On January 14, Chinese A-shares experienced a notable recovery, as the Shanghai Composite Index surpassed 3,200 points and the Shenzhen Composite Index broke the 10,000 markThis resurgence comes after a period of adjustment in the A-shares since the beginning of the year, during which the Shanghai index had dropped over 3%. The significant upward trend is expected to provide a substantial boost to market confidence.

In recent weeks, favorable policy announcements have emerged, with measures from the central bank aimed at stabilizing the currency marketFollowing the issuance of 600 billion yuan in bills in Hong Kong, the central bank raised the macro-prudential adjustment parameters for cross-border financingFurthermore, major foreign investors have expressed optimism about the Chinese stock market, raising the ratings of Chinese assets.

Looking towards the future, as the policies of the newly elected President of the United States become clearer, it is anticipated that China's response strategies and specific measures will gradually come to lightThe synergy of these policies is likely to propel continuous economic recovery, bolstering both the supportive policies and the underlying economic fundamentals of the A-share marketMost analysts predict the bottom of this adjustment cycle will settle before the Lunar New Year.

Confluence of Uncertainty

On the same day, the A-share market showcased a rare surge, with three major indices opening higher and continuing to climb throughout the trading dayThe Shanghai Composite Index, Shenzhen Component Index, and ChiNext Index closed with gains of 2.54%, 3.77%, and 4.71% respectively, with total trading volume reaching 1.35 trillion yuan.

The new year had seen a wave of adjustments in the A-share market, with the Shanghai Composite shedding 3.31% by the end of January 14. The recent decline can be attributed to a confluence of internal and external factors.

Deng Wei, deputy director of wealth management at Guangfa Securities in Foshan, noted in an interview that the A-share market's early-year adjustments were influenced by numerous factors

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On the international front, the Federal Reserve indicated a pause in interest rate cuts, causing a substantial appreciation of the dollar and a persistent depreciation of the renminbi (RMB) against itMarket participants have adopted a wait-and-see approach concerning policies expected to be enacted after the new President’s inauguration.

Additionally, Deng cited the approach within China, where the policy landscape is expected to witness increased activity from September to December 2024, resulting in a relatively long current policy vacuumIn light of the strong dollar, quick cuts to reserve requirements or interest rates pose challenges, leaving investors poised for more definitive policy signalsMoreover, the late January period marks an important timeframe for companies to disclose their earnings forecasts, prompting investors to reduce holdings to avoid potential underperformance.

Representatives from Starstone Investment indicated that the recent adjustments in the A-share market stem primarily from three factors: First, the approach of a government transition in the United States has increased trading uncertainties, wherein personal uncertainties and tariff policies suppress risk appetites towards the Chinese stock market, causing primarily a wait-and-see attitude among investors before the inaugurationThe recent drop in traded volume further underscores this hesitation.

Second, recent data indicating robust inflation and better-than-expected employment figures in the U.S. have raised speculation that the Federal Reserve may delay further rate cutsThis scenario has led to upward pressure on the dollar index, imposing passive devaluation on the RMB and consequently affecting RMB-denominated assets.

Third, from a domestic perspective, the market is currently in a policy vacuum and observing economic recovery trends, lacking clear positive signals to drive stock market momentum; the effects of the previous two factors are likely to be magnified in a phased manner.

Despite the market's pullback under these weak conditions, structural overheating persists

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Miu Yiling, chief strategist at Minsheng Securities, observed that the market is currently characterized by a high proportion of trades in technology, media, and telecommunications (TMT) sectors while physical assets lag behindAny slight positive change in fundamentals may lead to at least a temporary reversal, indicating that the core indicator of absolute returns centers on the stabilization and recovery of the overall economy.

Stabilizing Currency Benefits the Stock Market

Recently, the central bank has taken significant steps to stabilize the currency marketFollowing the issuance of 600 billion yuan in bills on January 9 in Hong Kong, another move was made on January 13 to adjust macro-prudential parameters for cross-border financing.

Central bank officials have also been vocal about their strategiesOn January 13, Pan Gongsheng, Governor of the People's Bank of China (PBOC), emphasized at the 18th Asian Financial Forum opening that corrective actions would be taken against market cyclical behaviors, and that measures would be enacted to prevent excessive volatility in the exchange rate, aiming for the yuan to maintain basic stability at reasonable and equitable levels.

On January 14, Xuan Changneng, deputy governor of the PBOC, reiterated in a news conference that the central bank's stance on exchange rate policies is consistent and clear, with commitments to maintaining the stability of the yuan’s exchange rate unchangedWith years of experience in addressing external shocks, the PBOC is confident in its ability to achieve this goal.

