Haitong Securities Jiang Chao: Now is the historic opportunity to invest in China
Source: Jiangchao Hong outlook Bond Research (ID: jiangchao8848) Author: Jiang Chaodeng shift from supply to stimulate demand reform, is the core reason we are optimistic about the future development of China’s capital market, we firmly believe that investment in China is now a historic opportunity.
01 Since the 19-year A-shares dominated the market in 2019, the Chinese stock market has swept away the haze of last year and performed very well.
In the end, the major A-share indexes, including those in the Shanghai Stock Exchange Index, rose by more than 20%, of which the Shanghai and Shenzhen 300 and other indexes rose by 25%.
From the perspective of the housing market, the prices of second-hand housing in 70 cities nationwide announced by the Statistics Bureau in January rose slightly by 0.
2%, the lowest monthly increase in the past 3 years.
The non-official “China Urban Second-hand Housing” index shows that the price of second-hand housing in 376 cities nationwide fell slightly by 0 in a month.
Both official and unofficial data show that house prices have not risen.
From the perspective of fixed income products, the CSI Treasury Bond Index has increased by zero since 19 years.
82%, the CSI Monetary Fund Index rose 0.
5%, the holder’s 3-month bank wealth management product yield is about 0.
After last week’s plunge, the international gold price rose only zero this year.
9%, and because the yuan has appreciated by 2 this year.
3%, the price of RMB gold has also fallen by 1 this year.
Globally, the US S & P 500 has increased by 11 this year.
8%, the German DAX index rose 9.
9%, the Nikkei 225 index rose 7.
9%, Korea Composite Index rose 7.
At 6%, the Mumbai sensex30 index also fell 0.
Therefore, the performance of China’s A-shares this year is completely better than domestic real estate, gold, bank wealth management, bonds and cash and other asset classes, as well as developed markets such as US stocks, European stocks, Japanese stocks and emerging markets such as India and South Korea.
02What is a historic opportunity?
But for China’s capital market, what has always been lacking is confidence.
Even if A shares are up 20% now, everyone ‘s first reaction is to sell too much.
In particular, the current economic data is not good, coupled with the rapid recovery of the two melting balances, some people believe that it is now a new round of leverage, and that growth may not be realized.
If we say this is the beginning of a new round of bull market, I believe many people will sniff.
I joined the industry myself in 2005. After witnessing the madness of the A-share bull market in 2006/07, I wrote the report “Dapeng rises in the same wind” childishly in 2007, omitting the second half of the phrase”Nine thousand miles”, trying to use a 100-page report to prove that the Chinese stock market can rise to 10,000 points in 2008, but instead fell to more than 1,000 points. This goal is still out of reach after more than 10 years.
Since that lesson, I have cherished the views of each report. I have to be objective, and I must have the logic first, then the mark. I can’t do the reverse.
Because the report written is the water that spilled out, it is impossible to take it back with black and white proof.
At the end of 14 years, we wrote the “Finance of the Financial Bubble”. Due to loose money and too much water, we believe that there is a financial bubble that is about to be born and we can participate, but we must keep in mind that this is a bubble.
In the new economic cycle of everyone’s budget in 17 years, we wrote “The Tip of Prosperity” in the middle of the year, thinking that borrowing to buy a house is unsustainable. In the future, we must guard against recession rather than usher in a new cycle.
And this time in October 2018, we wrote “Historical Opportunities for Investing in China”, and in November we wrote “Why are we confident in China’s future?
At the beginning of 19, we successively wrote “This is the worst era, and the best era-again on the historic opportunity to invest in China!
“, And” cheap is the last word! ”
-Let’s talk about why we are bullish on the stock market and bearish on the housing market?”In all these articles, we are actually expressing a point of view that the Chinese economy may be in the worst era, but it is the best era for China’s capital market. At present, it is a historic opportunity to invest in China!
What is a historic opportunity?
In “40 Years of the Great River: Seven Opportunities to Change Destiny”, Zhang Jiajiao and Boss Dai wrote the seven opportunities for ordinary Chinese 上海夜网论坛 to change their destiny in the past 40 years. They are: the return of the college entrance examination, the township enterprises, and the dual trackBusiness, going to sea in 1992, huge tide of resources, crazy property market, network dividends.
