month. Therefore, due to the market rebound, the proportion of margin financing to the market cap decreased from about 2% before the rebound to 1.79%.

This indicates that the current stock market rebound and increased trading activity are not driven by leverage because the overall investors' risk appetite has not increased to the level that requires more leverage.

On the other hand, new investors usually do not use leverage much, and they may be the main contributors to the fund inflows this time. Data shows that the number of new account openings in the past week has increased by 5-6 times compared to previous weeks.

In addition, during the rebound, funds flowed out of brokerage ETFs, with major brokerage ETFs tracked by JPMorgan experiencing a net outflow of about 1.9 billion units in the past week. This may once again indicate that the buying of brokerage stocks is primarily driven by individual investors, as they tend to prefer direct stock purchases over ETF investments.

Individual investors have sufficient power to continue to drive the stock market's rebound.

JPMorgan believes that Chinese individual investors have sufficient power to continue to drive the stock market rebound. JPMorgan also stated that the rebound of the A-share market has just begun.

JPMorgan pointed out that in 2022, Chinese household financial assets increased by 14.8 trillion RMB, and in 2023, it increased by 21.3 trillion RMB, with bank deposits growing by 17-18 trillion RMB annually. In terms of household asset allocation, the proportion of deposits increased from 48% in 2021 to 55% in the first half of 2024.

This indicates that there is an insufficient allocation of household assets in stock investments, due to poor performance of stocks and mutual funds.

Recently, the drastic changes in the sentiment of the A-share market and the rapid inflow of capital may be driving household funds to quickly return to the stock market. However, compared to the bull market in 2015, the speed of this capital inflow may be slower, as there was greater leverage at that time, often leading to more concentrated inflows of funds.

JPMorgan also pointed out that if market sentiment continues to be high, there could potentially be 6 trillion yuan of household assets entering the stock market and possibly bringing about 2-3 trillion yuan of reinvestment. The calculation method is as follows:

As of the first half of 2024, direct stock investments accounted for approximately 4.8% of household financial assets. During the bull markets in 2020 and 2021, this ratio averaged 7.1%. With household financial assets amounting to 264.7 trillion yuan in the first half of 2024, the potential funds flowing into the stock market are estimated to be around 5.9 trillion yuan based on a 2.2% difference.

Assuming a 25% market increase driving stock appreciation, households may potentially reinvest assets into the stock market, with an estimated 2.6 trillion yuan of potential funds.

JPMorgan similarly believes that the funding pool of individual investors is quite substantial.

As of August 2024, retail demand deposits amounted to 39 trillion yuan, about twice the 20 trillion yuan of direct stock investments. The proportion of private equity investments in household financial assets is only 6%.

Furthermore, from 2021 to the first half of 2024, the average annual growth rate of retail deposits was around 14%, significantly higher than the 11.6% during the period from 2010 to 2020. Assuming a normal growth rate of 11.6% for retail deposits from 2021 to August 2024, we expect the excess retail deposit balance to reach 8 trillion yuan by the end of August 2024.

Brokerage stocks may be overvalued in this round of rebound.

Morgan Stanley pointed out that individual investors' trading often leads to excessive reactions. The price-to-book ratio (P/B) of many H-share brokerage stocks is 10-20% higher than the levels of 2020-2021, but individual investment may still drive them further up. However, due to changes in business structure and relatively small scale of fund inflows, Morgan Stanley believes that brokerage stocks are unlikely to reach the valuation of more than twice the price-to-book ratio in 2015.

Morgan Stanley stated that on Wednesday, October 3, after the rebound of H-share brokerage stocks, investors may consider the daily average trading volume (ADT) priced at around 1.4 trillion yuan as the benchmark. If the market sentiment is high enough, Morgan Stanley even believes that individual investors may also regard 2 trillion yuan as the benchmark.

When the daily average trading volume cools down, stocks usually experience sharp pullbacks - Morgan Stanley stated that it is difficult to predict how long high emotions and daily average trading volumes can be sustained, and at what level individual investors can push up the valuation of brokerage stocks.

JPMorgan believes that China's announced monetary support measures and potential fiscal easing are positive for fund flows and macro outlook. There is a 37% upside potential for the earnings per share of brokerage stocks. Among H-share stocks, the overall PB discount of Chinese financial stocks compared to the peak in 2020 and 2021 is 39%, compared to 65% discount from the peak in 2015.

Editor/ping