What impact does currency stabilization have on the stock market? Deng Wei suggests that the market should expect that the issuance of bills will temporarily absorb some offshore RMB liquidity

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Considering the recent fluctuations of the RMB, stabilizing the exchange rate aligns with the central bank's goals, with a stabilized exchange rate beneficial for A-shares.

"Adjusting the macro-prudential parameters for cross-border financing increases the cross-border financing quotas for enterprises and financial institutions, thereby enhancing dollar liquidity within the domestic marketHowever, this influx of funds will not immediately flood into the stock market," explained DengIn the medium to long term, this parameter adjustment is favorable for better utilizing international and domestic markets and resources, ultimately easing the financing challenges and costs faced by the real economy.

Starstone Investment commented that due to the devaluation pressures on the RMB negatively impacting the performance of RMB-denominated assets, the central bank's actions to stabilize the currency are vital in alleviating this pressure and reducing irrational fluctuations in the short-term currency marketBy utilizing targeted tools to stabilize the exchange rate, China demonstrates it's equipped with sufficient measures to counter various market fluctuations, which in turn supports stability in policy expectations and underpins price rebounds in RMB assets.

From a medium to long-term perspective, the movements in the stock market are determined by China's fundamentalsAs the economy improves, it is projected that the RMB will appreciate, leading both the stock market and currency market trends to alignThis anticipated appreciation may encourage more global funds to increase their allocation to RMB-denominated assets, amplifying their stock market performance.

Prospects for a New Bull Market

Recently, major foreign financial institutions like Goldman Sachs and JP Morgan have expressed optimism regarding the performance of the Chinese capital market

They have been raising their ratings on Chinese assets.

Goldman Sachs expects that by the end of 2025, the MSCI China Index and the CSI 300 Index will increase by approximately 20%. They recommend maintaining an overweight position in A-shares and Hong Kong-listed Chinese stocks due to the attractive risk-return ratio.

JP Morgan, in its latest report, noted that as the policies of the newly elected President of the United States towards China become clearer, it is expected that the Chinese stock market will see a reversal around the end of January.

“Deng observed that China and the United States currently find themselves in different phases of the economic cycleWhile external factors may influence the A-shares' operational rhythm, they will not affect the overarching trendIn the future, with the President's policies falling into place, expectations for liquidity improvement post-Lunar New Year, and expectations for policies prior to the Two Sessions, a new bull run may be on the horizon.”

In the upcoming two quarters, the A-share market is likely to demonstrate stronger performanceStarstone Investment projects that after the President takes office, the clarity of policy rhythms will yield a reduction in external uncertainties, leading to a relief of market pressuresThis could revitalize market activities marginallyOverall, the potential for upward movement in the stock market is expected to outweigh the risks of downward movements, as China's policy measures take effect and economic indicators improve, fueling an upward trend supported by solid fundamentals.

Investment Opportunities in Dividend Assets

After the conclusion of the Central Economic Work Conference in December 2024, significant policy changes may not emerge until the National People's Congress in 2025. Although the current period is marked by a policy vacuum, it is evident that reinforcing domestic demand and boosting consumer spending will be prioritized based on the outcomes of the previous conference.

“In terms of major events impacting the stock market, numerous developments are expected to settle around or after the Lunar New Year

Furthermore, following the recent sharp declines, a potential bounce-back based on market sentiment is likely, suggesting that the bottom of this round of adjustments will most likely occur before the Lunar New Year,” Deng asserted.

In terms of allocation strategies, Deng recommended focusing on a "barbell strategy", which includes high-dividend yielding stocks on one end and technology stocks on the other that represent future directionsWhile the financial supply-demand situation has yet to improve significantly, dividend assets remain valuable for allocation and continue to attract interest from institutions like insurance companiesThe technology sector represents an attractive opportunity as a future trend, especially areas like humanoid robotics, AI applications, satellite navigation, and the low-altitude economy.

The market allocation approach may shift from seeking upside elasticity to focusing on downside protectionMiu Yiling pointed out that undervalued state-owned enterprises (in sectors like oil and petrochemicals, and banking) hold greater cost-efficiency from a defensive perspective, while resource assets (such as aluminum, coal, gold, and copper) are vital points to considerAdditionally, leading manufacturing enterprises in areas like machinery, basic chemicals, and steel have strong momentum for industry trends; likewise, opportunities abound in service consumption (such as airlines, online travel agencies, and express deliveries).

Starstone Investment advises investors to focus on opportunities in domestic demand and consumption sectorsWith the current policy framework aiming to boost domestic consumption, it is anticipated that these efforts will catalyze further demand recovery and improve the operating conditions of enterprises, supported by favorable industry fundamentals

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