In other words, if you participated in the college entrance examination in 78 years, started a township enterprise in 1980, or became a “downlord”, went to sea to do business in 1992, became a coal boss in 2000, and a steel boss, and bought a house after 2005.Or even joining well-known Internet companies such as Tencent and Ali can change their own destiny.
But unfortunately, what used to be here was a chance in the past and cannot be copied.
For example, there were more than 8.2 million college graduates last year, compared to 16 in 1978.
50,000, college graduates are no longer scarce, and the basic requirements for many other jobs.
Township and village enterprises have faded out of the arena of history, and the “downlord” has disappeared.
Now that housing prices are high, it may be just a good dream to change a life by buying a house.
We noticed that none of the above seven opportunities mentioned China’s capital market, which is actually a very sad fact: in the past few decades, China’s capital market has replaced ordinary people to create wealth.
Although this year’s A-shares have surged by 20% and the Shanghai Composite Index has returned to 3,000 points, the score with the highest point of more than 6000 points in 2007 still fell by half.
The Chinese A-share market was born in 1990. As early as 1992, the Shanghai Stock Exchange Index had risen to more than 1,400 points, and it only doubled in 27 years. Even the prices were far outperformed.
However, the past does not represent the future. If we look for opportunities that may change the fate of ordinary Chinese people in the future, I believe that China’s capital market may be one of them, far more reliable than P2P, Bitcoin and the like.”Gold, US dollars” is even more appropriate than property.
This is actually the core idea we want to express: China’s capital market is the “historical opportunity to invest in China”!
03 The historic turning point of the US stock market and the housing market. Why do we think that the Chinese capital market will face historic opportunities in the future, because we find that the current situation in China is particularly similar to that of the United States in 1980.
In 1979, the United States’ S & P 500 closed at 107.
9 points, and in 1964 the S & P 500 reached 84.
8 points, equivalent to the US stock market rose only 27% in 15 years.
And after that, gold went from 35.
The $ 1 / breakout rose to $ 512 / breakout, an increase of up to 14 times.
Oil from 2.
92 dollars per barrel rose to 32.
5 dollars / barrel, an increase of more than 10 times.
The median price of new home sales in the United States is from 1.
$ 890,000 rose to 6.
$ 290,000, an increase of 2.
And even the US price index rose by 1.
Three times, holding cash assets such as money funds can also double.
That is to say, if the United States invested in the stock market in 1964, then after 15 years of holding, there would be almost no gain, not only losing gold, oil, but also losing houses, prices, and even holding cash.
It is no wonder that the famous “Business Week” magazine published the famous article “The Stock Market is Dead” in 1979. Its core point is that young people are far away from the stock market, and buying a money fund can easily defeat the stock market. Only buying a house can resist, andBuying stocks is not anti-corruption.
This is actually very similar to the sentiment of the current Chinese market. Because the A-share market has been declining for a long time and the housing market has been growing for a long time, young Chinese people would rather be house slaves than stocks. The main force of Chinese stockholders is the elderly.
According to the “2018 A Shareholders’ Report” of DataBao and Tencent’s self-selected stocks, the proportion of shareholders over 40 years old is 43%, while the proportion of shareholders under 30 years old is only 18%.
According to the “2018 National House Buyer Survey Report” released by the Shell Research Institute, the average age of Chinese house buyers in 2018 was 29.
5 years old, near the lowest level in the world, significantly lower than the average age of Chinese shareholders.
I just went to our Yunnan branch to give a lecture to the customers of the sales department. I looked around at the venue and found that many of the old comrades with pale hair and even came over with a stick.
During the meal with customers on the same day, I found that everyone has almost no stock assets, and even forgot where the stock account was opened.
Everyone’s main asset is the house, the bank’s financial management, and even the money fund. There is no stock. Isn’t that what was written in “Securities Are Dead” above?
In hindsight, however, Business Week’s predictions were actually very wrong.
After 1980, the US stock market and part of the housing market have undergone a shocking reversal. The stock market has risen as much as 25 times, while the house has risen only 4 times.From an annualized rate of return, the average annual growth of the stock market is 8.
4%, while the average annual increase in the housing market is only 4.
3%, and the return on cash held during the same period is 4.
8%. In the past 40 years, buying a house in the United States was actually underperforming.
