On the last trading day of the Year of the Tiger, northbound funds continue to purchase goods aggressively! The net buying in the late trading auction was nearly 1.5 billion yuan, and the net buying in the whole day was 9.256 billion yuan, which was the 13th consecutive trading day of net buying. Among them, the net buying of Shanghai Stock Connect was 4.211 billion yuan, and the net buying of Shenzhen Stock Connect was 5.046 billion yuan.
Since this week, northbound funds have added a total of 48.515 billion yuan in positions, and the net purchase amount in a single week has reached the second highest in history, only slightly lower than the historical record of 48.8 billion yuan set in December 2021. Since January, northbound funds have accumulated a net purchase of 112.531 billion yuan, setting a new high for Shanghai-Shenzhen Stock Connect single-month net purchases. Moreover, this number has exceeded the total net purchases for the whole year of 2022 (90.020 billion yuan), and also exceeded the total net purchases for the whole year in 2014, 2015, and 2016.
Why the massive reshoring?
The massive buying of northbound funds since the beginning of 2023 has exceeded the expectations of many institutions. As of the close of trading on January 20, northbound funds had purchased a total of 112.531 billion yuan this month, exceeding the total net purchases in 2022 (90.020 billion yuan). At the same time, this figure also set a single-month net purchase since the launch of Shanghai-Shenzhen Stock Connect. Inflows hit a new high.
“The level of foreign capital inflows this time has indeed exceeded our previous expectations.” Shenwan Hongyuan Securities said bluntly in the research report. Shenwan Hongyuan believes that the sharp return of foreign capital this time coincides with the sharp appreciation of the RMB, reflecting the typical economic fundamentals of "strong in the middle and weak in the US". The appreciation rate of the RMB has also exceeded expectations. The appreciation of the RMB central parity rate since the beginning of the year has ranked second in history since November 2014, indicating that foreign investors have a high degree of recognition of China's post-epidemic recovery.
CICC believes that there may be many factors behind the recent inflow of foreign capital: first, the Fed’s interest rate hike pace has eased, and the global liquidity environment has improved marginally; second, under changes in domestic policies, factors that suppress the economy are expected to gradually Ease, economic fundamentals are expected to recover relatively quickly in the near future; thirdly, marginal changes in some industrial policies affect market risk appetite. Overseas investors are more concerned about the Central Economic Work Conference’s stance on industries such as the platform economy at the end of 2022, as well as the recent marginal changes in some industrial fields. Changes, such as the resumption of issuance of overseas game version numbers, etc.
Industrial Securities mentioned that the recent large inflow of foreign capital is by no means "impulsive". From the perspective of global asset allocation, the motivation for overseas funds to allocate Chinese assets will weaken in 2022, and even significantly outflow at one time. However, currently, concerns about the economy, real estate risks, and the Federal Reserve's interest rate hikes have been significantly alleviated and improved. The improvement in the cost performance of Chinese assets is attracting foreign investment to accelerate its return.
Although the expressions of mainstream institutions are different, their core views are consistent in foreign investors’ expectations for the fundamentals of the Chinese and overseas economies, their expectations for domestic policies, and the exchange rate after the slowdown in overseas interest rate hikes. Changes have also resulted in a substantial return of foreign investment.
Buy heavyweight blue-chip stocks
From the perspective of the inflow structure, since the beginning of 2023, northbound funds are re-arranging their heavy positions in industries, showing the characteristics of overall equal-proportion increase in positions, and the inflows into the sector are Mainly finance and consumption.
Judging from the purchase amount, the characteristic of northbound funds adding equal proportions to their positions is reflected in their continued purchases of leading stocks in the three major directions of consumer, financial, and new energy. Choice data shows that the net purchases of northbound funds for benchmark stocks such as Kweichow Moutai, CATL, Wuliangye, and Ping An have exceeded 5 billion yuan so far this year, with CATL ranking first with an amount exceeding 8 billion yuan.
The net purchases of constituent stocks of the "Ning Group" and "Mao Index" such as Midea Group, Longi Green Energy, China Merchants Bank, BYD, Gree Electric Appliances, and AIER Ophthalmology also ranked among the top.
Judging from changes in the shareholding ratio of northbound funds, Eston ranked first in the Shanghai and Shenzhen stock markets with an increase of 2.82 percentage points. In addition, the shareholding ratios of Yunnan Aluminum Co., Ltd., Risheng Oriental and Anke Biotech also increased by more than 2 percentage points.
CICC analysis believes that during the recent market recovery process, the consumption, pharmaceutical and other industries with heavy foreign investment have performed relatively strongly. After more than a year of correction, the stock style with heavy foreign investment has recovered significantly recently, and there is still room for upward growth. CICC stated that the current forward price-to-earnings ratio of its fitted A-share foreign investment index is 10.0 times, which is 0.57 times standard deviation below the historical average since 2018, and the valuation high point in February 2021 ( 17.2 times) is still 42% worse than that.
However, Industrial Securities split the northbound funds from the perspective of trading and allocation. It believes that the allocation and trading of northbound funds are important in adding positions in food and beverage, household appliances, banks, non-bank finance and There is obvious mutual understanding in industries such as medicine and biology, but the two types of funds have great differences in industries such as power equipment, transportation, public utilities, agriculture, forestry, animal husbandry and fishery, machinery and equipment, communications and basic chemicals.
How much room is there for adding positions in 2023?
It is worth noting that in the 2023 annual strategy released by securities firms earlier, "return of foreign capital" was the unanimous expectation of institutions. CITIC Securities stated that foreign capital will be one of the main sources of incremental funds for A-shares in 2023. With the slow appreciation of the RMB in 2023, the net inflow of foreign capital is expected to return to more than 100 billion levels.
CICC predicts that the net inflow of overseas funds (QFII/RQFII plus northbound funds) into A-shares in 2023 may be 300 billion to 400 billion yuan.
Industrial Securities said that looking back from 2017 to 2022, northbound capital inflows had an obvious "good start" effect. Over the years, foreign investors would significantly increase their positions in A-shares from January to February, accounting for the entire year's net inflows. The median share is 20.9%. Industries in which foreign capital increased their positions significantly at the beginning of the year are expected to continue to lead the market.
Judging from the historical market conditions, except for a brief period of pressure in 2022, the annual net purchase amount of northbound funds has basically shown a year-over-year increase since its opening. At the same time, through review of historical experience, the A-share market can often achieve significant gains one month after a large inflow of northbound funds.
GF Securities selected representative time points when the net northbound capital inflow exceeded 50 billion yuan within 10 trading days as the research object. Judging from the performance of the All-A Index, GEM Index, and CSI 1000 Index, one month after similar rapid and large inflows of northbound funds, the probability of the above three major indexes rising is more than 70%, but after three months, A shares rose The probability and cumulative increase have both declined, and the momentum of net northbound capital inflows has also further weakened.