What the market cares about is not good or bad, but better and worse, market pricing is about certainty and cost performance…

The current state of the economy has been priced in by higher market odds, and marginal changes are reflected in the odds. A major problem with the current winning rate is ambiguity . There are many uncertainties about the epidemic, economic stabilization policies, and overseas liquidity.

The uncertainty of the epidemic lies in whether it will rebound again in the future and the economic cost of prevention and control. The uncertainty of the policy lies in the possibility of a large-scale stimulus plan and the implementation effect of the existing policies. Certainty and value for money remain at the heart of market pricing.

Why are growth stocks more cost-effective?

Growth stocks outperform value stocks in terms of risk premiums and crowding. Risk premium is an important indicator for judging the medium-term cost performance of equity assets. After a major adjustment in the previous period, the risk premium of growth stocks is generally higher than that of value stocks. The risk premium is in the 91%, 39% and 40% quantiles.

At the same time, we use the trading crowding degree as a reference for judging the short-term profit-loss ratio of the index. At present, the trading crowding degree of the style index is at a low position, and the oversold range of growth stocks is deeper than that of value stocks.

Large-cap/mid-cap/small-cap value stocks are at 11%, 13%, and 15%, respectively, and large-cap/mid-cap/small-cap growth stocks are at 3%, 7%, and 5%, respectively The last time the growth style was in this position was in November 2018.

Why are growth stocks more certain to improve their win rates?

First, from a fundamental perspective.

Growth stocks are less correlated with short-term fundamentals than value stocks. Growth stocks are more concerned with long-term fundamentals, such as industry trends, industry growth, and corporate competition patterns. Growth styles have an average correlation of 5.4% with growth factors, while value styles have a 16.3% correlation with growth factors.

After the Shanghai epidemic, the slope of economic recovery is the core issue of market concern. Growth stocks have lower requirements for the recovery slope. As long as the epidemic situation and real estate capacity stabilize and drive sentiment to recover, the certainty that growth stocks will increase their winning rate will be higher. However, the slope of economic recovery, the way and effect of policy efforts, etc. will directly affect the rebound space and structure of value stocks.

In addition, high oil prices and the depreciation of the RMB exchange rate are also uncertain factors affecting the sustainability of the rebound in value stocks. On the one hand, value stocks have a higher correlation with the RMB exchange rate. The large-cap value style is not only an area with a high concentration of foreign holdings, but also more related to the expected trend of the economy.

At the same time, the impact of high oil prices is mainly concentrated in value-style industries. How much impact will high oil prices have on China’s economy and industries? “ , combining the two aspects of crude oil consumption intensity and price transmission capacity, it is found that the industries that are greatly affected by oil prices are mainly chemical raw materials, building materials, power equipment, and consumption.

Second, from a liquidity perspective.

Growth stocks have a longer duration and are more sensitive to the internal and external liquidity environment. The negative correlation between the broader market growth index and the US ten-year real interest rate is as high as 66%. Uncertainty about overseas liquidity is being removed. Since May, the number of interest rate hikes implied by FFR futures has declined during the year, and U.S. bond interest rates have fallen from a high of 3.2%.

We believe that the Fed may slow down the pace of interest rate hikes in Q3 and stop raising interest rates in Q4. If we look at the half-year dimension, both the interest rate hike expectations and the direction of US bond interest rates will fall.

A major trend reversal in growth stocks could be on the way…

Marginal improvements in the two dimensions of fundamentals and liquidity are both more favorable to growth stocks, and the certainty that growth stocks will improve their winning ratios is also higher. Our “May Asset Allocation Report” shows that the winning rate of “large market growth” has risen to a high position of 66% from May to July . It is recommended to increase the allocation weight of “large market growth” to [overweight] . (For details, please refer to “Looking at the Growth of Large Markets and Finance – Asset Allocation Report in May”)

At the same time, from a technical point of view, the current trading congestion level of growth stocks, since 2010, the only time points that can be referred to since 2010 are July 2010, January 2012, October 2015, and November 2018. After these four time points Growth stocks have seen large oversold rebounds at least in the medium term.

The current level of crowding in growth stocks is extremely low, and once sentiment improves, a rebound in growth stocks may initiate a major trend reversal . (

For value stocks, there are many factors that currently constrain the improvement of the winning rate, such as the slope of post-pandemic economic recovery, the negative impact of export declines, the squeeze of high oil prices on manufacturing profits, the strength of economic stabilization policies that only give the bottom line without stimulation, and the depreciation of the RMB exchange rate. fully wait.

Before the above factors are clarified and improved, there is still uncertainty in the improvement of the winning rate of value stocks. Therefore, in the short to medium term, value stocks may continue the shock pattern of “policy bullish rebound and fundamentals bearish pullback” since the second quarter, and the fundamentals have bottomed out The space is expected to be basically sufficient, but the time for trend reversal may still have to wait .

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