Will the A-shares see a bull market again?

Understanding the Conditions for a Bull Market in A-shares

In the world of finance, the A-share market has recently undergone a tumultuous period, with the Shanghai Composite Index plunging from a peak of 3723 points just before the Lunar New Year in 2021 down to worrying levels where it seems to struggle to maintain the 3000-point thresholdThis significant decline has left investors and fund managers in a persistent state of anticipation, eagerly awaiting the dawn of a new bull marketThe critical question that looms is: what does it take for A-shares to embark on a bullish run?

The first and foremost factor is the influence of governmental and regulatory policiesA sustainable bull market cannot flourish without substantial policy supportOver the past year, the regulatory environment has shown a tilt towards easing restrictions to facilitate market momentum

For instance, critical measures such as reductions in transaction stamp duty, a deceleration in the pace of new stock offerings, regularization of major shareholder sell-offs, and even a suspension of margin trading have all manifestedWhile these policies appear to align with investor longings, the subsequent sluggish market performance suggests that policy changes alone are not sufficient to ignite renewed market enthusiasm.

Next in line is the corporate fundamentals. The sluggish pace of economic recovery has greatly hampered profit growth among publicly traded companies, with 2023 revenues and net profits closely mirroring those of 2022. Alarmingly, in Q1 of this year, revenue fell by 1.15% while net profits decreased by 4.29%. As the mid-year earnings reports continue to unfold, there is a prevailing uncertainty surrounding corporate profitability

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Despite current performances failing to bolster expectations for an imminent bull market, the overall low valuation suggests that there might not be considerable downside potential remaining in the stock index.

Perhaps the most critical element, however, is the capital influx. A thriving bull market necessitates a steady stream of incremental capital, yet currently, it is precisely this influx that the A-share market is desperately lackingMajor sources of new capital typically consist of four categories: first, state intervention via national investment entities frequently regarded as the ‘national team,’ which this year has become a primary stabilizing force, providing liquidity by increasing stakes in broad-based ETFs, contributing hundreds of billions to the marketSecond, foreign investment which initially showed promise but has since shifted from inflow to outflow, raising concerns about sustained foreign interest

Third, contributions from industrial capital, manifesting as stock repurchases and shareholder buy-ups, although this remains relatively modest in sizeFinally, individual investors, who have exhibited significant outflows from the market this year, further exacerbating capital scarcityThe stark reality is that without new capital influxes, restoring even the 3000-point barrier appears challenging.

Furthermore, the notion of a stabilization fund has been floated among investors hoping that such an initiative could elevate market levelsHowever, skepticism reigns supreme in this regard, given that to effectively establish such funds, government-led issuance of special bonds aimed at stock market investment would be requiredThis leads to pressing questions about potential funding sources.

Many analysts have posited that a reduction in interest rates by the U.SFederal Reserve could redirect dollar flows back toward the A-share and Hong Kong markets

While such a scenario remains plausible, significant uncertainty lingers in the wake of ongoing geopolitical tensions, where financial resources might rather favor alternate markets, supported by recent global trends highlighting fortuitous increases across equities globally, with the A-share market witnessing declines in stark contrast.

Industrially-driven capital faces constraints due to inherent limitations in self-funding, making substantial buybacks or share increases highly improbableTypically, such moves are more performative than impactful, lacking the momentum seen in the robust buyback trends characterizing U.Smarkets.

A potential savior for capital inflows remains with the general populaceChina boasts one of the highest saving rates globally and households consistently generate significant surpluses annually, which invariably find their way into investment markets

For instance, in 2023, the average disposable income for Chinese citizens reportedly stood at 39,218 yuan, with consumption expenditures at 26,796 yuan, leaving an average surplus of around 12,422 yuan per individualWith a population of approximately 1.4 billion, the aggregate surplus approximates a staggering 173.908 trillion yuan.

With these unspent funds, investment opportunities arise in four predominant categories: bank savings, bonds, real estate, and stocksIn 2023 alone, new deposits surged by 166.7 trillion yuan, consuming the majority of the available surplusThis left only 7.208 trillion yuan flowing into the bond, real estate, and stock markets, indicating a struggle for the stock and real estate markets to flourish this year.

The year 2022 posed significant challenges, not only due to the pandemic but also amidst declines in the stock and real estate markets, with a pronounced downturn in the bond market

Data indicates that in 2022, household surpluses totaled around 172.834 trillion yuan, while new deposits amounted to 178.4 trillion yuan, evidenced by outflows exceeding investment in equity and housing markets.

Looking back towards 2018-2021, despite the hurdles posed by the pandemic, consumer confidence remained relatively robust, allowing households to continue reallocating substantial resources away from savings towards investments with figures ranging from 3.14 to 5.64 trillion yuan, which facilitated capital flow across the equity, bond, or real estate markets during prosperous periods.

Specifically, in 2018 as the stock markets faltered, funds were primarily redirected to real estate; however, from 2019 through 2021, both the stock and property sectors enjoyed buoyancy, with 2021 marking their apexes.

In the first half of 2023, disposable income reached 20,733 yuan, with consumption expended at 13,601 yuan and an average surplus of 7,132 yuan per capital

The collective surplus across 1.4 billion individuals reached 99.848 trillion yuan, with new deposits of 92.7 trillion yuanWhen removing these deposits, the remaining surplus mirrors the figures from the entirety of 2023, revealing the underlying reasons for the continued decline in the stock and housing markets this year.

Consequently, with a thriving bond market drawing away resources from stocks and real estate, both markets remain under significant strain going forward.

Should this trend persist, both the stock and housing markets might languish in protracted instabilityAlthough the rationale behind such expectations is sound, it is worth noting that changes are already underway as a result of declining bank deposit rates leading to diminished collection growth; in turn, financial products tied to the bond market have surged, while the inevitable decline in potential returns looms large.

Should the investment returns diminish equivalently to deposit rates, capital is bound to seek new avenues of opportunity

Should this occur, both the stock and housing markets may have the chance to attract newfound incremental funding.

With disposable income and consumption statistics published quarterly, assessing the state of affairs through the lens of first-half data can help gauge forthcoming developments in JulyAs average monthly surpluses approached 16,641 billion yuan, along with 3,300 billion yuan exiting savings, estimates suggest that approximately 20 trillion yuan flows could be anticipated towards non-savings products, markedly eclipsing the first-half performance, though primarily with funds gravitating towards the bond market.

Recent fluctuations in bond markets could amplify declines in bank investment returns this second half of the year, leading to speculation on whether greater tides of capital might shift from individual savings and surplus reserves into the stock and real estate sectors