Outlook For A Share Investment Strategy In 2017: Slow Bull Market

The driving force of A shares has shifted from the downward trend of the discount rate to the sustainable improvement of the profitability of the molecular end enterprises. This round of profit taking has been stronger than any one since 2011. The slow bull market will continue. At present, most investors still believe that this profit recovery can only last until the first quarter of next year. Why are we more optimistic than others? Mainly because of three important judgments: first, we believe that Chinese enterprises are approaching the end of the debt repayment cycle.

Two, China has entered a cycle of active replenishment, and the three is a new round of government expansion cycles.

The judgement of liquidity is neutral, and will maintain a low interest rate environment. Risk appetite will continue to pick up as the profitability of enterprises continues to repair. For the industry configuration, we mainly talked about the upstream, and this year we will go upstream, and next year we should gradually move from the upstream to the middle reaches.

The five main sections we recommend are steel, basic chemical industry, machinery, military industry and so on.

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We think that we should focus on the new momentum and make up the short board. The new kinetic energy is mainly in the direction of market-oriented reform, including mixed reform, debt to equity swap, land pfer and electricity reform.

The complementarity board mainly revolves around the construction of beautiful cities, the theme of fabricated architecture and the theme of sponge city.

It has become a reality that we have recommended the supply side slow cow logic, which provides the two step of the side slow cow, including reducing the long-term risk premium of A shares and the pmission of corporate profitability beyond the market expectations. I think it has been basically fulfilled at the present time. This is when we put forward the supply side slow cow, which is mainly the improvement of driving force preference of the denominator in the DDM model. At the present time, we think that the left half of the supply side is slow to the right, and the profit from the denominator drive to the sustainable repair of the profit margin of the molecular end. Then we may say that we haven't seen the sustainability of profitability for a long time, which can drive the A stock situation. We put forward a certainty in the medium-term strategy meeting (A share ROE in the three quarter of this year, upward turning point), a possibility (policy signal gradually clear, supply side reform as an important starting point).

Why do we make such judgments? There are three main factors:

First, we are all talking about China's economy falling into the trap of liquidity. Indeed, we see that from 2011 to 2015, Chinese enterprises are deeply involved in the debt repayment cycle. The goal of the enterprise is not to maximize profits, but to minimize debts.

A subtle change took place in 2016. We can see that the cash flow growth of enterprises for fixed asset expenditure started to slow up year by year, while the cash flow for debt repayment year-on-year expenditure fell for the two consecutive quarter.

We believe that China is now in the third stage, asset liability recession and the activation of enterprise deposits, but it is close to the end of the debt repayment cycle, that is to say, it is at the end of the third stage.

This is the first sign I have just said.

The second sign is that capital returns have rebounded in the three quarter of this year. The financing costs of enterprises have seen a positive match between capital returns and financing costs over the past few years. The difference has rebounded in the three quarter. We are delighted to find that the rebound in the difference is leading private investment to stabilize and slow up in the three quarter of this year. I think this is not an accident.

This is what we have just said. Chinese enterprises are at the end of the debt repayment cycle and have a very big cognitive gap with the market.

The second judgment is that the market is currently discussing the market consensus, that is, China has entered a round of active replenishment. The first three rounds of replenishment are for one to two years.

The improvement is about a year or so. The current round of active replenishment and conservative estimation can be maintained until the middle of next year. This is our second judgement.

The third judgment is also very different from the market. Many investors believe that the local government will start a new expansion after the nineteen big government. We think the new round of expansion cycle has already started.

More than a month ago in the sixth Plenary Session of the 18th CPC Central Committee, the core of the core has been established. Since this year, the mobilization of local officers has been equivalent to the sum of four years from 2012 to 2015. The core of the core is determined and local personnel have been adjusted to a large extent, so the local government has been able to make a new round of expansion.

We can see that in the past round of real estate to inventory, the local government's land leasing continued to rise, this year the local government special debt issuance scale is expanding significantly, so the local government's pocketbook also slowly and comfortably.

This is our third judgement that the new expansion cycle of local governments will come out.

Combined with our just three judgments, we believe that the expansion of aggregate demand can also be seen next year in the context of supply side reform. Next year, we judge that the net profit of A shares will grow by about 8% over the same period next year.

Speaking of profitability and sustainable repair, liquidity is also a key factor. Next year, our view is that liquidity neutral and low interest rate environment remains unchanged. Why should we emphasize the environment of low interest rates? Since 2002, the yield of ten year bonds has been in the 3% place since the beginning of 2002, and there have been four times. In the first three times, when the interest rate rebounded, the valuation level of the entire A shares had expanded, and the overall valuation of the current A shares was about 22 times. Historically, it was a low position. Recently, the interest rates abroad were very fast. If the interest rate uplink is due to the expectation of inflation, the level of interest rates and the operation of the stock market are in the same direction.

