Take history as a mirror: what kind of expectations and opportunities will the dominance of small and medium-sized values mean for A-shares?

Core ideas:

Since the Spring Festival, A shares have been adjusted to a certain extent, but only the small-cap value has risen. Small-cap value dominance generally occurs when the economy accelerates upward while interest rates accelerate at the same time. Investors need to find high growth targets to hedge against the valuation pressure caused by rising interest rates. PEG ≤ 1 has become an important stock selection reference index for investors.

At the same time, the dominant environment of small and medium-sized value often means that the market lacks exponential opportunities, but it is not a bear market, and the market style is from looking for β to looking for a stock alpha.

Investors need to pay more attention to the marginal improvement of the company and the possibility of better-than-expected performance during the year, and accept a certain degree of imperfection. From the perspective of industry attributes, it has become an important direction to take the global economic recovery as the direction of stock selection. Global demand is oriented to China's superior manufacturing industry, which has both manufacturing and price-rising attributes. It involves household appliances, household appliances, consumer building materials, components, communications equipment, chemical industry, machinery, Dianxin, and so on. In addition, carbon neutralization carbon peak is also worth digging stock selection direction.

Text:

The style changes suddenly after the Spring Festival, and the value of the small market is dominant.

The market after the Spring Festival and the market before the Spring Festival feel like two worlds. Before the Spring Festival, the core assets and the growth of the market continued to rise sharply, while after the Spring Festival, the style suddenly changed. Almost all the previously rising targets gave up their gains during the year, and even fell, but the value of the small market rose against the trend. At the industry level, in addition to energy and public utilities, almost all first-tier industries have withdrawn to varying degrees.

This shows that some changes have indeed taken place in the market style, and the logic of these changes has been analyzed in our reports before the Spring Festival, such as "causes of extreme style, timing and reasons for change", "A-share small-ticket bear market vs small-ticket bull market, what kind of expectations are included respectively", "US stocks do not always lead to win, US debt upward need to pay attention to", "style rotation apocalypse: a style switch that must be noticed" and so on.

What does it mean that the value of small and medium-sized stocks is dominant?

Judging from the history of A-shares, the relative dominance of small-cap value has appeared four times, namely, from January 2006 to May 2017, from August 2009 to April 2011, from May 2013 to October 2014, and from February 2016 to April 2017.

Compared with these four segments, the environment in which the value of the small market is dominant is very close:

"the global economy (including China) has entered an upward cycle, and corporate profits have accelerated.

China's credit cycle has entered a downward cycle, reflecting the characteristics of counter-cyclical adjustment of China's monetary policy.

As the credit environment tightened and the economy improved, interest rates on 10-year government bonds accelerated.

This kind of environment is called "resuscitation austerity". Why is the small market dominant in value under resuscitation austerity?

First of all, why is the economic recovery relatively positive for the small market?

We discuss in "the Apocalypse of style rotation: the style switch that must be noticed":

First, small and medium-sized companies are relatively flexible, and they are more affected in the recession. In the recession, investors tend to buy large companies, industry leaders, and have stronger performance stability. As for a period of economic recovery, small and medium-sized companies that have fallen sharply because of accelerated fundamentals will show an improvement in fundamentals, reflecting stronger performance flexibility.

Second, A-share small and medium-sized companies, a large number of them are in manufacturing, traditional cyclical sectors, to a large extent, are more related to the global economy. China, as a global manufacturing power and "world factory", the improvement in global demand will directly or indirectly benefit small and medium-sized manufacturing companies, while the improvement in global demand will often lead to a rise in commodity prices, which will lead to a rise in cyclical stock prices.

Third, China's large companies, many in finance, real estate, or those that benefit more from improved liquidity and certainty in consumption, technology and medicine, are relatively disadvantageous to these companies once the financial environment tightens and interest rates rise.

Therefore, the common perception of investors that "liquidity environment deterioration or credit environment deterioration" is not conducive to small-cap, from a statistical point of view, is not quite correct. The real cause of the decline of small-cap stocks is the later stage of the deterioration of liquidity and credit environment, when the economy begins to decline and the business flexibility of small and medium-sized companies is reflected, then there will be a sharp fall in small-cap stocks.

Second, why is the deterioration of liquidity good for value?

Companies with improved liquidity, downward interest rates, large long-term space and stable long-term cash flow will enjoy higher valuations brought about by the downward discount rate, which is, in essence, money overissued under the downward pressure of the economy. On the other hand, if the excess liquidity is negative or the 10-year Treasury yield accelerates upward, it will face downward valuation pressure. We need to rely on the improvement in long-term growth expectations brought about by the improvement in short-term performance to offset the downward pressure on valuations caused by the decline in the discount rate. At this point, low valuation becomes an important condition to resist falling or rising, and the importance of PEG indicators will increase significantly.

