$500 Billion Floodgates Open: Investors Go Berserk

A new phase of the bull market is underway, as signals point toward significant economic recovery!

At 15:21 yesterday, crucial announcements from a high-profile meeting caused Hong Kong stocks to soar dramatically, with the Hang Seng Index reversing a 0.33% drop to an exhilarating 2.76% gain.

Chinese stocks celebrated through the night, with the China Concept Index climbing an impressive 8.5%, marking its best single-day performance since late September

Meanwhile, the leveraged FTSE China ETF skyrocketed by 24% within a single night.

Today, the turnover on the A-share market surged by 500 billion, surpassing 20 trillion again, marking the 50th consecutive trading day above 10 trillion, setting a new historical record.

What are the implications of the high-profile meeting’s press release that triggered this explosive response in Chinese assets?

01

Significant signals! A dual loosening of fiscal and monetary policies.

Chief Economist Ming Ming from Citic Securities has pointed out that the recent important meeting unveiled multiple significant signals:

Firstly, macro policies are becoming “more proactive and effective,” as “moderately loose monetary policy” is being reintroduced after several years, alongside “strengthening extraordinary counter-cyclical adjustments” for the first time; secondly, “stabilizing the real estate and stock markets” has been prioritized as one of the key focuses in the economic work for the coming year; thirdly, a strong emphasis is being placed on “greatly boosting consumption,” highlighting its increased importance in government agendas.

These policy expressions are rarely seen in history, and post-release, both Hong Kong stocks and the FTSE A50 index surged rapidly

• U.S. Inflation Decline Set to Slow
• Developing Multi-Tiered Capital Markets
• Dollar Wealth Management Assets Double Amidst Interest Rate Uncertainty
• RMB Stays Steady Against a Strong Dollar
• India's Q3 GDP Growth Hits Low, Economy Faces Headwinds

What could this all mean?

The introduction of “extraordinary” counter-cyclical adjustments indicates that expectations for next year’s policy implementation suggest aggressive measures, potentially exceeding the current policy toolkit.

With a more “proactive” fiscal policy set in place, next year’s fiscal measures are likely to exceed those from this year significantly.

The monetary policy stance has shifted from “stable” to “moderately loose.” Historically, China has only adopted a “moderately loose” stance during the global financial crisis in 2009 and 2010.

At last, the entire market is finally witnessing the long-awaited period of monetary easing in both China and the United States!

If we rewind to the policy turn of September 24, we can identify that the Federal Reserve's decision to lower interest rates by 50 basis points on September 19 was a pivotal moment that triggered significant changes.

In August, it was alarming when the 10-year government bond yield approached 2%, but now it has entered the 1% territory, reaching a historic low of 1.867% today

This shift is precisely why the market is paying close attention to the reintroduction of “moderately loose” monetary policy after 14 years.

What’s more remarkable is that the meeting placed “greatly boosting consumption” as a higher priority and emphasized “stabilizing the real estate and stock markets,” further validating the shift in policy thinking.

It is widely recognized that insufficient effective demand is a critical constraint on the economy, which is further exacerbated by the real estate and stock markets eroding household asset income.

As a response, the meeting in September acknowledged the need for “the real estate market to stabilize” and expressed a commitment to “efforts to boost the capital market,” while the December meeting for the first time addressed “stabilizing the real estate and stock markets,” reflecting policy hopes to enhance the private sector's asset situation, thereby supporting the real economy.

However, when it comes to investment, there still remain worries about fundamentals, with sentiments that profitability will not improve, raising questions about any potentially significant market movements.

But is it true that the stock market rally must wait for an economic recovery? Is this a fact?

Historical data suggests otherwise; for instance, the U.S

stock market in 2009 and Japan in 2012 both experienced recoveries in the stock market under conditions of abundant liquidity and low valuations before the economies themselves recoveredThe rebound seen in A-shares since September 24 can also be considered a case of “valuation leading the way.”

In the chain from policy bottom to market bottom to profitability bottom, if the profitability bottom exists, the market anticipates that it will be seen at the earliest in Q3 next year, with profitability expectations generally leading profits by three quartersThus, around March to April next year will be critical to determine whether profitability expectations see an upturn, while significant policies will likely only come to fruition post the substantial meetings in March next year.

This indicates that prior to that, validation of profitability or policy is unnecessary

Rather, each significant meeting and release of economic data may become moments of intense market speculation, thus leading to heightened market volatility.

02

Broad-based ETFs show strong historical performance

As market uncertainties rise, broad-based indices offer investors balanced, simple, and direct investment tools

Reviewing the historical rebounds from past lows, broad-based indices have demonstrated exceptional performance due to their high capital utilization rates (with ETF positions exceeding 95%) and coverage of leading stocks.