What factors led to the huge increase in the US housing market in the 1960s and 1970s, and what led to the 40-year bull market in the US stock market after the 1980s, and what caused the big reversal of the housing market and the stock market?
04 Keynesianism: From Roosevelt’s New Deal to Stagflation In 1980, actor Reagan announced the announcement of the president of the United States, and his meeting slogan was “Make America Great Again”, which was later replaced by replacement.
Reagan was hailed as the greatest president of the United States after World War II, and his companion was the great president of the United States during World War II, Roosevelt.
In economics, Roosevelt’s most famous policy was the “Roosevelt New Deal”, while Reagan was “Reagan Economics”. The former pushed the United States out of the Great Depression, and the rest caused the United States to get out of the quagmire.
To understand Reagan’s greatness is also inseparable from Roosevelt.
The Great Depression and Roosevelt’s New Deal.
In 1929, the economic crisis broke out in the United States due to the stock market crash, which later evolved into the Great Depression that swept the world.
By 1932, US GDP had shrunk by 43%, per capita income had fallen by 40%, and the number of unemployed had reached 13 million.
Germany’s industrial production in 1932 also dropped by nearly half compared to 1929, with more than 5 million unemployed people.
In the face of the economic crisis, in order to protect themselves, various countries have strengthened trade protection and restricted imports by setting up tariff barriers, thereby intensifying competition for international markets and leading to deepening of rivalries among countries. This may also be the outbreak of World War II.One of the important reasons.
In 1936, Keynes published the well-known “General Theory on Employment, Indexes, and Currency,” proposing that in the face of economic crisis, it is necessary to rely on state intervention to stimulate effective demand and promote employment and economic growth.
In layman’s terms, we don’t need to rob, and the government can ask people to dig a pit to solve the Great Depression.
After Roosevelt became president of the United States in 1933, he proposed a series of new policies. Its core idea is to provide a large number of employment opportunities through public works construction and emergency assistance, and indirectly increase residents’ income and consumption growth.
Roosevelt’s series of new policies initially achieved very good results. By 1941, the accumulation of the United States economy had exceeded the peak level of $ 104.6 billion in 1929.
But the corresponding price is a sharp increase in the size of the US government, and in 1932 US fiscal revenue accounted for only 2% of GDP.
7%, but surged to 18% by 1945.
Keynesianism and stagflation.
In the 1950s and 1960s after World War II, Keynesianism became the “obvious science” of Western economics.
But in the 1960s and 1970s, Keynesianism failed, and continuous stimulus brought economic growth, but instead led to continuous growth, which is “stagflation.”
The core of Keynesianism is to stimulate the economy by stimulating demand from the government, but the problem that Keynesianism cannot solve is what to do if the economy cannot be stimulated by stimulating demand?
This is exactly the phenomenon that happened in the 1960s and 1970s. The government kept stimulating the economy, but the stimulus policy did not bring about growth, it just overissued the currency and pushed up the substitution.
From 1964 to 1979, the broad currency M3 in the United States surged from 440 billion US dollars to 1.80 billion US dollars, and the total amount of money tripled, while the US economy grew by only 70% during the same period.
This means that most stimulus policies only lead to oversupply of currencies and economic growth.
Stagflation: pushing up housing prices, driving down.
The oversupply of currency pushed up expectations and was beneficial to real assets. The increase in house prices in the United States during the same period was roughly the same as that of currency.
The high currency growth has brought high interest rates, which is extremely unfavorable to securities and bond markets that are financial assets.
In 1964, the PE valuation of the US S & P 500 index was as high as 20 times, and by 1979 the lowest overlap was about 8 times. Due to the reduction of 60%, even if the performance of listed companies increased by 3 times, the total stock market rose by only 20%, Almost equal to no rise.
So for the American residents at the time, the main way to defend against risk was to buy a house.
It is precisely the emergence of stagflation that led to a sharp rise in house prices in the 1960s and 1970s, and the stock market did not rise. The source of this is actually the Roosevelt New Deal and its related Keynesian stimulus policy.
05 Supply school: Reagan and the American economic revival were often born in adversity. It was in the quagmire that Reagan became the president of the United States.
In his inaugural speech, he said: “We are a country with a government, not the other way around.
This sets us apart from other nations on the planet.
Except for the powers granted by the people, our government has no power.