Speaking of risk-free interest rates, I would like to point out that we should not just stare at the yield of the ten year treasury bonds. We mainly see the yield of financial products in the A shares, because A shares are the retail LED market. Although we see that the yield of the ten year treasury bonds has reached 40 BP, the yield of financial products has not changed significantly.

Some investors say that there has been a sharp rise in commodity prices to restrain inflation and monetary policy. I say PPI and CPI are at the level of 2%, oil prices are at the level of 50 dollars, monetary policy is hard to turn to tighten, and the social leverage ratio is relatively high. The supply side reform needs the cooperation of low interest rate environment.

Finally, risk appetite, money is not the reason for the stock market to rise, it is necessary to restore the risk appetite, that is to say, we commonly call the money making effect. Next we will see that the profitability of sustainable repair to continue to improve the risk preference of A shares.

This year, you told me that many investors say that although the stock market has gone up in the second half of this year, he has not made much money.

I said maybe the industry configuration of Huatai strategy has not been tracked in real time: I think the industry configuration is still very important next year. Now there is a misunderstanding in the market that the upstream is forming a squeeze on the middle stream. I think more is conduction rather than extrusion. We will see that the current inventory level is the lowest position since the subprime crisis in 2008. In the case of stable demand, replenishment will bring about the improvement of the profitability of enterprises and the pmission of the upper and middle reaches.

If the middle reaches are divided into the middle reaches and the middle reaches, the profitability of the steel can still be improved during the upstream price increase. The manufacturing of the middle reaches is relatively low in sensitivity to the cost. The gross profit margin of the construction machinery can still be better recovered in the upstream and downstream price rising process, and the profitability of the manufacturing industry in the middle reaches is significantly positively related to PPI.

From the upstream to the middle and lower reaches of the pmission path, the middle reaches will benefit from the replenishment of the industrial chain and the drop in the cost of debt, so we think that next year we should pay attention to the pmission from the upstream to the middle reaches. I propose three main lines of configuration: first, we should buy the industry with high inventory level and low finished goods inventory in the middle reaches.

Two, we need to buy.

The industry that recovered better and started capital expenditure.

The three is to buy the industries that most benefit from the falling cost of debt. We recommend five sectors: steel, basic chemical industry, machinery, military industry and banking stocks.

Finished product inventory level is low, usually means that the industry chain will be better, the high level of raw material inventory means that you have accumulated a lot of low cost raw materials, in the future can more fully enjoy the expansion of the industry boom brought about by the expansion of profits.

In addition to the five plates I have just mentioned, nonferrous metals, pportation and non silver finance are also our preferred sectors.

After we set the core of the theme investment in the sixth Plenary Session of the 18th CPC Central Committee, we quickly comb the core direction of the core, mainly around the new kinetic energy and compensation board.

The marketization reform of new kinetic energy is considered to be mixed reform and debt to equity swap, land pfer and electricity reform.

We recommend the direction of steel structure. The sponge City proposes to focus on the design and construction direction, and the two is the target of environmental water affairs.

What we can see before the mixed reform is the merger and reorganization and asset securitization of state-owned enterprise reform, but what we all want to see is employee stock ownership and mixed reform. These will help to improve efficiency. Next year, we believe that the mixed reform is worth paying attention to.

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Debt to equity swap, which we told you in August, is an important CALL for supply side reform. The theme of debt to equity swap is good.

Next year, I think it is a new year of debt to equity swap, mainly around two main lines, one is the implementing agency AMC, the other is the debt to equity target, more concentrated in the colored, steel and iron these areas.

Next year, we should pay close attention to the reform process of household registration system and the matching of homestead and land pfer policies, and the value of land revaluation of some land reclamation enterprises is high.

The theme of electricity reform and debt to equity swap are also the focus of cost reduction. We recommend that you pay more attention to the underlying low cost power generation and the underlying sales side.

Finally, let me sum up our outlook for the next year's market, and we will switch from the supply side to the profit cow. This round of profitability will last longer than any other time since 2011. It is based on three judgments: the closing of the Chinese enterprises in the close to the debt repayment week, China is entering a round of active replenishment, and the local government is opening a new round of expansion cycle.

For liquidity next year, we think it is neutral, low interest rate environment remains, risk appetite will gradually improve with the profitability of sustainable repair, industry configuration should pay attention to the upstream to the middle reaches of the pmission, focusing on buying raw materials high inventory level, finished products inventory low level of these middle reaches industries, focusing on steel, basic chemical industry, machinery, military and banking stocks.

In the theme investment, we think that we should focus on new kinetic energy, short board direction, mixed change theme, debt to equity theme, land pfer theme and what we call electricity reform theme.

For the short board, around the construction of beautiful cities, including the theme of the fabricated architecture and the theme of sponge city.

Next year, we think it is still a continuation of the slow cow. We start with the title of "changing the core of the slow cow and making profits". The supply side reform combination will reduce the long-term risk premium of A shares, and drive the A share supply from the denominator to the supply side of the slow start. At this point, I think the logic of our supply side has been basically discovered by the market.

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