Seizing the Leaders of China’s Stock Market Recovery
The discussion surrounding how to increase the allocation of Chinese assets around the National Day holiday has become the most popular topic globally. This surge in interest stems from the comprehensive policy measures announced during the press conference held by the State Council on September 24, as well as the strong policy signals conveyed during the Politburo meeting two days later. Both significant events have demonstrated to the market that the long-awaited policy turning point may have finally emerged.
In the market developments post-holiday, several major stock indices have shown volatility, prompting many investors to focus on the logic behind this recent rally and its sustainability. With the significant jump in the index in September confirming a mid-term low, the overall market direction moving forward appears optimistic. However, if short-term gains become excessive, a phase of intensified fluctuations cannot be ruled out.
Looking ahead, ETFs have emerged as the primary source of incremental capital supporting this round of market stabilization and recovery, and they are expected to continue this trend, benefiting leading stocks and blue chips across various sectors. Structurally, if policy continues to drive growth, indices represented by the China Securities A50 (930050.CSI), which consist of top-tier companies, warrant closer attention.
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ETFs have become a vital source of new capital in the market
Increased activity from foreign capital
Investors cannot infinitely purchase stocks; consequently, choices must be made during their buying process. Hence, the amount of incremental capital ultimately determines the overall market rise and fall. The characteristics and preferences of this incremental capital serve as another critical force influencing which stocks realize price increases.
Analyzing various funds' flows, it becomes evident that ETFs have contributed significantly to new capital in recent years. By September 30, broad-based ETFs achieved a net inflow of 875.2 billion yuan this year.
Moreover, foreign capital's interest in the Chinese market is also notably recovering. Data from EPFR indicates that from September 26 to October 2, foreign equity funds investing in China experienced a significant net inflow of $5.89 billion. Among them, actively managed foreign capital shifted from a previous net outflow of $410 million to a net inflow of $510 million, while passive foreign capital's net inflow expanded from $1.34 billion to $5.38 billion.
As the Chinese stock market stabilizes and the economy steadies, under the inherent drive of capital to pursue profits, overseas funds are likely to spark a new wave of enthusiasm for allocating resources to the Chinese stock market.
Outlook for the market rebound
—— Why focus on the China Securities A50?
Looking back at previous major market cycles, the prevailing themes typically revolve around policy, macroeconomic trends, industrial directions, and capital movements.
In historical rising markets, the primary characteristic of the leading wave is evident: if the economy accelerates and improves, large-cap growth stocks, represented by the China Securities A50, tend to perform well; if the economy is moderate and industrial trends accelerate, the indices corresponding to those industries often prevail.
Reviewing the spirits from previous meetings, it is apparent that upcoming policies will likely focus on "striving to achieve the annual economic and social development goals." Key policy directions include:
In consideration of overseas macroeconomic factors, the easing of liquidity following the United States entering a rate-cutting cycle also benefits China's core assets. Coupled with two market trends, this will support stocks with high static intrinsic returns, overall favoring core broad-based indices, including the China Securities A50.
Investment Value Analysis of the China Securities A50 Index
From an investment standpoint, leading companies are regarded as having superior fundamentals due to their relatively steady performance, strong market competitiveness, and promising growth prospects. Additionally, leading stocks typically feature stable dividend policies, providing investors with consistent cash flow returns.
The China Securities A50 Index, which encompasses the leading stocks across all industries, selects the 50 securities with the largest market capitalization from the top publicly listed companies in various sectors, thereby reflecting the overall performance of the most representative leading stocks across industries. In terms of specific industry distribution:
Compared to the CSI 300 and the Shanghai 50, the China Securities A50 reduces its weight in sectors like finance and real estate while increasing its proportions in information technology and pharmaceuticals. This adjustment avoids the “hostage” effect from heavily weighted stocks and the distortion of performance caused by it, preventing excessive beta adjustments from one sector from weighing too heavily on the overall index. It focuses on the new economic growth engines of China, with index components exhibiting stronger growth characteristics.
Regarding the constituent stocks, the China Securities A50 Index covers approximately 16.47% of the A-share market's market capitalization, 17.7% of revenues, and 15.78% of profits using only 50 constituent stocks, concentrating on industry leaders with premium capabilities and long-term competitiveness.
In terms of its long-term performance, since 2015, the China Securities A50 Index has outperformed the CSI 300 Index for seven years, with a cumulative excess return of 47.81% and a maximum annual excess of 21.03% (in 2017). It only slightly underperformed the CSI 300 in three years (2015, 2021, and 2023) by about 1%. Furthermore, its returns have also surpassed other mainstream broad-based indices such as the CSI 500, Shanghai 50, and MSCI 50.
In summary, the core of the current market logic reversal lies in the following: the unexpected capital market policy dividends, new macro policy approaches focusing on the demand side, and the unexpected strength of macro policy counter-cyclical adjustments. Looking ahead, the combination of further loosening domestic liquidity and continued inflows of foreign capital may highlight the allocation value of high-quality core assets represented by the China Securities A50.
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