It is time to curb and reverse government development, which shows that there are signs that government development has exceeded government consent.In this speech, Reagan only asked one question: “Why can’t people create wealth freely in this world’s freest country?”
He replied: “The government is over-inflated!”
“In fact, this is the first time in half a century that the U.S. President has faced the conflict brought about by the Roosevelt New Deal to the U.S. economy, and it has also marked the United States’ full declaration of war against Keynesianism.
Supply school: growth does not come from demand or effective supply.
Reagan’s prescription for this country came from a “make-up school”, that is, instead of stimulating demand to obtain economic growth, he turned to improving the efficiency of supply.
From the perspective of the supply school, the performance of the economic downturn is due to oversupply, and because of excess capacity, supply exceeds demand.
But the surplus is actually “inferior goods”. The deeper reason is not insufficient demand or even lack of innovative production.
We can take an example to understand that we regard a country as a store, and people in this country can only go to this store to buy things. Whether the national economy is good or not is the business of the store.
If this store always sells the same thing, then everyone will not buy it if they have enough, just like eating seafood every day will be greasy.
If the store sends money to everyone for promotion, the result is that everyone may not buy more, but the store’s things will increase in price.
But if the store can continue to sell new things, such as selling cars this year, selling computers next year, and selling mobile phones in the following year, then as long as new things come out, as long as they are easy to use, everyone will rush to buy them, and there is no need for store promotions.
Therefore, supply is the fundamental difference between modern and ancient economies.
The supply of the ancient economy remained unchanged for many years, so economic growth was slow.
But after entering the Industrial Revolution, the supply efficiency of mankind has greatly improved, so it has entered the era of rapid economic development.
Therefore, in the long run it is determined that economic growth is not demand, but also supply.
Reagan Economics: Shrinking Money and Reducing Taxes.
As a result, Reagan proposed the famous “Economic Recovery Act.” The core idea is two points. First, shrinking the currency. He believed that currency oversupply was the source of high inflation and therefore supported the then Federal Reserve Chairman Walker’s monetary tightening policy.
After a major contraction of the currency, by 1983, the growth rate of the United States had fallen below 5%, and remained low below 5% for a long time.
Reagan’s other major policy provision was tax reductions. He implemented two expanded tax reduction policies in any one of them, effectively reducing the three major tax rates of corporate income, personal income and capital gains tax.
The sharp tax cuts have stimulated US companies’ R & D innovation and household consumption, thus revitalizing the economy.
The US economy has regained high growth since 1983, and the unemployment rate has slowly declined from a high of more than 10%.
Since Reagan came to power, the US economy has finally experienced stagnation for more than a decade and laid the foundation for Clinton’s prosperity.
Supply Revolution: Unfavorable housing market, pushing up the stock market.
Reagan’s reform of the supply school is the fundamental reason for the reversal of the performance of the stock market and the housing market.
Because Reagan supported the then Federal Reserve Chairman Walker’s monetary tightening policy, the currency growth rate in the United States replaced 10% in the 1970s and 6% after the 1980s, and house prices were highly correlated with currency growth.The increase was significantly reduced.
And higher is the decline in the rise in US income and interest rates caused by the decline in currency growth. High interest rates were the main cause of the decline in the US stock market growth in the 1970s. After the decline declined, the US stock market valuations significantly recovered.The PE of the S & P 500 is estimated to return from 8 times in 79 to 20 times now.
At the same time, Reagan’s tax reduction policy increased corporate profits and stimulated corporate innovation. This has enabled US corporate earnings growth to maintain long-term steady growth, and the profits of US listed companies have increased 10-fold in the past 40 years.
The increase in earnings combined with the estimated repairs have created a myth that the stock market has risen 25 times in 40 years, far exceeding the 4 times increase in the housing market over the same period.
06 From stimulating demand to reforming supply-the real reason why A shares are bullish!
In economics, supply and demand are two eternal themes. Correspondingly, how to promote economic growth has a deep era mark in each era, and it also brings different investment opportunities.
The beginning of the market economy: supply first.
Smith, for the first time in “The Wealth of Nations”, put forward a statement that the market is an invisible hand, believing that the market can solve all problems in the operation of the economy.
From Adam Smith’s point of view, economic growth actually comes from the supply side. He said that the growth of national wealth is relatively dependent on two conditions: the increase in labor productivity and the increase in the number of laborers.
