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Tuesday, January 12, 2021
Investment Trends under Excess Capital
ANBOUND

Since 2021, driven by the double-themes of consumption and technology, the A-share market has seen controversy over the concentrating phenomenon of institutional investors investing in certain stocks. For those institutional investors involved, their emphasis on value investing and long-term investment philosophy seems to be fine, but they have pushed certain stock prices to unprecedented heights. Critics, on the other hand, are concerned about short-term risks and that the prices of those stocks have been too high, arguing that those institutional investors involved are jumping on the bandwagon rather than being rational. Some even believe that the institutional investors' concentrating investment has caused excessive capital concentration, which is distorting the market and leading to the failure of the market mechanism.

In terms of the performance of A-shares in recent days, the market phenomenon of investment concentration has brought about short-term volatility. On January 11, led by the ChiNext, the three major A-share indexes have fallen sharply, with the Shanghai Composite Index down 1.08%, the Shenzhen Component Index down 1.33%, and the ChiNext down 2%. The stocks involved in the phenomenon of investment concentration were even more volatile. They drove A-shares to record highs on January 12 despite the drop on January 11. On January 12, led by the Kweichow Moutai Co., Ltd., the stocks involved in the phenomenon of investment concentration hit all-time highs, and even the stock prices of holding companies were also up across the board; the Shanghai Composite Index stood at 3,600 points, which was the first time since December 2015. Such a volatile market could be more worrying to investors and regulators.

Any discussion of the appropriateness of the aforementioned market phenomenon in terms of value discovery, or the difference between the long- and short-term, may end up in a dispute over the divergence of judgment on the future trend of the stock market. Pessimists worry that a market bubble will send the institutional investors involved fleeing en masse; optimists, on the other hand, insist that the prospects for the consumer goods and technology sectors will keep driving up share prices and related-asset prices. Market speculators are afraid of missing out on this speculative opportunity, and also fear of a phased pullback. Therefore, this market phenomenon aforementioned reflects the game of market participants for the future, which is in fact the law of the market playing its rightful role in price discovery.

From the perspective of value investment, some market institutions believe that the reasons for this market phenomenon can be discovered from two aspects: First, under the impact of economic growth slowdown, the COVID-19pandemic, and other factors, the advantages of the leading companies, which were already in the leading position and had significant competitive advantages, were further strengthened. Second, the "high-yield asset shortage" in the low interest rate environment is intensifying. Leading companies with high valuations, despite their low investment returns, continue to attract low-cost funds due to the certainty of their performance. In practice, this also means that investors are looking for certainty amid increased uncertainty.

Against the backdrop of changes in global monetary and capital markets, the aforementioned market phenomenon is also a global phenomenon brought about by the excess capital in the ultra-loose monetary environment. In a macro environment of low interest rates, slow growth, and low inflation, capital will inevitably concentrate on less risky assets, resulting in a differentiated and stratified "high-yield asset shortage". A similar situation in the stock market is the aforementioned market phenomenon.Institutional investors' concentrating investment in the leading companies reflects the trend of risk aversion in the stock market.

In the case of the U.S., the U.S. stock market has continued to reach all-time highs in recent years, this is mainly due to the continuous rise of major tech stocks. At present, the combined market value of "FAANG (Facebook, Amazon, Apple, Netflix and Alphabet)" has accounted for about 20% of the market value of the U.S. stock market. In addition, passive investments, mainly in ETFs, have soared, meaning that investors are more willing to reduce risk in a passive way by investing in indices. By August last year, global monetary easing had led investors to invest USD 428 billion in ETFs, up 57% from the same period last year, according to data. Global assets held by ETFs have reached a record USD 7 trillion. As far as A-shares are concerned, the continuous rise of alcohol and pharmaceutical stocks represented by Kweichow Moutai Co., Ltd. and the massive purchase of public offering funds by retail investors indicate that domestic investors are doing something similar to investors around the world, i.e., seeking rational investment and avoiding risky assets. Wu Chao, director of China CITIC Research Institute, said that the investor structure has become increasingly institutionalized since 2018, leading to the prices of white-horse stocks which are heavily held by institutional investors being pushed ever higher. What is implied behind the bubbling of core assets in the past two years is the certainty of growth of leading companies.

In terms of the structure of the domestic market, despite the current market phenomenon of investment concentration, as far as most investors are concerned, the current position structure still has a considerable part of small-cap stocks. Even among institutional investors, their investment concentration in terms of volume is not significant. According to estimates from sources, the share turnover of companies in the bottom 50% of A-share market value in 2020 was 19%, a significant drop from 33% in 2016. However, compared with 1% in Hong Kong and 2% in the United States, the share turnover of China's small-cap stocks still far exceeds that of mature markets. Also, the market phenomenon of investment concentration has been diverging over the long term and is not severe. This market phenomenon in various stock market sectors is in the dynamic process of continuous formation and collapse. This shows that the market is still work and efficient. Fully respect the changes in the market is the rational attitude investors should have.

Final Analysis Conclusion:

The increasingly obvious phenomenon of investment concentration in the A-share market needs to be understood not only in terms of changes and trends in the market, but also in terms of the direction and changes in the global monetary and asset markets as a whole. Only by fully respecting the changes and rules of the capital market can we benefit from the game of the market.

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