On March 4, 2021, the A-share market opened low and fell sharply. By the end of the day, the Shanghai Composite Index was down 2.1%, the Shenzhen Composite Index was down 3.5%, the gem Index was down 4.9%, and Vandequan A was down 2.5%. In terms of industry, among the 28 emergency industries, only four industries such as iron and steel, public utilities, extractive and architectural decoration rose slightly, while the rest closed down, with electrical equipment, food and beverage and leisure services at the bottom of the list. In terms of trading volume, the turnover between the two cities totaled 971.8 billion yuan. Compared with the previous trading day, there was a net outflow of 7.37 billion yuan from northward funds throughout the day.

The sharp rise in commodity prices and the rise in US debt interest rates triggered a sharp fall in US stocks to transmit A-share markets.

We believe that the recent rise in commodity prices and the rise in US bond interest rates caused by rising inflation expectations are the direct cause of the sharp fall in the market.

Affected by the COVID-19 epidemic last year, the global economy fell sharply, and commodity prices also reached a low in the first half of last year. However, in the second half of last year, as the epidemic was gradually brought under control, the global economy began to recover and commodity prices rose sharply, with commodity prices represented by the CRB metals index within walking distance of their all-time highs after the 2008 financial crisis.

Inflation expectations in the market began to rise at the same time as commodity prices rose, which directly led to the rise in interest rates on 10-year Treasurys in major economies, including US Treasuries, which recently exceeded 1.5%. The rise in interest rates has led to a pullback in stocks in major global markets such as US stocks, which in turn has disrupted the A-share market.

The overall market valuation is highly differentiated, and valuation differentiation accelerates convergence.

Highly differentiated valuation is the biggest feature of the current A-share market. The overall valuation level of the A-share market is not high, basically at the historical average level or even below the historical average level, but the valuations of some varieties are extremely high. This led to the valuation differentiation of A-share market once reached the historical extreme level. As commodity prices begin to rise sharply and interest rates tend to rise significantly, the valuation differentiation of the A-share market has begun a process of accelerated convergence since the beginning of this year, which is the main reason for the recent sharp adjustment in the market.

From the relative trend of Shenwan low P / E index and high P / E index, there has been an obvious shift in market style since the Spring Festival, and the low P / E index continues to outperform the high P / E index.

From historical experience, because undervalued stocks are mainly concentrated in industries with high macroeconomic relevance, such as finance, real estate, construction, cycles, etc., low valuation strategies perform significantly better in profit-driven bull markets, such as 2003, 2006, 2017, etc., while low valuation strategies perform poorly in valuation-driven bull markets, such as 2000, 2015, 2019, etc.

The fundamental inflection point is more important than the liquidity inflection point in economic recovery.

Historical experience shows that liquidity tightening tends to increase market volatility, but the real turning point in the market from bull to bear basically occurs after the inflection point of fundamentals.

Looking back at the three economic recoveries in 2007-2008, 2009-2010 and 2016-2017, liquidity tightening is generally inevitable, especially the first liquidity tightening will make the market fluctuate a lot. However, on the whole, although interest rates are on the rise, the upward trend of the market market is very significant in the process of economic recovery, and the final turning point in the market trend is often due to the inflection point of fundamentals.

Looking ahead, we believe that the subsequent fundamental inflection point is more important than the liquidity inflection point, and valuation differentiation will continue to converge in the context of sustained economic recovery.We believe that the current rebound in global industrial year-on-year growth has only just begun, and we expect this round of PPI growth to peak in the third quarter of 2021, and PPI is the most closely related indicator of corporate earnings, so we judge that the fundamental inflection point is not likely to occur until at least the third quarter.

Under the background of the overall valuation of the market is still not too high, the rapid economic recovery and the improvement of corporate profits, we think we can be relatively happy, the inflection point of the market from "cow" to "bear" has not yet appeared, and the current adjustment is a short-term phase. the convergence of valuation differentiation will continue, and undervalued pro-cyclical varieties are expected to be more dominant.

Risk Tips:Macro-economy is less than expected, overseas markets fluctuate greatly, and historical experience does not represent the future.