Finance Spotlight｜What is the future trend?
By Christina Ngai, Senior Financial Expert
Last week, the People's Bank of China announced strong monetary policies, leading to sharp rebounds in China's A-shares and Hong Kong stock market (the Shanghai Composite Index rose 24% from Sept. 18 to Sept. 30, and the Hang Seng Index rose 26% during the same period). Can this trend be sustained?
The trend of the stock market largely depends on the valuation of the stock market and companies, the market liquidity, and the expectation and confidence in the future economy. This time, the financial support and policy adjustments have strongly supported the already low valuation of the Chinese stock market.
1) Monetary policy support: The policy announced by the central bank encourages a large amount of funds previously accumulated and invested in treasury bonds and cash-management funds to be transferred to the stock market. Such a policy increases the money multiples. In the past, a large amount of funds was retained in treasury/government bonds and cash-management funds, which had very limited use in promoting the real economy. However, after the adjusted policy, these funds can now be leveraged and used as collateral to borrow from the central bank (at as low as 2 % interest cost) to invest in the stock market. At the same time, the expectations given by the central bank are positive; that is, if the first tranche of RMB500 billion is borrowed and used up, more arrangements will be made. Therefore, the market has a greater incentive to continue investing in the stock market.
2) Fiscal policy support: In addition to the huge amount of financial support provided by the central government, fiscal stimulation plans have also begun to be introduced gradually. For example, RMB1 trillion treasury bonds are about to be issued. The funds after the issuance of these treasury bonds are expected to make fiscal contributions to different stimulus policies, which are used for subsidies. According to the financial subsidy policies of some countries in the past, a subsidy of $1 can generate an economic stimulus effect ranging from 3 to 5 times. It is conservatively estimated that this will bring new funds to the market to a new level.
3) Foreign capital is expected to enter the Chinese stock market from other stock markets to support: in the past few years, the Hong Kong stock and A-share markets have been negatively affected by the funding outflow and lacked confidence in economic growth, as well as the impact of the sharp interest rate hikes in the United States, a large amount of foreign capital has flowed out, which led to an underweight investment strategy for Chinese stock market, and that also led to the Chinese stock market remained at a very low valuation level. Such allocation and valuation are expected to be affected by this new policy, as well as the U.S. interest rate cut, Japan's interest rate hike, and the geopolitical tensions in the Middle East, all of which are very likely to push the foreign capital reverse its allocation and adjust the Chinese stock market to an overweight position. (For example, according to data from the State Administration of Foreign Exchange, foreign direct investment dropped sharply by US$14.8 billion in the second quarter of this year and US$11.8 billion in the third quarter of last year). Expect the fund to gradually withdraw from the Japanese stock market (yen Interest rate hikes will continue, leading to a large amount of capital outflows from the Japanese stock market) and flow into the low valuation of the Chinese stock market. As well as the U.S. dollar interest rate cut, it is expected that U.S. high-tech stocks, which have always been relatively high-valued, will have out-flow and switch to the Chinese stock market.
Therefore, with the above-mentioned multi-financial support, the starting point of a new bull market has been ignited. Of course, whether it can be sustained in the future depends on how policies are refined to support economic development. Therefore, investors in the early stages of a bull market can increase their positions step by step. Any market adjustment (as long as it is not a sudden change in policy) provides opportunities to increase investment position. Of course, if the housing prices rise sharply, suggest waiting and seeing the policy movement and considering whether the stock market and company valuations at that time. Therefore, investment needs to be cautious.
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