The day when A-shares are dominated by panic, it’s not the time to buy bottoms

From Hong Kong stocks, Chinese concept stocks to A-shares, the stock market has performed like “Russian roulette” in these two days.

On July 23, the market turbulence caused by the collapse of the education sector that suffered a heavy regulatory hammer was transmitted from Hong Kong stocks to China’s concept stocks, and then back to A shares on July 26. As of the close, the Shanghai Composite Index closed down 2.34%, the Shenzhen Component Index closed down 2.65%, the ChiNext Index fell 2.84%, and only 2 of the 28 first-tier industries to which Shenwan belonged rose. 

In terms of capital, the net outflow of northbound funds throughout the day was 12.802 billion yuan, and the single-day net sales reached a new high in nearly a year. Among them, the net outflow of Shanghai Stock Connect was 5.65 billion yuan, and the net outflow of Shenzhen Stock Connect was 7.152 billion yuan.

Hong Kong stocks also continued their downward trend last Friday. The Hang Seng Index opened lower and closed down 4.13%. Large technology stocks and education stocks plummeted. The Hang Seng Technology Index fell 6.57%, Meituan closed 13.76%, and New Oriental closed down. 47.02%. According to data compiled by Bloomberg, mainland investors have net sold Hong Kong stocks through the Hong Kong Stock Exchange for the sixth consecutive day. This is the longest time since May 2019. 

Min Liangchao, chief macro and strategist of HSBC Jinxin Fund, said that multiple recent events have superimposed and expanded today’s market panic, including the education and training industry ushered in a “double reduction” policy, real estate adjustments continue to increase, and today’s Sino-US talks revealed the next There are still some uncertainties in the development of Sino-US relations at this stage. 

The day when A-shares are dominated by panic, it’s not the time to buy bottoms

1  Wall Street is worried, is it safe to invest in China’s concept stocks?

The main catalyst for this round of plunge is the “double reduction” document that was circulated in the market on the 23rd and officially released on the 24th for the supervision of the education and training industry-“Regarding the further reduction of the burden of students in compulsory education and the burden of off-campus training opinion”. The document clarifies that all discipline training institutions shall not be listed for financing, and capitalized operations are strictly prohibited. All regions no longer approve new subject-based off-campus training institutions for students in the compulsory education stage, and existing subject-based training institutions are uniformly registered as non-profit institutions. 

On the 23rd, online education stocks in Hong Kong stocks fell sharply. New Oriental closed down 40% and its stock price was cut in half, setting a record for the largest one-day drop in history. On the same day, after the opening of the US stock market, the collective of online education stocks unsurprisingly started the free fall mode. Good Future plummeted 70.76%, Gaotu ( GSX ) plummeted 63.26%, and New Oriental plummeted 54.22%. On the 24th, the A-shares and the education stocks of the Hong Kong stocks will continue to fall. Xueda Education, Doushen Education, Kingsun shares and Ongli Education all closed their limits as soon as the market opened. 

According to Bloomberg, investors have been pricing in the increasing risks brought about by the Chinese government’s intensified industry crackdowns. (Educational regulation) may disrupt the $100 billion industry and jeopardize billions of dollars in foreign investment. 

Not only education stocks, but also affected by regulatory news, Alibaba’s US stocks fell 4.5% on the 23rd; Weilai, Ideal and Xiaopeng fell between 5% and 6%; JD.com fell nearly 6% and is still under regulatory investigation. Didi fell 20% from a high of $18.01 hit on June 30 to $8. “Barron’s Weekly” commented that a question that Wall Street investors have to think about is: Are other Chinese companies that use the United States as their first listing place safe?

Datatrek analyst Nicholas Colas (Nicholas Colas) pointed out in a report to customers on July 23 that the MSCI China Index has fallen by 20% since February 2021, while it has risen by 50% in the same period last year. This is “no coincidence “. The rewards of investing in a high-growth economy have been replaced by the risks of regulatory crackdowns. 

2 When there is  no bargaining, who is next?

At present, the general view of domestic and foreign investors and observers is that this regulatory storm may not stop, and after education, some consumer tracks may also usher in the introduction of further regulatory policies. 

Liu Yuhui, chief economist of Tianfeng Securities , posted on his Weibo over the weekend : “The next solution will be…games? Liquor? Real estate? Don’t say it is unpredictable . Don’t blame it and blame it .” 

On July 26, large consumer stocks such as A-share liquor, food and beverage, medicine and medical care, and medical aesthetics plummeted across the board. Liquor and medical beauty index fell more than 7%. Moutai fell more than 5%, and its market value evaporated by 100 billion yuan. It fell below 1,800 yuan and fell back to 1,804.11 yuan as of the close. Ireland eye , beauty off , Huaxi Sheng was down 10%, 15%, 18% or more. 

On the morning of the 26th, another media reported that in the real estate industry, dozens of key enterprises included in the “three red lines” pilot program have been required by the regulatory authorities to purchase land not exceeding 40% of their annual sales. Allegedly, this proportional restriction includes not only the purchase of land on the open market, but also the expenditure for acquiring land through mergers and acquisitions. On the same day, Vanke A fell by 7.57% and Poly Real Estate fell by 6.64%.

