Analysis of A-shares Market Rebound Direction

Since the adjustment of financial policies, the Chinese stock market has experienced a significant rise. The policy measures from the financial regulatory authorities and the central leadership meetings have unexpectedly boosted market sentiment, leading to a strong rebound in both the A-share and Hong Kong stock markets, which have performed remarkably in the global market. However, after the holiday, the market has retreated under generally optimistic expectations. Is this round of market activity a temporary phenomenon, or does it indicate that the market has already reached its bottom? This article will analyze from three perspectives: the domestic economic fundamentals, policies, and the overall valuation level of the stock market.

1. Economic Fundamentals

Overall, the domestic fundamentals remain relatively weak. Although there are some signs of marginal improvement, no clear turning point has been observed yet. During the holiday period, consumption activity has seen an increase both year-on-year and month-on-month, but this improvement has not yet been fully reflected in the main economic indicators. It is expected that in the coming quarters, China's economic growth may show a mild recovery trend supported by policy.

In September, the Manufacturing Purchasing Managers' Index (PMI) was 49.8%, an increase of 0.7 percentage points from the previous month, indicating a slight rebound in the manufacturing sector; the Non-Manufacturing Business Activity Index was 50.0%, a slight decrease of 0.3 percentage points from the previous month, showing a slight decline in the non-manufacturing sector.

Affected by high base factors from the same period last year, the profits of industrial enterprises above designated size in August decreased by 17.8% year-on-year.

In August 2023, the national consumer price index (CPI) rose by 0.6% year-on-year. Among them, food prices increased by 2.8%, while non-food prices rose by 0.2%; consumer goods prices increased by 0.7%, and service prices rose by 0.5%. From January to August, the average CPI increased by 0.2% compared to the same period last year.

In August, the total retail sales of consumer goods reached 38,726 billion yuan, a year-on-year increase of 2.1%.

From the perspective of financial leading indicators, the overall financing demand in society is relatively insufficient. Since the second quarter, the year-on-year growth rates of M1 and M2 have slowed down, and the gap between the two has risen to a historical high, reflecting insufficient demand and a certain degree of idling in the financial system. The transmission effect of monetary policy is hindered, and the short-term economic fundamentals still need improvement.

2. Policy Aspect

Referring to the characteristics of the phased bottoms in the A-share market over the past 20 years, policy signals are usually significant and need to exceed the investors' expectations at that time. Historically, this has been an important condition for the A-shares to stabilize and rebound. Recently, policies have exceeded expectations, and the policy signals have already emerged.

On September 24, the central bank announced the establishment of new monetary policy tools to support the stable development of the stock market, including swap facilities for securities, funds, insurance companies, and special re-loans for increasing stock repurchases.

On September 26, relevant departments jointly issued the "Guiding Opinions on Promoting Medium and Long-term Funds to Enter the Market," which involves cultivating the capital market ecology for long-term investment of long-term funds, developing equity public funds and supporting the stable development of private equity funds, and improving supporting policies for medium and long-term funds to enter the market.

The root cause of China's current growth problems is the ongoing credit contraction and deleveraging in the private sector, while the credit expansion in the government sector has failed to effectively offset this. The main reasons for this situation are low expectations for investment returns and relatively high financing costs. The core of this round of policy changes is to lower financing costs and boost expectations for investment returns, which are targeted measures. However, to achieve sustainable re-inflation in the medium to long term, subsequent structural fiscal stimulus and actual policy implementation will be needed; otherwise, the recovery of the market may be difficult to sustain.

On October 8, the National Development and Reform Commission held a press conference to introduce the implementation of a package of incremental policies aimed at promoting economic development. The market had high expectations for this press conference, but there were no large-scale counter-cyclical fiscal adjustment policies, which was one of the main reasons for the market's rebound after the holiday.

3. Valuation Level

From the perspective of the duration of the decline, the degree of decline, and valuation levels, this round of market conditions has already shown bottom characteristics.

As of October 9, the valuation level of A-shares has been restored to around the median. Historically, compared to previous periods, the rebound at the end of September was relatively high, reaching the PE multiples seen at the beginning of 2023 when expectations for economic reopening were strong. In a horizontal comparison with major global markets, China's market still has the lowest valuation relative to emerging markets in the Asia-Pacific region, close to the level of South Korea.

Conclusion

The key to the market rebound lies in the confirmation of mid-term fundamental signals. Currently, the fundamental data has not shown significant improvement, and the recent short-term rise mainly relies on expectations and capital-driven factors. A highly volatile market often accompanies overreactions, and a pullback after a historic surge is both a technical requirement and a matter of course. After the monetary policy has been proactively intensified, whether the subsequent fiscal policy can keep up is the main factor affecting the upward rhythm and space of the stock market in the near term.

From a long-term perspective, the recent decline may be an adjustment rather than the end of a trend. In the medium to long term, the bottom of the A-shares may have already appeared, but the main upward trend has yet to come. Investors should remain patient and focus on the implementation of policies and substantial improvements in the economic fundamentals.