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Dialogue With Wang Qing: New Signals And Logic Of "Value Investment" Of A Shares

2020/11/14 14:25:00 0

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After graduating from a famous university, he joined the International Monetary Fund (IMF), Bank of America, Morgan Stanley, and then joined CICC and Shanghai Chongyang. Wang Qing is a typical "returnee" financial elite. His dual roles as an economist and head financial institution president, especially the two roles of overseas and domestic head office practitioners, are to observe China's capital market One of the best perspectives for the development of the 30th anniversary.

A few days ago, the 21st century economic reporter had an exclusive dialogue with Wang Qing, President of Chongyang investment in Shanghai. Looking back, new changes are taking place.

In 2013, Wang Qing resigned from the position of managing director and executive director of Investment Banking Department of CICC, and joined Chongyang investment, the largest sunshine private equity fund in China at that time, and became one of the early participants in domestic private equity industry, which once attracted wide attention of the market.

Many years later, looking back at the vigorous development of the domestic private equity industry, it is just a microcosm of the brilliant achievements of China's capital market in the past 30 years.

Changes of China's economic and financial strength from the perspective of overseas

21st century: in 2000, China's foreign exchange data were not disclosed to the public. What did the IMF think of China at that time?

Wang Qing: from 1999 to 2005, I worked in the International Monetary Fund for a total of six years.

At that time, according to the regulations, China and the IMF provided foreign exchange reserve data, the difference is that it did not disclose the data and details of foreign exchange reserves to the outside world, because as a member of the international monetary organization, each member was obliged to provide data to the IMF, so the IMF mastered China's foreign exchange reserve data at that time.

Looking back, China at that time was very different from China today.

I remember that in 2004-2005, China's foreign exchange reserves were between 400 billion and 500 billion US dollars, and now our foreign exchange reserves have exceeded 3 trillion US dollars. At that time, China's voting rights in the IMF were less than 3%, but now China has become the third largest country with voting rights. The proportion of voting rights is about 6.4%. This is a huge change.

At that time, China's RMB exchange rate against the US dollar was still a fixed exchange rate, but now we have a managed floating exchange rate, and the exchange rate fluctuates every day. At that time, domestic enterprises and individuals had many restrictions on the use of foreign exchange. Although the current account transaction restrictions were a little less, the capital account transaction restrictions were more.

Now, the definition of RMB is "free currency".

RMB has also joined the IMF's SDR basket in 2016, becoming the fifth currency in the IMF's SDR basket after the US dollar, Japanese yen, euro and pound.

Therefore, compared with the time when I worked in the International Monetary Fund, China's economic and financial strength has changed greatly.

21st century: what are the important time points and events of China's capital market opening to the outside world in your eyes?

Wang Qing: a very important time point is 2005.

I remember that on July 21, the landmark event was that China started the reform of the RMB exchange rate. The RMB exchange rate began to get rid of the rigid link with the fixed exchange rate of the US dollar and moved towards a managed floating exchange rate. In practice, the RMB exchange rate gradually appreciated against the US dollar.

With the change of exchange rate, China's foreign exchange management system is gradually liberalizing some control.

At that time, because China's overall economic performance was very good, especially after China's accession to the WTO in 2001, China's economy entered a new business cycle. Therefore, international capital is very confident in China. There are a large number of capital inflows, including direct investment and some financial capital inflows. In addition, with the impact of the expanding trade surplus, the RMB exchange rate began to bear some appreciation pressure.

In this context, in order to alleviate the pressure of RMB exchange rate appreciation and further promote the reform of financial and foreign exchange system, domestic supervision is also relaxing some restrictions, including restrictions on the use of foreign exchange by domestic enterprises and residents and cross-border capital flow.

At that time, China seized the opportunity to promote some important financial reforms, such as banking reform.

After 2005-2006, China's state-owned banks, including China Construction Bank and Bank of China, followed by industrial and Commercial Bank of China, Bank of communications, Agricultural Bank of China and so on, were listed in both A-share and Hong Kong stock markets. During this period, the biggest improvement of the financial system was the transformation of the banking industry.

It should be said that this completely new change has promoted the prosperity of the capital market and the stock market.

At the same time, the smooth launch of the reform of the equity system is the most important reason for the stock market to soar in the second half of 2005.

For quite some time before 2005, the performance of China's stock market was sluggish. One of the most important reasons is that there was still a huge price difference between tradable shares and corporate shares. In this context, both domestic and international market participants have strong expectations for the reform of China's capital market. The most important expectation is to solve the problem of restricted shares, that is, the reform of non tradable shares that we launched in 2005.

