Guo Lei: Whether this round of bull market can form a long bull market like that of 2019-2021 depends on two crucial factors, which are also the two major potential opportunities in this round of bull market

As the year-end approaches, Guo Lei, Chief Economist of GF Securities and a New Wealth Platinum Analyst in the macro field, recently provided an outlook on the economy and major asset classes for 2025 at the Wind "Chief Economist Outlook 2025" forum.

Guo Lei pointed out that the real estate sector is expected to experience a round of "stabilization in volume and price" next year. Regarding the stock market, whether the bull market pattern can continue the long bull from 2019 to 2021 still requires attention to two important clues.

The investment workbook representative summarized the core points of Guo Lei's speech:

1. (Next year) household consumption should be higher than this year. The situation of early loan repayments should significantly decrease, which will release the momentum for consumption stabilization. If we add next year's consumption promotion measures, including special actions for consumption, the household consumption sector should perform overall better than this year.

2. The growth rate of broad infrastructure may not necessarily be higher than this year, but the growth rate of narrow infrastructure should still have a relatively high probability of exceeding this year.

3. Manufacturing investment next year may be slightly lower than this year. However, considering "two new" and "two heavy," policies will still focus on support, and even if it declines, there will still be some support.

4. It is expected that export growth will slow down next year compared to this year, but it will still maintain a certain degree of resilience. The main uncertainty in exports actually comes from trade conditions and overseas trade policies.

5. It is estimated that next year, there may be a more systematic emphasis on supply optimization. This involves some industries with low capacity utilization and low product differentiation, which may systematically promote the rectification of inward competition in the future. This is actually a signal worth paying attention to for the capital market.

6. The long-cycle adjustment in real estate may not have been completed yet. The stabilization of volume and price in real estate next year has a fundamental basis.

7. The recent upward trend in stocks since the end of September is very similar to the beginning of 2019 in terms of characteristics. The initiating factors are very similar to this round, but the initiating factors are not important; what matters are the two supporting factors from 2020 and 2021.

At that time, the two factors were one regarding the total (rapid expansion of exports) and one regarding the structure (formation of dual carbon economic expectations), which were very important backgrounds for forming a long bull market. Therefore, from this framework, whether similar supporting factors can be formed in this round is relatively critical.

1. I believe there are two potential opportunities in this round (of the bull market).

First, the current position of nominal GDP is relatively low. If we can pull nominal GDP back above 5% next year, it would be comparable to the expansion of nominal GDP in 2021, which should lead to a high slope recovery of corporate profits Second, the current position of consumption is relatively low. If we pull consumption back to near nominal GDP, it will also create structural highlights or driving factors.

The following is a summary of key points organized by the investment homework class representative (WeChat ID: touzizuoyeben), shared with everyone:

2025 Economic Outlook: Consumption, Real Estate, Infrastructure, Manufacturing, Export Estimates

Next, let's talk about economic growth in 2025. First, under neutral circumstances, we expect GDP to still achieve a growth rate of around 5%. We have made a simple estimate here.

The main assumption of our estimate is that, first in terms of consumption, we estimate that household consumption should be higher than this year. The reason is simple: this year, urban consumption is relatively weak, and the reason for weak urban consumption is the early repayment of loans by households. The background is the inversion of existing and new mortgage rates.

This time, the reduction in existing mortgage rates should address the core issue. Therefore, we estimate that next year the situation of early loan repayment should significantly decrease, which will release the momentum for stabilizing consumption. If we also add next year's measures to promote consumption, including special actions for consumption, etc., the household consumption sector should perform overall better than this year.

We understand real estate as follows: we estimate that sales and prices will further stabilize based on this year's foundation. However, investment still has a relatively high probability of negative growth. This is because our current policy focus is actually on the demand side, while on the supply side, some cities still have relatively high inventory.

So at this time, the focus is not on increasing supply, and coupled with the fact that developers have not acquired too much land in the early stages, we estimate that investment will still experience negative growth, but the decline will be narrower than this year. According to our previous understanding, the growth rate of broad infrastructure may not necessarily be higher than this year, but the growth rate of narrow infrastructure should still have a relatively high probability of being higher than this year.

Another part is manufacturing. Note that after 2015, we have had three rounds of investment expansion in manufacturing. One round was in 2018, another during the export expansion in 2021, and this year is another round, mainly focused on large-scale equipment updates.

You will find that after the first year of high growth in the first two rounds, the growth rate in the second year has slowed down to varying degrees. Therefore, we expect manufacturing investment next year may be slightly lower than this year. However, considering the "two new and two heavy" policies, it remains a key area of support, so we estimate there will still be some support downward.

Another key assumption is exports. Our understanding of exports includes several aspects. First, the fundamentals of exports next year will not have particularly significant changes. According to the WTO and UNCTAD's forecast for the global goods trade environment next year, this area is expected to still be in a relatively good year This means that the main uncertainty in exports actually comes from trade conditions and overseas trade policies.

