From the beginning of the year, the CSI 300 Index has risen by 16.9%, and A shares have entered in the spring market. The reason for this round of market rally is the attractiveness of the undervaluation of A shares. The injected liquidity has made the market ushered in the support of money inflow, and with the support of a series of policies during the data vacuum period, the index has risen step by step. The Shanghai Composite Index finally stood above 2800 points on last Friday.
Liquidity creates the rally bellwether
Financial stocks are the main force of this round of stock market rebound, among which the stock brokers are the leaders of this round of rebound. The brokerage index is up 36% year-to-date. Especially after the release of China’s January financial data on Friday, the rally trend of stock brokers more certain. In January, total social financing increased by 4.64 trillion yuan, an increase of 1.56 trillion yuan year-on-year and a record high. On the other hand, the market sentiment also has the obvious recovery. In addition to a series of hot topics, margin trade balance in Shanghai and Shenzhen rose to 751.8 billion yuan, up 40.9 billion yuan compared to the level before the Spring Festival.
Market sentiment determined by infrastructure investment
Lack of economic support the stock market is hard to sustain the rally. Money sloshing around the financial system is not what Chinese government’s final target. Excess liquidity will eventually flow into the real economy. Infrastructure investment led by the government and state-owned enterprises is an important channel. The expectation is that Beijing will begin a new round of infrastructure investment.
In fact, since the second half of 2018, a number of pro-infrastructure policies have been introduced. First, the planned investment in infrastructure projects approved by the NDRC has reached 1.34 trillion yuan, much faster than in the first half of 2018. Second, the overall PPP projects has bottomed out, which reflects that the process of deleverage is over. Most importantly, the project funds ensure the smooth implementation of the infrastructure investment plan. Insufficient cash flow from local governments is the reason for weak infrastructure investment in 2018. However, issuance of local government bonds has accelerated, replenishing capital sources for infrastructure investment. Growth in infrastructure investment rose to 7.8 percent year-on-year in December 2018, after a -5.9 percent dropped in August.
New infrastructure is not the old “4 Trillion Plan”
The new infrastructure fund is different from the past. The new projects will not only stabilize economic growth, but also avoid going back to the old way and establish the foundation for economic transformation and industrial upgrade. In particular, the scale of infrastructure construction in China is already very large, and the growth rate of new infrastructure investment will be lower than the “4 Trillion plan” in 2009. According to CICC calculations, infrastructure investment growth is expected to peak at about 15 per cent in 2019. That means there is some room for infrastructure investment growth to accelerate in 2019.
In terms of sub-sectors, 5G-related industries are the most certain direction for new infrastructure investment. 5G is one of the important areas in China’s industry upgrade, with certainty in telecommunications equipment, semiconductors and other segments. In the railway sector, urban rail has replaced traditional railways as the segment with the most project funds approved by the NDRC. With the process of urbanization, sewage treatment and garbage treatment in municipal engineering is the shortcoming of current infrastructure investment, which will be the direction of accelerating infrastructure investment.
In summary, the current A share rebound has entered the late stage. If economic data do not confirm that China’s economy has stabilized, the rally will stall. It is too risky for investors to chase the leading stocks. The current new infrastructure valuation is attractive, and the government’s increased infrastructure investment will benefit the above-mentioned related industries.