At that time, global investors were very optimistic about the prospect of China's economy, but foreign direct participation in the A-share market was relatively limited, and only through QFII, and the quota of QFII was relatively limited. Therefore, more foreign funds participated in domestic listed companies through Hong Kong shares. The bull market of a shares in 2005 also led to the rise of Hong Kong stocks.

I left the IMF in September 2005 and returned to Hong Kong. I came across a magnificent bull market opened by China's A-shares.

With the further increase of QFII quota, the number of foreign investors participating in China's stock market is also increasing. However, it is the opening of the Shanghai Hong Kong stock connect in November 2014 that allows foreign investors to participate in a wider and larger scale.

Another milestone event is the addition of A-share to the global MSCI index in 2018, which brings the connectivity between China's capital market and the global capital market to a new height, and also enables global funds to participate in the A-share market systematically, in a large scale and for a long time.

21st century: what were the investment strategies of overseas institutions at that time, and when did they begin to focus on China's long-term investment opportunities?

Wang Qing: in fact, from the very beginning, overseas funds have attached great importance to China's long-term investment opportunities. The problem is that they attach importance to return, and the extent to which they can participate is very limited. Therefore, at that time, the optimistic judgment and attention of foreign capital on the prospect of China's economy was realized through direct investment, while the space for this way of participating in the capital market was limited.

Some international strategic funds indirectly participate in China's financial market by participating in China's banking restructuring.

But those who participate in China's stock market through QFII should be optimistic about the long-term development of China's capital market. In terms of the composition of QFII investors, there are basically two types. One is the real long-term investors, including these foreign sovereign funds and pension funds. They enter China to make long-term investment.

Another type of QFII is obtained through these big international investment banks, and the investment banks obtain these quotas for some of their institutional investors as channels to enter China's stock market.

Some of the funds entered through channels are medium and short-term speculative funds. For example, Morgan Stanley has obtained QFII quota in China. Although it is not much, part of the quota has been given to some of its hedge fund clients. Strictly speaking, this part of the fund is more focused on some phased opportunities.

However, most of the external funds enter China through QFII, which is a long-term investment opportunity in China. For example, sovereign funds of various countries, including some in the Middle East and Europe; for example, the well-known sovereign fund of Norway's central bank, has been involved since QFII was first established. For example, the well-known Singapore government investment company has entered the Chinese stock market very early, and their participation is long-term layout.

There are also some long-term pensions, such as the Canadian pension, which are also very well-known investment institutions. However, they are suffering from insufficient distribution. One important reason is that the amount that China can provide is still a very small part of the funds they can use.

Global investors are very optimistic about the prospect of China's economy, but foreign direct participation in the A-share market is relatively limited. -Photo by Gan Jun

New signals and logic of "value investment" in A-share market

21st century: as the first group of people to talk about price bidding, how do you view the development of "domestic price bidding"?

Wang Qing: looking back at the development of China's capital market, especially the development of China's stock market, there are some obvious stage characteristics, which lead to different types of investors to have different performances.

The first stage, the initial stage of the stock market, was from 1991 to 1995. At that time, when we participated in the stock market investment, we took the stock as a symbol and made investment, that is, we looked at the technical graphics.

The second stage, from 1996 to 2001, is micro fundamental investment. At that time, the concept of value investment began to be understood by Chinese investors, a small number of investors began to accept it, and even fewer people began to build an investment research system. The so-called micro fundamentals is that at that time, people began to associate stocks with enterprises, began to study the financial data of enterprises, and then based on the judgment of financial data of enterprises, they made stock market investment.

The third stage, 2002-2011, is the stage of China's macro fundamental investment. A very important change is China's accession to the WTO, China's macro-economy appeared a great business cycle, during this period, the appreciation of the RMB exchange rate, China's accession to the WTO has industrial upgrading, etc., China's macro-economy has undergone great changes. At the same time, the influence of macro level factors on the stock market is more and more obvious. In other words, at this stage, investors find that they can't invest in the stock market if they don't understand the macro-economy. Top down analysis is being used to invest in the stock market.

The fourth stage, 2012-2015, the stage of arbitrage in the primary and secondary markets. In this stage, some investors found that micro fundamental investment research and macro fundamental research are not helpful for stock market investment. During this period, the most important factor affecting the market is arbitrage in the primary and secondary markets. As the previous stock issuance was an approval system, the approval manufacturing became the listing companies to queue up for approval, so the listed companies are scarce resources. As a result, there is a huge difference in the valuation between listed companies and non listed companies, and there is a huge arbitrage space in the primary and secondary markets, which is also the main factor driving the rise of stocks at this stage. On the other hand, they are acquired by means of secondary investment and arbitrage.