In this part, we estimate that the impact will gradually take shape. However, it should not be a factor that can truly affect export performance. In terms of the U.S. tax increases, the tariffs should also bring some impact on the prices of U.S. consumer goods.

Therefore, we understand that it is unlikely for all products to consistently face very high tariffs. So in a neutral scenario, we expect the growth rate of exports next year to slow down compared to this year, but it will still maintain a certain degree of resilience.

In a neutral scenario, we anticipate a year-on-year growth rate of 1.5%. Under these conditions, the overall GDP can achieve a growth of around 5%. Of course, the main uncertainty here still comes from external demand, specifically from exports. If exports fall short of our assumptions, we estimate that policies will further warm up, and the relevant policy reserves should still be quite clear.

Capital markets should pay attention to this signal

In addition to demand expansion, I want to highlight another very important clue, which is supply optimization.

Please note that the Central Economic Work Conference clearly proposed to comprehensively rectify "involution-style" competition and regulate the behavior of enterprises and local governments. This actually points to the supply side of the industry. We estimate that next year, supply optimization may receive relatively systematic attention. Why?

Taking 2021 as an example, there was a rapid expansion in exports at that time, which drove the capacity utilization rate of our domestic industrial sector to rise. At that time, the overseas supply chain was temporarily disrupted, and China's export advantages became apparent, with exports growing nearly 30% in 2021.

However, after the overseas supply chain returned to normal in 2022, exports gradually normalized. In the second half of 2022, there was negative growth in monthly exports, and during this period, the capacity utilization rate gradually declined. This should be a very important background for the rise in PPI pressure, which is a transmission from demand to capacity utilization.

We observed that during this period, the capacity utilization rate was actually at a moderately low level. This corresponds to the fact that if external demand faces certain pressures, stabilizing the capacity utilization rate becomes crucial.

In addition to stabilizing demand, promoting supply optimization is still difficult to bypass. This involves some industries where capacity utilization is not high, and the degree of product differentiation is also low. In the future, there may be systematic promotion of the rectification of involution-style competition. This is actually a signal worth paying attention to for the capital market. Because once the supply in an industry contracts, it may be a relatively positive signal for prices and the future overall industry landscape.

The long-cycle adjustment in real estate has not yet been completed, and a round of stabilization in volume and price is expected next year

Let me talk about my understanding of the position of major assets. First, regarding real estate.

Please note that in the past few years, with the adjustment of volume and price in real estate, the entire real estate fundamentals have actually been adjusting. This corresponds to rental yields, which have actually been fluctuating upwards We know that if housing prices decline, then the overall rental yield will correspondingly increase. For example, in our first-tier cities like Beijing and Shanghai, the rental yield has already surpassed that of three years ago. According to the latest data from a hundred cities, the rental yield has returned to around 2.3%.

This corresponds to two conclusions. First, the long-cycle adjustment in real estate may not yet be fully completed. Theoretically, the rental yield should equal the long-term risk-free interest rate, such as the 30-year government bond plus a certain degree of risk premium. What does the current 2.3% rental yield mean?

It means that the risk premium has returned to a level above 0. According to this month, it has returned to above 0, and according to last month, it has generally returned to near zero growth. This indicates that the entire real estate market has actually become much healthier, meaning it is no longer at a negative premium. Households no longer view real estate as a guaranteed investment.

However, from a global perspective, a premium around zero or slightly above may still not be fully adjusted. As a risk asset, the empirical risk premium compensation for real estate should be higher. For example, it should return to above 1, so the long-cycle adjustment of housing prices is still ongoing.

The second conclusion is that from a short-cycle perspective, this year has seen a significant change: the rental yield has begun to exceed the yield of five-year fixed deposits and wealth management products. This change corresponds to a stabilization in both volume and price in real estate next year, providing a fundamental basis.

We estimate that the stabilization and positive growth of housing prices in this short cycle, as well as the year-on-year growth rate of sales returning, will have certain conditions next year.

Pay Attention to the Risk of Interest Rate Rebound

The second asset is bonds.

Historically, the valuation of interest rates can be divided into three stages.

The first stage is before 2012, where the nominal GDP elasticity was relatively high, and the relationship between nominal GDP and the yield of ten-year government bonds was a valuation ratio of 4 to 5 times, averaging 4.5 times.

The second stage is after 2012, when we further promoted economic structural adjustments and risk prevention and deleveraging. The nominal GDP elasticity decreased, and the nominal GDP divided by the yield of ten-year government bonds was generally around 2 to 3 times.

The third stage began in 2022, where the nominal GDP elasticity further declined. The ratio of nominal GDP to the yield of ten-year government bonds was 1.7 times in 2022, 1.7 times in 2023, and for the first 11 months of this year, it was also around 1.7 to 1.8 times.