The main factor promoting labor productivity is division of labor.
China’s reform and opening up began in 1978. Through our transition from a planned economy to a market economy, the Chinese economy has taken off. The core idea of a market economy is to transform the economy with the invisible hand of the market.
At the beginning of reform and opening up, what China lacked was not demand or effective supply.
We have successfully activated the vitality of 1.3 billion people through the responsibility system of household co-production, the cancellation of price controls, and the entry of farmers into cities, which has greatly improved production efficiency and achieved rapid economic take-off.
Depression emerged: But demand rose, but 150 years after the birth of the Wealth of Nations, the Great Depression that swept across the world in capitalist countries, Keynesianism came into being, and the promotion of economic growth turned to the demand side.The depression, but also foreshadowed the subsequent stagflation.
The Chinese economy experienced the global financial crisis in 2008 after 30 years of development before the reform and opening up. This was actually the challenge of the Great Depression of the United States in 1929.
Our response is a 4 trillion investment plan, two times the Roosevelt New Deal.
By stimulating demand, countries have survived the global financial crisis, but since then they have embarked on an unsustainable path of borrowing to stimulate economic development.
Stagflation crisis: 50 years after the Roosevelt New Deal, due to the outbreak of stagflation, in the 1980s Reagan and then Thatcher of the United Kingdom turned to the supply side of the economy, and policies such as tax reduction and deregulation reactivated economic growth, Entering a new era of prosperity.
Over the past 10 years, China ‘s currency has increased excessively, its debt rate has continued to rise, its economic growth has declined, and its house prices have continued to skyrocket. In fact, it is a stagflation-like state.
After painful thinking, in November 2015, China formally proposed structural reforms on the supply side. This is actually a reform of the “supply school” in the United States, which means that we have also shifted the focus of economic growth back to the supply side.
At the initial stage, our supply-side reforms are mainly reflected in reducing excess supply, such as reducing excess capacity in industries such as steel and coal, and reducing excess inventory in the real estate industry.
However, theoretically, reducing supply and increasing prices brought about by it only changed the distribution structure of the economy and did not improve the productivity of the Chinese economy.
Deleveraging to reduce tax burden: a historic opportunity to invest in China!
In the past two years, our supply-side reforms have begun to sting.
Through financial deleveraging, we closed down shadow banking, which drastically reduced the growth rate of money. The growth rate of broad money M2 has grown from an average annual rate of 15% in the past 10 years to the current 8%.
Since last year, we began to reduce taxes and fees. Last year, we reduced the reduction and personal income tax, and gradually reduced taxes by more than one trillion. In 19, we proposed a larger-scale tax and fee reduction plan.
This means that, like the United States in the 1980s, we no longer rely on stimulating demand for development, instead of reducing the rate of currency growth, and turning to tax reduction to activate the economy, then the changes that occurred in the United States around 80 years ago are likely to be in China.Reappear, and from this we are also expected to shift from a bull market in real estate to a bull market in stocks.
Many people say that there are no good companies in the Chinese stock market, but actually back in 1980, there were not so many good companies in the United States. Now everyone knows the US stock giants FAAMG. Among them, Microsoft and Apple were just born and not yet listed, and Google, Amazon, Facebook, etc. have not yet been reborn.
Therefore, the key to investment opportunities is not whether there are good companies in the Chinese stock market today, but whether there are good companies in China. Can we produce good companies in the future? Can these good companies be listed on A shares and companies listed on A shares now?Will it be better in the future?
These questions can actually be answered.
Tencent, Ali, Huawei, Douyin, etc. are actually good companies, which shows that we now have good companies.
If the burden on enterprises is reduced after tax and fee reductions, better companies will be born in the future.
It’s just that many good companies in China were not listed on the A-share market or were not listed.
But if we can reform the system of the capital market, especially the good relationship between market entry and export, strictly delist the system, speed up the registration system, let the outstanding companies go public as soon as possible, and the garbage companies delist the market as soon as possible, in fact, we can make the capital marketBetter serve the Chinese economy.
The replacement of bank financing with the capital market is actually a process of improving the efficiency of capital use and increasing China’s economic growth potential.
Therefore, shifting from stimulating demand to reforming supply is the core reason we are optimistic about the future development of China’s capital market. We firmly believe that now is a historic opportunity to invest in China.