China-Singapore Jingwei, March 4 (Xinhua) -- Which sectors may benefit from the accelerated inflow of northbound funds?
Author: Chen Gang, Chief Strategy Analyst of Soochow.
Chen Li is an analyst at Soochow.
Recently, with the improvement of the market's money-making effect and risk appetite, northbound funds have changed their previous "cautious" attitude, with a cumulative net inflow of 607 in February 20244.4 billion yuan, ending the net outflow trend for six consecutive months.
How does the acceleration of northbound capital inflows affect the market style?
We find that since 2018, the small-scale style rotation in the market has been highly correlated with the rhythm of northbound capital inflows, and the inflection point of northbound funds usually occurs simultaneously or before the style rotation (value-growth). Therefore, the current acceleration of northbound capital inflows is expected to accelerate the rise of the growth style.
Figure 1 Since April 2018, there has been a strong correlation between the style rotation of small and medium-sized levels and the scale of northbound capital inflows (unit: %; 100 million yuan).
This conclusion is based on two key premises: first, the switch of market style is often dominated by incremental funds, and northbound funds have always been "big is beautiful", prefer growth white horses, and enter the market as "prescient funds" and grasp the "style pricing power" first, so the inflow of northbound funds will lead to the relative dominance of growth style. As of February 2024, the structure of the Stock Connect is significantly overweight the "old growth" style of food and beverage, power equipment and other sectors, and the top three industries with net inflows in 2023 are electronics, automobiles, and power equipment, all indicating that the "growth attributes" of northbound funds are more obvious.
Figure 2 The current proportion of holdings in various industries and the proportion of ultra-underweight (unit: %)
Taking the round of style switching from June to September 2019 as an example, under the loosening of overseas liquidity and the recovery of the global economy, northbound funds have returned sharply, mainly into growth industries such as medicine and biology, food and beverage, and computers. It can be seen that at that time, benefiting from the "guidance" of northbound funds, the market tended to pursue a white horse leader with stable profits and a technology direction with policy support and industrial trends, and the growth style was significantly superior, showing a two-wheel drive of "consumption + technology".
Figure 3 Benefiting from the "leadership" of northbound funds, the growth style prevailed in 2019 (unit: %)
Second, the substantial inflow of northbound funds will trigger a market style rotation, and if only the scale of net outflows tends to narrow, the style rotation may still have to wait. By observing the monthly inflow of northbound funds, we can see that the formation of the inflection point at the bottom of the northbound needs to go through the process of "monthly net inflow reduction, net outflow, net outflow reduction, small and micro net inflow, large-scale net inflow", and style rotation often occurs in the last stage, that is, after the northbound funds form actual incremental funds, the growth style will be relatively dominant, which also explains why the inflection point of northbound funds has appeared at the end of 2023, but the style switch has been "delayed". For the current situation, northbound funds have turned from net outflows to net inflows for the previous six consecutive months, and have significantly increased their holdings in "new and old growth" sectors such as food and beverage, power equipment, and electronics, and the subsequent growth style is expected to accelerate its rise.
What are the signals of the accelerated inflow of northbound funds?
First, the narrowing of the nominal growth gap between China and the United States is conducive to the return of northbound funds and the repair of core assets. As can be seen from the recent move in US Treasury yields, the market tends to trade selectively with some information, such as focusing too much on the unexpected parts of the US economy and ignoring the weaker parts. The narrowing of the nominal growth gap between China and the United States will be accompanied by the narrowing of the interest rate gap between China and the United States, which will drive the recovery of global demand and domestic fundamentals, and funds will also form a positive feedback, prompting the valuation of core assets to repair. Second, compared with 2023, foreign investors may be more optimistic about the progress of China's economic recovery in 2024. With the improvement of the market's money-making effect, the return of northbound funds is worth looking forward to. Third, combined with our previous correlation**, the growth rate of A-share earnings in the second quarter is expected to reach the high point of the year.
Overall, the current risk appetite for the A** market has improved significantly. Looking ahead, the fundamentals and fundamentals of A-shares are expected to improve, and FTSE Russell will increase the inclusion factor of A-shares from March, and northbound funds are expected to continue to flow in, providing more liquidity support for the market. In terms of style, the accelerated inflow of northbound funds is expected to accelerate the rise of growth style, and we are optimistic about the "new growth" related to new industry trends such as AI and robotics, and the "old growth" sectors represented by core assets such as new energy and medicine. (Zhongxin Jingwei app).
The views in this article are for reference only and do not constitute investment advice. )
Zhongxin Jingwei is all rights reserved, and shall not be used in ** or other ways without authorization.
Editor in charge: Zhang Zhihan.
For more exciting content, please pay attention to the official WeChat of JWVIEW***