You May Already Be Invested In The Next Bull Market

Simon Fillmore

We have slowly started seeing positive signs emerge from China, and this, coupled with some of the cheapest valuations we have seen in our investment careers, has stirred our animal spirits.

So, what have we seen changing in China?

Amidst the backdrop of a stock market that is down 40% in 3 years, a slowing economy and a property bust, most Western investors have been anticipating a big bang stimulus announcement to rouse the economy. So far, they have been disappointed.

Source: Independent Securities Research, Bloomberg

However, we have noted more subtle news flow emanating from Chinese officials. Specifically, announcements around the stock market, where:

• The Chinese sovereign wealth fund has started buying domestic exchange-traded funds.
• The Chinese Securities Regulatory Commission (CSRC) has encouraged institutional investors to participate in the stock market with greater effort.
• The Ministry of Finance has halved stamp duty costs on stock purchases.
• The CSRC has reduced margin requirements for stock investments.

• The Cabinet has issued guidelines for a high-quality stock exchange and called for a higher proportion of stock-focused funds in the mutual fund industry.
• Regulators have changed the risk weighting of stocks when assessing insurers' capital adequacy.

So, why is this important?

Chinese investors are significantly underinvested in stocks, and households have 70% of their wealth invested in residential real estate, with a large portion of the balance being invested in cash. Household cash balances have increased by 65% since 2020 and now sit at $7.4trn, more than Germany's or Japan's GDP. Chinese households became fearful after covid and have hoarded cash ever since.

Given the extremely low base, a change in the investing habits of Chinese institutions and households towards stocks will have a meaningful impact on stock prices.

This would set off a virtuous cycle and create a positive feedback loop. A rising stock market makes investors feel wealthy and imbues them with a sense of confidence, which encourages spending. When this is done at scale, it raises employment and productivity and drives GDP growth.

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