On the afternoon of the 26th, after the Shanghai and Shenzhen markets closed, news came again-the State Administration of Market Supervision and other seven departments jointly issued the “Guiding Opinions on Implementing the Responsibilities of Online Catering Platforms and Effectively Protecting the Rights and Interests of Food Delivery Staff.” The opinion puts forward that in terms of guaranteeing labor income, the platform is required to establish an income distribution mechanism that matches the work tasks and labor intensity to ensure that the normal labor income of food delivery personnel is not lower than the local minimum wage standard. Do not use “the most stringent algorithm” as an evaluation requirement, and reasonably determine the evaluation factors such as the number of orders, punctuality rate, and online rate through methods such as “algorithm selection”, and appropriately relax the delivery time limit. On the same day, Meituan-W fell 13.76%.

At present, some investors are thinking whether the large-scale slump caused by continuous and multi-industry regulatory pressure has created buying opportunities.

Castor Pang, head of research at Core Pacific Yamaichi, told Bloomberg: “I think there is a panic sell-off in the market at the moment, because investors expect that the Chinese government may strengthen supervision of all industries that have grown strongly in recent years. . I think that investors are currently unable to carry out any bottom-hunting actions. We don’t know where the bottom is. ” 

3  “Mao Index” has fallen out of favor, where is the liquidity going?

Looking ahead, how will the market diversify while liquidity is still relatively abundant? 

Jiasheng Group stated that the “Mao Index”, which covers many of China’s core assets, has been the “good heart” of foreign capital in the past two years, and its valuation has also been rising due to the overweight of foreign capital, but now the wind direction seems to be quietly changing. Affected by the economic downturn, the performance expectations of traditional white horse stocks have been lowered, and the “Mao Index” has continued to fall. At present, the downward trend of “Mao Index” is still not over. Funds are still migrating from white horse stocks to growth stocks represented by semiconductors and new energy . 

On the 26th, the return of funds to chip and lithium battery stocks was obvious in late trading. The China Securities Index Semiconductor Products and Equipment Index fell sharply by more than 2.9% at one time, and rose by 1.56% in late trading. SMIC bucked the trend and rose by more than 10% in late trading, and A shares closed at 57.20 yuan; China Micro Corporation’s late gains once pulled up to more than 9%, closing up 8.05%, and Tibet City Investment rose 9.98%. 

However, Jiasheng Group also reminded that the valuations of semiconductors and new energy are already very high. The macro logic of their rise is that the market’s capital interest rate declines, which promotes the rise of growth stock valuations. However, the current capital interest rate has limited room for further downside. The room for further upside is also limited. 

Huaan Securities believes that under the premise of limited market upside and risk appetite facing multiple disturbances, industry allocation tends to shift from growth to equilibrium, avoiding high valuation sectors, and embracing high prosperity. The current high-prosperity sector is mainly concentrated in parts of the semiconductor and new energy vehicle industry chain. In the cycle, coal, basic chemicals such as polyester, urea and phosphate fertilizers and other sectors. 

Liu Yuhui expressed his optimism about the high-tech agriculture sector: “High-tech agricultural giants have come forward to lead China’s agricultural intensification and modernization process and ensure the country’s agricultural safety and food security. This is the requirement of today’s era, and it’s reached this point. All chemical fertilizers will be exhausted. The future of agricultural production materials for seed chemical fertilizers, pesticides, plant protection is a high-tech industry, high industry thresholds, high industry premiums, and the core support of national agricultural safety and food security.” 

4  The logic of long-term deployment of China has not changed

From the perspective of longer-term scope and global allocation, the logic of allocating Chinese assets has not changed. 

According to the New York Times, the Chinese market is very important and is becoming more and more important. If Chinese assets are not included in today’s investment portfolio, it is not a diversified investment. Excluding Chinese assets from global investment portfolios is as absurd as thinking that “the earth is flat”. 

Jason Hsu, founder of Rayliant Global Advisors in China and an adjunct professor of finance at the University of California, Los Angeles, said: “Although China’s regulation may be very strict, it is still an important investment location.” 

At present, Chinese stocks and bonds are still relatively small in the global investment portfolio. Chinese stocks account for a little more than 4% of global stock indexes (such as MSCI ACWI or FTSE Global All Cap), and Chinese bonds account for more than 7% of some global bond indexes. Even if there is volatility, it will not have much impact on the investment portfolio, and in the long run, holding Chinese assets will be of great benefit to the investment portfolio. 

But as Barron’s Weekly said earlier this month, investors should invest through mutual funds or ETF funds, which can cope with increasingly complex situations. 

Andrew Mattock, fund manager of Matthews Asia China, said that his optimistic Chinese companies include Zhongsheng Group, Sinoma Technology and Estun Automation. Aberdeen China A Share Equity Fund shares held by China, including Guizhou Maotai and Yunnan grace the Czech Republic and new materials . 

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