Taking the A500 index and equity-mixed fund index as examples, analyzing the period from the month before to a year after the four lows of the Shanghai Composite Index, the CSI 300 index and A500 index outperformed the equity-mixed fund index notably in three instances, with average gains exceeding 50% in the four rebounds.

Prior to the announcement of this meeting, Wall Street funds opted to buy the CSI 300 ETF and the threefold leveraged FTSE China ETF futures to preemptively position themselves

Data from EPFR indicated that from November 28 to December 4, a net inflow of $210 million in passive funds went into A-shares, bringing an end to a five-week streak of outflows.

Given that every type of fund product has scenarios suitable for investment, we cannot expect broad-based ETFs to cure all ailmentsDifferent broad indices like the ChiNext Index, MSCI China A50, SSE 50, CSI 300, CSI 500, A500, CSI 1000, and STAR 50 each have their own unique logicWhat we need to focus on is how to penetrate the core essence of these investments.

Historically, when macro policies strengthened and the economic outlook improved, large-cap style ETFs such as the SSE 50 ETF (510050), A50 ETF (159601), and Huaxia CSI 300 ETF (510330) have tended to outperform.

From an industry distribution perspective, the SSE 50 and CSI 300 indices focus more on traditional major finance and major consumer industries, while higher proportions correspond to new economy sectors

The MSCI China A50 Connect Index balances both traditional financial sectors and high-growth sectors, reflecting a higher proportion of the new economy.

The new generation of core broad-based A500 belongs to the mid-to-large cap style and includes 35 CSI second-level industries, combining larger cap styles while integrating leading stocks from sectors representing new productive forces, thereby better reflecting the transformation of the Chinese economyThe A500Index has quickly become the fastest to surpass 100 billion in history, with the A500 ETF (512050) raising 11.3 billion since its inception.

In contrast, the CSI 500 Index selects stocks ranked 301-800 by market capitalization on both Shenzhen and Shanghai markets, focusing on mid-cap stocks with a growth style, while the CSI 1000 and ChiNext indexes cater to small-cap growth styles.

Recently, market trends have shown a noticeable preference for small-cap growth stocks

This can be attributed to the buoyant liquidity conducive to a risk-loving environment, with M1 and GDP growth expected to bottom out and recoverCoupled with the new technology cycle represented by artificial intelligence, the market is inclined to afford higher valuations to indices like CSI 1000, STAR 50, and STAR 100 that feature high growth content.

As of December 10, only the CSI 1000 Index has recorded gains since October 9, with significant inflows directed towards growth-oriented broad-based ETFs, with the CSI 1000 ETF (159845), CSI 500 ETF (512500), and Huaxia ChiNext 100 ETF (159957) experiencing net inflows of 13.979 billion, 5.989 billion, and 2.074 billion respectively this year.

Looking back at historical trends, once A-share listed companies confirm a turning point in profitability, growth style tends to remain strong during market upswings and periods of consolidation at the top, while value style often follows suit at the end of a final spike in the market.

03

Conclusion

Reflecting on today’s A-shares, a fluctuating trend was observed, with the Shanghai Index up 0.59%, the Shenzhen Component rising 0.75%, and the ChiNext Index climbing 0.69%. Fortunately, the trading volume boosted to 5.667 trillion reaching 22 trillion, indicating that market engagement remains vigorous.

Beneath the market's hesitance might be underlying concerns about whether nominal GDP can improve

However, investment revolves around expectations, reflecting marginal changes, and once trends solidify, they become tough to alter.

The Fed's initiation of a rate-cutting cycle for the first time in four years is bound to profoundly affect our investment logic over the next two to three yearsUnquestionably, the shift in China's policy approach, with the reintroduction of “moderately loose” monetary policy after 14 years, creates an environment where U.S.-China monetary loosening resonates together.

Currently, the 10-year government bond yield has officially entered the 1% era, indicating the arrival of a low-rate environment, suggesting an increase in deposits being “relocated.” Following the shift in policy in September, resident deposits have sharply diminished by 570 billion.

The real estate sector's return to its residential attributes implies that, besides bonds, the equity market is likely to become a new medium for wealth generation for residents

This backdrop explains the historic first mention of “stabilizing the real estate and stock markets” in recent policy announcements.

Policy is increasingly orienting long- and medium-term capital toward the market, stabilizing the ecology of A-sharesThere are new reports that major broad-based indices are set to include personal pension Y-shares, encompassing products like the CSI 300 index, CSI 500 index, A500 index, and ChiNext index.

Scrutinizing the high-frequency economic data since the policy shift in September reveals a gradually improving marginal trend