The corresponding conclusion is that the relatively low yield of ten-year government bonds currently reflects a relatively sufficient response to the decline in nominal growth. It has already reflected a relatively low expectation of nominal GDP.

This may include pricing factors such as expectations for the liquidity environment. If we lower interest rates and reserve requirements, then liquidity easing is beneficial for interest rate pricing, including external demand. If there are certain risks, interest rates may also undergo a downward pricing process Both of these logics are certainly valid, but we need to note that once these two situations arise, the previous interest rates may have already priced in the understanding of these two logics. Once these two logics truly materialize, we still need to pay attention to the risk of interest rate rebound.

Can this bull market achieve a long bull similar to the 2019-2021 bull market? There are two major potential opportunities in this bull market.

The last part is about equities, specifically stock assets.

First, I understand that the upward movement of stocks since the end of September this round is very similar to the beginning of 2019. We summarize the recovery of stocks during that period into five reasons. Looking back, the first four reasons have a high degree of similarity with this round. Factors such as the peak of the overseas tightening cycle, improvement in micro expectations of fiscal expansion, adjustments in monetary and financial policies, and the confirmation of the strategic position of the capital market represent a concentrated correction of economic fundamentals, liquidity, and risk appetite.

In 2019, we proposed a framework where stocks, as risk assets, are priced based on corporate earnings, which are determined by nominal GDP. Therefore, the compound growth rate of nominal GDP can be used as a reference coordinate system for stock index returns. For example, from the equity division reform in 2005 to 2019, China's nominal GDP had an average annual compound growth rate of 12.8%.

We found that after the surge in 2019, by the end of 2019, the compound return rate of WIND All A returned to 12.2%, close to leveling with the growth rate of nominal GDP.

This round is the same; from 2020 to 2024, the average annual compound growth rate of nominal GDP is around five percent. However, before September 24, we saw that the average annual compound return rate of WIND All A was only negative 1.9%, indicating a significant discount.

After the changes in the market over the past two months, the average annual compound return rate of WIND All A has returned to a level of 3% to 4%. This process corresponds to the gradual normalization of the discount after the reversal of micro expectations.

However, during the bull market in 2019, there was a continuation in 2020 and 2021 (the bull market), with WIND All A continuing to rise until the end of 2021. What was the main reason for this?

In fact, the initiating factors are very similar to this round, but the initiating factors are not important; what matters are the two continuation factors in 2020 and 2021. One is the rapid expansion of exports starting in the fourth quarter of 2020, which drove the expansion of nominal GDP in 2021, leading to a significant recovery in corporate earnings growth that year. The second is the formation of expectations regarding the dual carbon economy in 2021, which brought significant highlights to the economic structure These two factors, one regarding the total amount and the other regarding the structure, are very important backgrounds for forming a long bull market in that round. Therefore, from this framework, it is relatively critical to see whether similar follow-up factors can be formed in this round.

Of course, I think there are two potential opportunities in this round. First, the current position of nominal GDP is relatively low. If we can pull nominal GDP back to above 5% next year, it would be comparable to the expansion of nominal GDP in 2021, which should lead to a high slope recovery in corporate profits.

Second, the current position of consumption is relatively low. From a global perspective, consumption should generally be near the growth rate of nominal GDP. Historically, we have also followed a similar pattern, but consumption growth has been relatively low in the past two years.

If we can use our proactive consumption promotion policies to pull consumption back to near nominal GDP, it will also create structural highlights or driving factors.

Therefore, regarding these two potential clues, we believe they are relatively important for the future and need further observation and confirmation.

From a top-down perspective, since the beginning of 2021, the volume and price of consumer goods have actually been in an adjustment process. For example, looking at this chart, the red line represents the BCI's forward-looking index for consumer goods prices, which has been adjusting from the beginning of 2021 to the end of 2024.

The driving factors in between include the peak of nominal GDP growth in 2021, the adjustment of the real estate market in 2022, and the adjustment of the asset-liability balance of urban households in the resident sector starting in the second half of 2023.

At this stage, I understand that all factors should have roughly been reflected. Currently, this indicator has reached or is at all-time lows historically (since September 2011).

Looking ahead to next year, first, there is a relatively high probability that nominal GDP will exceed this year's level of around 4%. Second, the adjustment of existing mortgage rates has released space for the recovery of consumption in urban households. Third, promoting consumption is still one of the major priorities for next year, and the policy dividends remain very obvious. Fourth, the current position of core CPI is also relatively low The recovery of volume and price in consumer goods has relatively significant probability clues. Therefore, from a top-down perspective, we should give it full attention.

This year marks the 8th year that Guo Lei has been awarded the first place as the best macro analyst by New Fortune. How does he view the macroeconomic environment for stocks? Guo Lei has built a macro analysis framework and developed the most practical analysis methods in detail. Scan the QR code below to learn more.

Source: Investment Workbook Pro Author: Wang Li

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