Yin Zhongli Column 2020 Stock Market Investment Outlook

Yin Zhongli (Research Fellow, Institute of finance, Chinese Academy of Social Sciences, chief economist of Rongsheng Development)

In the past 2019, the A share market was neither a bull market nor a bear market.

For institutional investors represented by public offering funds, 2019 was a very rewarding year. Several funds had an annual yield of more than 100%, with tens of more than 50% of earnings, and hundreds of funds earning more than 30%. But retail investors are scarred. Although the main index has risen by more than 20% a year, more than half of the shares have not risen this year, and hundreds of shares have fallen by more than 30%. Therefore, the phenomenon of "earning index but losing money" is everywhere.

Market differentiation is the biggest feature of the stock market in 2019, which is similar to that in 2017. The causes of market differentiation are related to changes in relevant systems. As the author predicted in 2019 New Year's day, the registration system reform of stock issue profoundly affected the valuation system of the market. Because the stock value of China's A share market depends not only on the discount of cash flow, but also the value of shell, which is the characteristic of A share. The existence of shell value of stock is related to the administrative control system of IPO. The number and pace of IPO issuance, or even the price of the issue, are subject to strict administrative control. The acceleration of stock issuance in 2017 and the establishment of the science and technology board in 2019 led to a sustained decline in the value of small and medium capitalization stocks, because the acceleration of the issuance of new shares led to the depreciation of the shell value of the stock market.

Yin Zhongli, a researcher at the Institute of finance, Chinese Academy of social sciences. Data map

But there are also obvious differences between 2019 and 2017. The top industries in 2017 were mainly cyclical and consumer goods, such as food and beverage, steel, household appliances, non silver finance, construction materials and nonferrous metals. In 2017, the attention paid by the cyclical industry was related to the supply side reform. Under the influence of the supply side reform, the price of cyclical products increased considerably, stimulating the growth of the listed companies in related industries. However, the performance of the cyclical industry in the year 2019 was not satisfactory. The index of automobile, chemical industry, building decoration, mining and iron and steel industry all fell, and became the worst industry index in the year.

The best performing industries in 2019 were: agriculture, forestry, animal husbandry, food and beverage, electronics, non silver finance, household appliances, computers and communications. No doubt, the biggest bright spot of the stock market in 2019 was technology stocks. The outstanding performance of technology stocks is directly related to the trade war launched by the United States. The US sanctions against HUAWEI and ZTE accelerate the domestic substitution process of key technologies in China. The domestic chips and operating systems are the key technical links in information technology. The listed companies concerned become the best performing companies in science and technology stocks. Besides, the companies related to 5G communication and HUAWEI mobile phone industry chain also perform well.

Of course, in the stock market in 2019, there were also amazing performances like "Oriental communications". Their common feature was that stock prices soared in the short term, and the price of Dongfang communications increased 10 times in two months, and then the stock prices declined gradually. The behavior of such "monster stocks" almost disappeared in 2017 and 2018, but it was resurrected with the change of regulatory policy. This phenomenon is not the mainstream of the market, only entertainment value, lack of investment reference significance.

Looking forward to 2020, the trend of stock market valuation system will continue. With the implementation of the new securities law, the full implementation of registration system will accelerate the change of the valuation system. For the worse performing stocks, it still needs to prompt risks.

The risk-free rate of return in 2020 is expected to continue downward, and the risk premium will fall, which is conducive to the rise of the stock market. Looking around the world, the risk-free rate of return is a common trend. European and Japanese government bond yields have been negative, and the attractiveness of RMB assets to global asset allocation has increased. In the 12 months of 2019, the northbound capital was bought in 10 months, and the trend is expected to continue in 2020. The assets allocation of domestic residents is 70% real estate, and the share allocation ratio is very low. In 2020, the real estate prices were difficult to sustain the upward trend in the past, and the marginal demand of residents' allocation of financial assets is expected to increase. From the comparison of stock market capitalization and total economic volume, the market value of domestic stock market is only 50% of GDP, which is expected to return to the mean value.

The RMB exchange rate will steadily rise in 2020, which will help the stock market to flourish. Although the RMB exchange rate has fluctuated to a certain extent in 2019, the stability of the RMB exchange rate will increase with the change of the external environment in 2020.

From the point of view of investment, with the cooling of the real estate market, the cyclical stocks are hard to predict in 2020. The valuation of large consumer stocks is already at a high level, and the driving force for continuing upward is insufficient. The author believes that domestic substitution of key technologies is still the hot spot of investment in 2020.