Written By: Manager Cao Mingchang
Currently, the market is at the historical low.
Low market valuations are not a reason for short-term market rise, but each extreme valuation bottom forms one of the key conditions for a sustained market rally. The present valuation level of A-share market is at historical low after rounds of market adjustment since 2018. For example, the valuation of CSI 800 is even lower than the historical bottom of 2005 and 2012-2013, close to the lowest level during the 2008 financial crisis.
The recent market has come with some good news. US economy and stock market are faced with downturn stress, and the Federal Reserve is likely to slow down the Fed rate rise, which will ease the pressure of exchange rates of emerging markets. Besides, the result of G20 negotiation is better than expectation, and additional tariff between China and US is suspended. Domestically, the Chinese government is expected to reinforce the policy in favor of reducing taxes and fees (social contributions) for enterprises, while the monetary policy is also improving. Therefore, the general financing costs of real economy are expected to decrease. All in all, these are good for the A-share market.
Growths of economy and enterprises’ profitability are expected to be controllable in 2019
Beside of valuation, the economy growth also sees slowdown. However, we believe that the economy would return to stable and that the simultaneous decline in real estate and automobile sector, which was only seen in 2008, is non-sustainable. The current decrease in growth rate of revenue and profit of industrial enterprises is evidently slower than that in 2011-12 and 2014-15. We believe the growth of economy and enterprises’ profitability in 2019 will be controllable, so that there are more good candidates with low valuation and good growth potential that we can explore.
As the market keeps falling, we are getting more confident. We remain our positive views on blue chips stocks with low valuation. At the same time, we also explore reasonably valued growth stocks whose prices are suppressed by the declining market liquidity but with high growth potential. We are positive on industries like medicine, food and beverage, real estate, household appliance, automobile parts and light manufacturing. These are also the ones having valuation at the bottom of long-term cycle.
Main potential risks:
The Sino-US trade conflict. In the short term, the trade conflict would not pose significant impact on the economy. However, if the conflict keeps escalating without any mitigation, the scope of influence will be greater. Therefore, it is suggested to keep eyes on the development of trade conflict and control investment positions to minimize risks.
Zhong Ou Asset Management Co., Ltd
5F, OFC, 333 Lu Jia Zui Ring Rd, Shanghai, China
Disclaimer: This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.