Haitong macro Jiang Chao: the stock market is expected to turn into bull bond market or bear market

category:Finance
 Haitong macro Jiang Chao: the stock market is expected to turn into bull bond market or bear market


Recently, the Bureau of statistics also quoted the relevant research results of the Academy of social sciences as saying that the total assets of Chinas residential sector in 2016 were 358 trillion yuan. We also use Chinas various data to estimate the total assets of residents, and the results are similar. In 2019, the total assets of Chinas residential sector is estimated to be 514 trillion yuan, and the total assets per capita is 370000 yuan. The residents assets are mainly physical assets, and the proportion of housing is nearly 70%.

Suppose we have a monthly income of 1000 yuan and an annual income of 12000 yuan. At present, Chinas one-year deposit rate is 1.5%, and the return rate of yuebao, the monetary fund, is less than 1.5%. Even if we save all our income, we will have to eat and drink for 26 years to reach the average level of per capita assets of the whole country.

Obviously, the wealth accumulated by Chinese residents in the past is not by saving, but by choosing the right assets. The proportion of real estate in the assets of residents is as high as 70%, and the continuous rise of house prices has made an important contribution to the wealth appreciation of urban residents.

From 1990 to 2019, the average sales price of new houses in China increased by 9.3% annually. Assuming that our monthly income is still 1000 yuan, but all the income of each month is saved in the house, then after 16 years, the total assets will exceed 370000 yuan; and after 26 years, the total assets will reach 1.17 million yuan, twice the 370000 yuan obtained by saving 1.5% interest every year.

This tells us that choice is more important than effort. If you work hard all the time, but only save when you earn money, in fact, the less money you save, because other peoples money is stored in assets, and the value-added speed of assets is much faster than that of deposits.

But in the United Kingdom and the United States, the stock market has also achieved a long-term return of about 10%. Most of the wealth of American residents is financial assets. Due to the poor performance of Chinas stock market in the past, the allocation of financial assets by Chinese residents is also very low. According to our statistics, the allocation of financial assets of urban households in China is only 30%, and the main risk products are bank financing, bank deposits and other low-risk products, while the proportion of holding stocks, bonds, funds and other risk assets is only about 4%.

Since the historical data of the UK and the US show that the long-term performance of the stock market is not inferior to that of the housing market, this means that we should attach great importance to the Chinese stock market, which may be another important source of wealth growth for Chinese residents in the future.

The stock market has outperformed the bond market for a long time.

First, in the era of paper money, the stock market outperformed the bond market in the long run.

For example, in the United States, since it broke away from the gold standard in 1933, its S & P 500 index has an annual return of 10.5%, of which the average annual increase of stock price is 6.9% and the average annual dividend rate is 3.6%. In the same period, the annualized rate of return of holding 10-year Treasury bonds is 5.6%, and the annualized rate of return of holding short-term treasury bonds is 3.5%.

In the UK, since it broke away from the gold standard in 1931, the annual return rate of its stock market is 10.7%, of which the average annual growth rate of stock price is 6% and the average annual dividend rate is 4.7%. In the same period, the annualized rate of return of holding 10-year Treasury bonds is 5.6%, and the annualized rate of return of holding short-term treasury bonds is 4.7%.

In China, both the 10-year bond interest rate and the CSI 300 index have been trading data since 2002. Since 2002, the average annual growth rate of the CSI 300 index is 6.3%, which is higher than 3.5% of the average interest rate of 10-year Treasury bonds.

In the first quarter of this year, due to the outbreak of the epidemic, there was a bull market in Chinas bond market. The interest rate of the landmark 10-year bond fell sharply from 3.14% to 2.59%, which is equivalent to a 5.5% increase. Meanwhile, the stock market fell sharply, with the CSI 300 index down 10%.

But by the second quarter, the stock market and bond market bull bear swap. The bond market quickly entered a bear market, with the benchmark 10-year bond interest rate rising from 2.59% to 2.88%, equivalent to a 2.9% drop. Meanwhile, the stock market rebounded sharply, with the CSI 300 index up 11.2% and the gem index up 23.9%.

If you invested in the China Securities equity fund index and bond fund index respectively, the former fell 4.9% in the first quarter and the latter rose 1.76%. But in the second quarter, the former rose 15.6%, while the latter did not. So far, the cumulative yield of stock fund is 10%, far more than 2% of bond fund. 8% of this gap is the excessive reward that people who have chosen the right direction of financial asset allocation received in the first half of this year.