The fifth stage, from 2016 to now, is the real price bidding stage. With the bursting of the stock market bubble in 2015, China's stock market has entered a new stage from 2016, which we call the three-dimensional and real value investment stage. One of the important driving forces, I think, may be related to the opening of the mainland stock connect. After the opening of the mainland stock connect, overseas funds can participate in the A-share market in a large scale and systematically. The concept of long-term investment and value investment brought by foreign capital, especially long-term overseas investors, has brought a very important impact.

21st century: there are also some phenomena different from the traditional value investment concept in the current market.

Wang Qing: value investment can be divided into broad value investment and narrow value investment.

The so-called "speculation" means that the concept of investment should not be analyzed in a broad sense. Any investment decision must have rules and framework, and make decisions through basic analysis. Some investors attribute this investment method to value investment.

The narrow definition should be said to be derived from Graham, Warren Buffet and Munger. They understand the value of investment, first, to buy stocks is to buy listed companies themselves. Second, holding the stocks of listed companies and obtaining profits mainly depends on the internal value of listed companies. Third, when buying stocks, we must pay attention to the margin of safety and reasonably match the level of valuation with its intrinsic value.

A lot of group buying in the market this year doesn't seem to be very price bidding. I understand that they are broad price bidding.

Although there are some short-term investment and speculation. However, they have used some basic analysis and even value investment methods and ideas to support, which is better than the previous speculation on news and concept.

For example, from the second half of last year to this year's market, there is a very interesting feature. Although it is obviously different from the market performance in 2015. In 2015, the market rose. Some stocks were very expensive, but they were not supported by fundamentals. In 2015, it should be said that people did not look at the fundamentals in their investment. Now, they are looking at the fundamentals, but not the valuation.

In this sense, the orthodox value investors in the strict sense are not adapted to the current environment.

In fact, this undervalued or orthodox value investment strategy has also failed the growth strategy in the US market. This phenomenon has been more than 10 years since 2008 in the United States, and the value investment strategy is inferior to the growth strategy.

In China, from the second half of 2019 to now, it is also a very obvious rule.

21st century: why?

Wang Qing: one of the reasons is that in the current global economic downturn, growth itself has become relatively scarce. Because of scarcity, investors are willing to give higher premium to companies with better growth trends.

Another reason is related to the interest rate environment.

In the global context of low interest rates or even negative interest rates, money or money has no time value, which means that 100000 yuan today is equivalent to 100000 yuan 10 years later. This feature is conducive to growth stocks, because growth stocks represent the future cash flow of the enterprise is much larger than the current cash flow.

The combination of these two factors makes growth stocks show a strong premium, which obviously outperforms the value strategy.

But we don't think that's always the case in the Chinese market. Because China's interest rate level will not be as low as that of developed countries, China's economic growth will not be as low as that of mature economies, and changes in China's industrial structure and consumption structure will be very colorful, so the scarcity of growth may not be so obvious. Generally speaking, the effectiveness of this value investment strategy and growth strategy in China is stronger than that in other countries. Therefore, we should pay attention to the change and possible switching of value strategy and growth strategy style in investment.

New situation of institutional investors

21st century: what changes will the registration system bring to the price performance of A-share market?

Wang Qing: the comprehensive promotion of the registration system, first in the science and technology innovation board, then in the growth enterprise market, and now gradually to the whole market, this is an important change in China's capital market.

In the past, it was the approval system. Due to the strict standards, the approved listed companies should say that the quality is generally better, at least the basic financial data are better. In our current registration system, the conditions for prior approval are reduced, and there are more information disclosure and supervision afterwards, which may bring about changes in the quality of listed companies.

However, the most important point of the registration system is that in the past, under the approval system, due to some rigid and pre-set standards, enterprises that really become listed companies have actually entered a relatively mature stage of development.

This means that there is not so much room for future growth, which is why our stock market is not as brilliant as other markets under the approval.

Under the registration system, there will be a large number of enterprises listed in the growth stage and the initial stage. After it becomes a listed company, it is still in a high-speed growth stage. In this process, a large number of excellent and good stocks may emerge in our stock market. However, another possibility is that due to the relaxation of the listing standards of the registration system, the market will be mixed The phenomenon of differentiation.

21st century: will the increase of institutional investors increase the difficulty of investment?