So, historically, when our definition of "excess liquidity" is positive and the 10-year Treasury yield is below 3.5%, growth and high valuations dominate, and vice versa.

In July last year, due to the negative excess liquidity, low valuations, represented by the banking cycle, began to rise gradually. although the central bank returned to easing and growth regained dominance for various reasons, excess liquidity turned negative in January this year. Style is also suddenly biased towards value. From the perspective of future economic and inflation expectations, there is a higher probability that excess liquidity will continue to be negative, similar to that in 2016-2017, and the 10-year Treasury yield will rise to more than 3.5%.

What is the essence of the dominance of small and medium-sized values? -- β to α, accept certain imperfections and attach importance to marginal power.

What is the nature of small and medium-sized value? is there no opportunity in the market? No chance to grow up? Actually, it's not. In essence, due to the higher performance growth brought about by the economic upswing, investors began to look from the bottom up for companies with better-than-expected performance and relatively reasonable valuations. There are divisions in all industries, and the target for stock prices to rise in this economic upward cycle is to gain new growth logic in the process of economic recovery-- such as share increase, category expansion, operation efficiency improvement, management level improvement, and so on.

In this environment, the β of the industry is not obvious, top-down stock selection has become the key to win or lose.

In the past four years, economic growth has dropped to a lower level, external shocks and unexpected shocks have occurred frequently, and the market's demand for certainty and texture has been increasing, but objectively, the valuations of targets with strong certainty and excellent texture have been rising continuously, even after a period of adjustment, it is not cheap. Investors must make a choice between "expensive" and "marginal improvement". After the economic improvement, the growth rate of corporate profits has improved, and investors need to reduce the requirements of stock selection to a certain extent, first of all, to see whether higher-than-expected growth can be achieved this year, and secondly, to pay more attention to whether there is marginal improvement in the target. The importance of pursuing marginal improvement in this year's special environment should take precedence over the target level of absolute quality.

Of course, in the long run, companies with excellent performance, excellent management and strong profitability will win. Just in this year's special environment, stock selection needs to accept a certain degree of imperfection.

What is the outcome of the dominant value of small and medium-sized stocks?

After experiencing the stage of small and medium-sized value, what will happen to the market in the future?

After 530 in 2007, due to the high growth rate of social finance and the acceleration of the economy, the market value stocks accelerated, the market finally accelerated upward, and the market accelerated to catch up. Half a year later, in January 2008, the market began to adjust sharply.

After April 2011, due to the return of the global economic downturn and the accelerated tightening of domestic monetary policy, the growth rate of social finance turned negative, the economy began to decline, A-shares entered a bear market, and the market value was relatively resistant to decline.

After October 2014, due to the economic downturn and loose monetary policy, the market gradually turned to a substantial increase in the market value, and after the undervaluation rose, it returned to the small market after January 2015, but at this time, the small market has been led by Internet +, Industrial 4.0, mergers and acquisitions, etc.

After March 2017, the growth rate of new social finance returned to high growth, the style accelerated to turn to the market value, and the small market began to show a significant pullback.

From the above description, we can see that after the small and medium-sized value is dominant, the final outcome will basically turn to the market value, either accelerating the increase of the market value, or the market value is relatively resistant to decline. This is also the reason why we repeatedly emphasize the transformation from "small and medium value" to "market value". And whether the market value is anti-falling or leading up, mainly in the "new social financial growth rate" this indicator.

Summary

Since the Spring Festival, A shares have been adjusted to a certain extent, but only the small-cap value (code: 399377) has risen. Small-cap value dominance generally occurs when the economy accelerates upward while interest rates accelerate at the same time. Investors need to find high growth targets to hedge against the valuation pressure caused by rising interest rates. PEG ≤ 1 has become an important stock selection reference index for investors. At the same time, the dominant environment of small and medium-sized value often means that the market lacks exponential opportunities, but it is not a bear market, and the market style is from looking for β to looking for a stock alpha. Investors need to pay more attention to the marginal improvement of the company and the possibility of better-than-expected performance during the year, and accept a certain degree of imperfection.

From the perspective of industry attributes, it has become an important direction to take the global economic recovery as the direction of stock selection. Global demand is oriented to China's superior manufacturing industry, which has both manufacturing and price-rising attributes. It involves household appliances, household appliances, consumer building materials, components, communications equipment, chemical industry, machinery, Dianxin, and so on. In addition, carbon neutralization carbon peak is also worth digging stock selection direction, we have recently released two in-depth reports "substitution, recycling, energy saving and high efficiency-- carbon neutralization carbon peak investment opportunities research series (1)", "in-depth analysis of carbon trading, pay attention to the four major allocation directions _ _ carbon neutralization carbon peak investment opportunities series (2)" for investors' reference.