For the Chinese stock market, 2018 was unkind. A slowdown in GDP growth and a gruelling trade war between the two economic superpowers saw major indexes in Shanghai and Shenzhen suffer annual losses of more than 24% in 2018, the worst performance in a decade.
But as we head into 2019, the outlook seems to be looking up, with the A-share market being one of the better performers out of all the major equity markets. In February alone, Chinese shares have risen 14% fuelled by optimism over the end of a U.S-China trade war and the
MSCI’s decision to include A-shares in its flagship Emerging Markets index for the first time.
Looking specifically at the Shanghai and ShenZhen stock market, both exchanges recorded more than 5% return in a day, signalling reversed investment sentiment in China. On 25 Feb 2019, the combined turnover of the two stock markets notched to a new high of over RMB 1,000 billion in the last two years, which implies a strong signal backing the view of bottoming up A-share.
Source: Company Report
According to our previous report, we found that foreign investors have increasing interest in the A-share market, with the market expecting more than US$50 billion to flow into the Chinese A-shares from both passive and active funds. In this report, we look to analyze historical A-share rallies to find commonalities in characteristics with the current market rebound in China.
We look to analyze two testing periods where the A-share market experienced a boom, from trough to peak, during the early stages of the A-share rally in 2015. Looking at capital raising activities, specifically the equity pledge financing index, where companies offer up shares as collateral for a loan, had dropped to the lowest level since 2015 and it rebounded recently after sliding to a level close to the starting point of the 2015 boom. This practice is well spread with about 11% of China’s market capitalization, or US$632 billion being pledged in 2018, particularly by founders and other big shareholders and brokerages. This rebound could indicate investor optimism and that risks around stock pledged loans are easing.
Source: China Securities Index
When we look at capital flows, the daily turnover of the CSI300 rocketed to over RMB 380 billion on 26 Feb 2019, the highest level in the last 3 years. It is worth to note that the current transaction size is just the average level during the 2015 A-share boom, only 41% compared to the highest daily turnover in 2015.
Tracking the northbound daily net buy, the two rallies were supported by a different source of capital. The 2015 boom was dominated by domestic investors with limited foreigner participation. This year, foreign investors have piled up on A-shares before the recent A-share rebound, with increasing daily net buy.
To find out more on the drivers behind the equity market rebound, the methodology behind our analysis of the two A-share rally periods through further study of trading statistics, sector performances and market valuations and finally, but most importantly, whether this rebound will be short lived or not, download the report below!