3u3001 Over issuance of global water release currency

In the era of paper money, assets are king.

Why does the stock market outperform the bond market for a long time, while the cash performance is the worst?

In last weeks report, we analyzed the performance of various asset prices in the era of gold standard and paper money, and found that the outperformance of stock market and housing market over bond market was a unique phenomenon in the era of paper money, and the key reason behind it was the over issuance of currency.

In the United States, for example, during the gold standard period of 1870-1933, the annual growth rate of GDP was 3%, and the annual growth rate of currency in circulation was 3.9% in the same period. Since the currency is not over issued, there is no inflation.

In the gold standard period, the best allocation is to hold fixed income assets. The average annual return on holding 10-year Treasury bonds is 4.8%, and the average annual return on holding cash (short-term treasury bonds) is even 5.3%. Even if the real estate and stock are held, the average annual growth rate is only about 1.4% because the house price and stock price do not rise for a long time. The main return is from rents and dividends, which is similar to fixed income assets.

Since 1933, the annual average inflation rate in the United States has risen to 3.53% from 0 before, because of the long-term over issuance of currency and inflation replacing deflation. In the paper money era, the best allocation is the housing market and the stock market, with an average annual return of about 10%. The average annual return on the interest rate of 10-year Treasury bonds is 5.6%, beating inflation, but far lower than the stock market and housing market. The average annual return on holding cash (short-term treasury bonds) is 3.49%, even beating inflation.

Over issuance of global water release currencies.

As a result, the reason for the reversal of global stock and bond market performance in the second quarter, as in the past more than 80 years, is the re overspending of currency.

In the United States, for example, its M2 growth rate in May rose to 23.1%, a new high since 1944. According to the latest forecast of CBO, its GDP will shrink by 6% in 2020, which means that the U.S. currency is nearly 30% over the economy, far more than the average 3.7% over the past 86 years. It is because of the currencys over issuance again that the US stock market rose sharply, and the NASDAQ index reached a record high. Since the second quarter, the interest rate of 10-year US bonds has been flat at 0.7%, and the bond market has stopped rising.

In China, the growth rate of M2 in May rose to 11.1%, a three-year high. With the subsequent large-scale issuance of special treasury bonds, it is expected that M2 growth at the end of the year is expected to rise to more than 13%. At the same time, as a result of the impact of the new crown epidemic, we expect GDP growth to fall to 3% in 2020. This means that the growth rate of broad money in China will be 10% higher than that of GDP, and this gap will be the highest since 2010.

Its also because of the over issuance of currency again, which makes the asset price performance of China reverse, and the stock market turns to bull while the bond market turns to bear.

Policy interest rate performance lags behind.

For example, from the perspective of the interest rate of 10-year Treasury bonds, the starting point of this bond bull market is November 2017, with the highest interest rate of 10-year Treasury bonds reaching 4.02%.

This round of policy interest rate reduction began in November, 19, when the bond bull market has started for two years, and all kinds of market interest rates have also declined for two years. Therefore, although the official interest rates such as dr007, 1-year MLF and LPR will be slightly reduced in the future, the interest rates of dr007, R007 and 10-year Treasury bonds will not be prevented from re entering the upward cycle.

Financing surged and interest rates rose.

Why is the trend of policy interest rate not consistent with that of market interest rate? The essential reason is that the interest rate is not determined by the central bank, but by the market, which can push the boat along the water, but not against the water.

You know what? The United States was founded in 1776, and the Federal Reserve was founded in 1913. That is to say, there was no central bank for 137 years after the establishment of the United States, but interest rates always existed. The fact that interest rates exist before the central bank itself means that interest rates are not necessarily determined by the central bank.

There are also many people who say that because the United States, the eurozone and Japan are all implementing zero interest rates, China is bound to move towards zero interest rates in the future. This may seem reasonable, but it doesnt hold up in reality. The reason is that there are regulations in Chinas capital market, and the proportion of foreign capital in Chinas bond market is very low. Therefore, the trend of Chinas interest rate is determined by the internal market of China, which has little to do with the overseas interest rate.

Why did the bond interest rate start to rise sharply in May? One important reason is the surge in government bond issuance. According to the social finance data released by the central bank, government bonds issued in May amounted to 1.14 trillion yuan, an increase of 800 billion yuan over April. This year, we have issued 8.5 trillion government bonds, compared with 3 trillion in the first five months and 5.5 trillion in the next seven months.

