Discussing confidence in the A-share market and the massive inflow of funds into A500

$ChinaAMC CSI A500 ETF(512050.CN)

Let's talk about A-shares and my confidence in the bull market. No matter what, the trading volume of A-shares has been expanding and remains robust. To find out the exact daily turnover for the past month, let's ask Wind's AI assistant Alice:

Our stock market capitalization is only one-fifth of the U.S. stock market, but the daily trading volume is almost on par with the U.S. market—like a bickering couple finally finding harmony. Without delving into the free float, a rough estimate based on total market cap shows that the current trading activity in A-shares is five times that of the U.S. market. If this 5x turnover rate were applied to a restaurant, it would mean the difference between the owner going crazy and the chef going crazy. The U.S. stock market's trading volume follows a strict power-law distribution, with the top stocks sucking up 99% of the trades. Meanwhile, in our market, as everyone knows, "How dare you invest in companies with solid fundamentals?"

Despite the significant increase in trading volume, the market has boldly consolidated for a month. Why? First, it can be easily dismissed as everyone playing with speculative stocks—heavy speculative sentiment. Second, the increased trading volume can also be explained by heavy day trading activity. Anyone who has ever turned 500,000 yuan into 100 million yuan in trading volume should deeply understand this. Third, there is indeed new money entering the market, whether it's fresh meat eagerly jumping into SFISF swaps or new funds—like the A500 ETFs being feverishly launched by various firms. The second batch of CSI A500 ETFs was approved in a flash, and the total scale of A500-related index funds has now exceeded 100 billion yuan. Today also marks the listing of the A500 ETF (trading code: 512050, subscription code: 512053). For A500 ETFs, you can choose ChinaAMC, which manages 670 billion yuan in ETFs and has ranked first in the industry for 19 consecutive years.

But why hasn't the active trading driven the market out of its sluggish trend? What is driving—or failing to drive—the market? What is driving the market CURRENTLY?

I believe the market is desperately, painfully, and blindly waiting for certain things to settle. As I mentioned earlier, this week is intense—Tuesday brings the much-anticipated election, serving up the toughest dish right away, along with the ISM Non-Manufacturing PMI data. Thursday brings the initial jobless claims data, but more importantly, the Fed's interest rate decision. In theory, this shouldn't follow the election results, but it's only "in theory." This decision is the move we've been waiting for. Friday brings the University of Michigan Consumer Sentiment Index data, plus earnings reports from 15% of S&P 500 companies. This week is packed, especially with the election results. On our side, let's say it in English: the NPC Standing Committee meeting runs from November 4 to 8, perfectly aligning with this critical week.

Against the backdrop of such an explosion of incremental and key information in the prelude to this week, I can fully understand A-shares' wobbly, indifferent performance. The two biggest influencing factors are: first, the U.S. election outcome, and second, our own stimulus measures. Our actions on September 24 have already proven that we're playing reactively, waiting for the Fed to make the first move so we can counter—or even exploit a bug.

The biggest confidence in A-shares still comes from the relatively large room for maneuver in stimulus measures. Based on the external environment, there are three divergent expectations. The first is the so-called "king bomb" measure equivalent to the 2008 four trillion yuan stimulus (adjusted for GDP proportion and inflation, that would be 10 trillion yuan), dropped all at once. This is the most optimistic scenario and likely what the September 24 crowd was hoping for. The second is dynamic calibration—taking it step by step, adjusting the intensity as needed. The third, and the one the market dislikes the most, is the "strategic patience" approach—or, as my good friend A Sheng puts it, "maintaining strategic resolve." Currently, the market seems to be pricing in the second expectation. Personally, I think the final approach might strike a balance between the first and second—perhaps a big initial move followed by adjustments based on the results.

As for stocks, don't overanalyze the fundamentals, because the bottom of fundamentals and the bottom of stock prices almost never coincide. Stock prices are always a leading indicator. If you're tracking the Q3 reports of A-share companies, you'll get a strong sense that the bottom of fundamentals hasn't arrived yet.

On a comparable basis, the Wind All-A Index shows that A-share companies' revenue fell 1.56% YoY in Q3, while net profit attributable to shareholders rose 4.73%. Excluding financials, oil, and petrochemicals, revenue fell 2.88% YoY, and net profit attributable to shareholders dropped 9.46%. Across the board, there's no V-shaped recovery in revenue—whether or not financials and oil/petrochemicals are excluded, the decline in revenue growth in Q3 widened compared to the interim reports. Net profit attributable to shareholders shows clear divergence depending on the calculation method (whether financials, oil, and petrochemicals are excluded). This means the recovery of profits across A-share industries is uneven, and the bottom of fundamentals for different industries won't arrive at the same time—it could even be years apart.

(A-share companies' EPS growth and other fundamentals don't seem to have bottomed yet. Source: UBS)

But stocks are ultimately about expectations—expectations of monetary and fiscal bazookas, as mentioned above. Don't ask me how the current fundamentals of A-shares can support a bull market. The answer is simple: if we wait until the fundamentals are strong enough to support a bull market, the bull market will already have happened. That's how the stock market works, everywhere and always. And by then, you'll realize—once again—that you're too late.

Moreover, so-called fundamentals are, after all, last quarter's earnings data—there's a lag. For this quarter's data, like September's retail figures, there's already marginal improvement, at least better than most expected.

In short, everyone is waiting—for these events and for incremental funds. Speaking of incremental funds, will foreign investors reconsider A-shares? I think it's possible. For example, the CSI A500 Index excludes components with ESG ratings of C or lower in its compilation methodology—a philosophy that appeals to foreign investors. All components are also within the Stock Connect program, allowing foreign investors to allocate without quota restrictions. From this perspective, the A500 Index is an index with a mission to attract investment.

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Disclosure: The author is bullish on A-shares and China-concept assets and holds long positions.