Wang Qing: theoretically speaking, when more and more investors in our market become mature and professional, the pricing efficiency of the market will naturally be improved, so it will be more difficult to defeat the market and the peers.

China's stock market has experienced a process from a very inefficient market to a mature one. In this process, with the participation of more and more mature institutional investors, the market pricing efficiency will be improved. The market is still in its infancy. For an institution like us that has always adhered to the fundamental value investment style, we are happy to see its success.

From the market as a whole, there are very few investors like us who insist on fundamental research and long-term investment value. In fact, they are lonely and even need some determination. In a market with a large number of immature investors, many fluctuations in the market may have little to do with fundamentals, and price institutions may have to endure the pressure brought about by market inefficiency for a long time.

As the market becomes more efficient, the degree and time for the market to deviate from fundamentals may be shortened, which will reduce our pressure. So since this year, many individual investors have turned from investors to fundamentalists. I think this is a positive change.

Pension insurance is a real long-term fund. However, the scale of both insurance fund and enterprise annuity is still limited. When can the insurance fund and enterprise annuity participate in the A-share market on a larger scale, or if we can introduce a long-term institutional arrangement like 401k in the United States, then A-share will have a long-term stability Capital inflow, which will fundamentally change the investment period of investors in our A-share market and bring about more meaningful changes.

At present, in order to deal with the characteristics of A-share which is not "price investing", on the one hand, it is necessary to do in-depth fundamental research from the perspective of value investment style; on the other hand, we should also pay attention to the characteristics of this kind of investor behavior in the market.

The 21st century: in the past, the market thought that the boom fund had peaked; however, this year, the market thought it was the beginning of a long bull?

Wang Qing: there was such a phenomenon in the past. When there was an obvious boom in funds, the market might peak. But this year I think it's different.

On the one hand, the characteristics of the market since this year are differentiation, and the ultimate differentiation. Some fund managers are not optimistic about the overall performance of some sectors, but they are not optimistic about the overall performance of some sectors. Therefore, it does not necessarily mean the peak of the overall market as before, but it may mean the peak of the relative performance of special style and special plate funds.

On the other hand, we are also paying close attention to the issue of whether a more profound change is taking place in China's capital market. In the past, China's capital market was prone to big fluctuations. Now it seems that our market is likely to get rid of the curse of "bull short bear long".

One of the possible factors behind this shift is the profound institutional change, that is, the registration system, which will fundamentally change the ecology of our stock market and the relationship between supply and demand, and may mark that China's stock market has gradually entered a new normal.

In the past, one of the core factors of "short bull and long bear" is the mismatch of market supply and demand, and the uneven quality of listed companies, which is manifested in the low pricing efficiency of the market as a whole. On the one hand, there are a lot of funds in pursuit of investment opportunities; on the other hand, from the overall supply and structure of listed companies, it is not satisfactory. However, in the environment of registration system, there will be a steady stream of companies entering the market, with a large increase in supply, which is in line with the potential demand. In addition, in this process, the market will gradually identify high-quality companies, and some high-quality companies enter the market at an early stage relative to their growth cycle. They have good growth, basic sustainability, and can accommodate more capital, which is obviously better than before.

On the demand side, funds are also increasing.

In addition to the loose monetary policy conditions determined by the macro policy, another important change is that we have broken the rigid cashing under the new asset management regulations, and the supply of high-yield financial products is becoming less and less. At the same time, the real estate industry is guided by the principle of "housing does not speculate". The joint effect of these two aspects has resulted in the so-called "brick" changing into stock and financial management into stock The potential scale is quite large.

21st century: how to predict next year's macro economy?

Wang Qing: the economic rebound has already begun. Actually, the rebound has already appeared in the second quarter and further established in the third quarter. I believe that this trend will continue in the fourth quarter and next year, especially the double-digit economic growth is expected to appear in the first half of next year.

There are technical reasons, that is, the impact of the epidemic has led to a relatively low base this year, so the figures in the first half of next year are better.

On the other hand, China's economy has experienced a process of deleveraging and tightening credit. It has experienced a three-year downward trend from the second half of 2016 to the first half of 2019. The downward credit cycle has driven the downward trend of the economic cycle. This process has reached an inflection point in the second half of 2019, but it has been hindered by the impact of the epidemic. However, with the earliest control of the epidemic and the fastest resumption of production, China's economy has been rapidly restored. Under the joint action of the two factors, China's economy will enter a new business cycle in the future.

So I think from the economic fundamentals, the whole Chinese economy is showing an obvious V-shaped repair.


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