Understanding the Market | Hong Kong Stock Market Liquidity Risk Bottomed Out! But Why "Still Need to Wait"?

Source: J.P. Morgan

These days, many investors have been asking about their views on the market, wanting to see the sustainability of this rebound. After communicating with them, the overall sentiment is still cautious and wait-and-see.

Firstly, from the perspective of liquidity, the support from the decision-making level for the stock market mainly addresses the issue of market liquidity contraction. Going deeper, the factors that have caused recent problems in market liquidity can be divided into: the snowball effect of pessimistic sentiment, the "domino" effect triggered by various leveraged financial instruments during the market price decline, and the lingering of the fundamentals at the bottom.

This "market rescue" has at least roughly solved the first two problems, that is, the risk in terms of market liquidity can be said to have bottomed out. As our strategy analysts mentioned, a similar situation occurred in the foreign exchange market around September-October last year. Under a weak fundamental background, the spread of pessimistic sentiment caused the RMB exchange rate against the US dollar to rapidly decline in a short period of time.

The central bank took action on September 11th to reverse the situation. After several rounds of market games, a relatively stable price range was reached, which also gave all market participants a clearer understanding of the bottom range.

Therefore, the prediction of the current stock market situation is also roughly like this. The decision-making level has a resolute attitude towards risk control, and the actions taken can at least guarantee a bottom range. Leveraged financial instruments will be gradually cleared out over the course of one month, and the subsequent "impact" will not be as significant as it was at the beginning.

Secondly, from the perspective of fundamentals, this decision-making level's operation cannot solve or is not intended to solve macro fundamental problems.

As mentioned earlier, our strategy team pays attention to three indicators: M1, the proportion of residents' demand deposits to total deposits, corporate capital expenditure, and finished goods inventory.

These indicators are used to judge the overall activities of residents and enterprises. The latest data shows that the fundamentals are still lingering at the bottom, and it is still too early to say that the turning point has arrived. However, although there is no clear turning point from a top-down perspective, there are already signs of recovery and improvement from a bottom-up perspective.

So, the old saying still holds true: if policies can continue to be implemented after the Spring Festival, regardless of their size, it is better to have something than nothing; if the post-holiday policies do not meet market expectations, and the economic fundamentals are still in the process of bottoming out, more patience is needed, but it is not as "worthless" as many pessimistic investors think.

As I have mentioned many times, pay attention to companies that increase market share during the downturn cycle. These companies must have their strengths. After enduring the long winter, I believe these companies will give investors the best returns.

Finally, let me add some thoughts from the trading floor and different types of traders. The trading situation reflected on our trading floor is consistent with the above views: the trading volume in the past few days has not significantly increased, and the buying and selling directions are relatively balanced, with no significant net buying or selling.

Only in the pharmaceutical industry, after the sharp decline caused by various events, some global long-only investors have slightly increased their positions in leading large companies (adhering to the value investment philosophy, even if they have concerns about macro factors, they cannot help but recognize the value of the companies). Hedge funds have also closed their short positions in small and medium-sized pharmaceutical companies. In terms of communication with overseas investors, hedge funds have divergent views on whether to rebound against the support actions of the decision-making level. Some believe that they can follow the rebound or at least close out short positions, while others believe that the sustainability is not strong. If it continues to rise, they may operate in the opposite direction.

Long-only funds have stricter requirements on fundamentals, and since there have been no changes in fundamentals, it has not triggered their trading. Therefore, my personal feeling after discussing is: we still need to wait.