And we should also take into account that this year, not only the government, but everyone is borrowing money. In China, the most important indicator of capital demand is the total amount of social financing, which includes all the financing needs of the government, enterprises, residents, etc. From the perspective of historical data, changes in the growth rate of total social financing can well represent changes in financing demand.

We find that after 2008, there have been three times of leverage increase in China, that is, the recovery of social financing balance growth. After each time of leverage, there will be a round of interest rate upward cycle.

The first time was to increase leverage in October 2008. After two months, the interest rate of 10-year Treasury bonds bottomed out and recovered. The second increase of leverage began in May 2012, and the interest rate of 10-year Treasury bonds also bottomed out two months later. The third leverage increase started in June 2015, but this time the growth rate of social finance is L-shaped bottom. After the growth rate bottomed out, it remained at about 13%, jumped to 16.4% at the beginning of 2017, and the interest rate of 10-year Treasury bonds rebounded at the end of 2016.

This round is the fourth time to increase leverage. From the perspective of the trend of social and financial growth, in fact, when it dropped to 10.3% in December of 2018, it had bottomed out, but as in the previous round, it had kept the L-shaped growth rate at about 10.7%. Until March this year, the growth rate of social finance has jumped continuously, which has risen to 12.5% by May. We expect that the growth rate of social finance at the end of the year is expected to rise to more than 14%, and the corresponding total amount of new social financing will exceed 30 trillion.

After all kinds of financing enter the entity, it will inevitably have an effect on the economy. However, there is a certain time lag between the financing of economic entities and the formation of effective investment consumption, so the financing growth will be ahead of the change of economic growth.

According to the data released at present, the economic growth rate in the second quarter may return to a weak level of about 3%. However, due to the obvious recovery of social financing growth rate in March, it is expected that all financial funds will be available in the third quarter, the transmission of financing to the economy will also take effect, and the economic growth rate in the second half of the year will return to the potential growth level of about 6%. It is expected that the recovery of social finance growth will continue until the end of this year, and support the economic growth in the first half of next year to continue to pick up. By next year, all unconventional policies may be withdrawn, and the economic growth rate in the second half of next year may fall again.

From the experience of the past three rounds of leverage, we can see that PPI will lag by about 1 to 3 quarters to the bottom after the financing growth rate picks up sharply. Therefore, it is speculated that the non food prices of PPI and CPI in this round are expected to rise to the bottom as soon as possible around June, thus stepping into a new round of inflation upward cycle.

Earnings improve stock bull market.

In the first leveraged period of 2008-09, the profit growth of listed companies increased from - 88.9% in the fourth quarter of 2008 to 592% in the fourth quarter of 2009. In the same period, the CSI 300 index rose from the fourth quarter of 2008 to the third quarter of 2009, with the largest increase of more than 130%.

In the second 12-13 years of leverage, the profit growth of listed companies increased from - 1.6% in the third quarter of 2012 to 21.6% in the fourth quarter of 2013. During this period, the CSI 300 index rose from the fourth quarter of 2012 to the first quarter of 2013, with the largest increase of more than 30%.

In the third 15-17 years of leverage, the growth rate of profits of listed companies increased from - 2.6% in the fourth quarter of 2015 to 35% in the fourth quarter of 2016, and remained at 18.9% in the second quarter of 2018. During this period, after experiencing the sharp fluctuation of leverage bull, the CSI 300 index rose from the first quarter of 2016 to the first quarter of 2018, with the maximum growth rate exceeding 50%.

The starting point of the fourth leverage is actually the beginning of 19 years. After the growth rate of social finance stabilized in 19 years, the growth rate of profit of Listed Companies in 19 years has recovered to 12.1%, far better than the growth rate of 2.6% in 18 years in the deleveraging environment. Therefore, despite the impact of Sino US trade frictions on the stock market in the past 19 years, the annual growth of the CSI 300 index is still 36%.

However, affected by the epidemic situation in 20 years, the profits of Listed Companies in quarter 1 fell by 21.4% year-on-year. However, due to the sharp recovery of monetary financing growth since March, corporate profits are expected to improve again, which will help Chinas stock market to rise again.

Source: Jiang Chao, editor in charge of macro bond research: Yang Qian_ NF4425