\u3000\u3000 1. Rotation of A-share industry from 2004 to 2012: Taking Merrill Lynch clock as the basic framework
Reviewing the industry rotation of China’s stock market from 2004 to 2012, we believe that it is basically carried out around the stock market Merrill Lynch Investment clock. In 20042012, the clues of industry rotation are in two aspects. The first is the logic of price, such as ppi-cpi; The second is the logic of quantity, such as real estate land acquisition – Completion – sales cycle.
Theoretical basis of industry rotation: Merrill Lynch clock is essentially a framework for the allocation of large categories of assets. Merrill Lynch put forward the investment clock model in 2004. According to the different changes of output gap and inflation rate, the economic cycle is divided into four stages: recession, recovery, overheating and stagflation, and then compare stocks, bonds The income performance of four types of assets, commodity and cash, at different stages. On this basis, the theoretical basis behind the Merrill Lynch clock is that the short-term fluctuations of any industry will be affected by the increase or decrease of market liquidity, policy changes and changes in investor preferences, while the long-term trend will return to the fundamentals, that is, the development of the industry conforms to the law of economic operation. Chinese and foreign scholars generally believe that economic operation is cyclical. In each round of economic cycle, the performance of the industry is closely related to the macro operation characteristics and the stage of economic development at that time. The performance of the industry can be regarded as a mapping of the economic fundamentals at that time. The stage of economic development determines that the industry sector in strong development at that time will have the ability of excess return.
The key to the judgment of industry rotation: at this stage, by dividing the economic cycle, excavate and summarize the historical laws of the industry that can obtain excess returns in different development stages, and judge the industry rotation in combination with the current macro background and economic operation characteristics. It is very important to accurately identify the inflection point in each macroeconomic cycle.
Here, we refer to the idea of Merrill Lynch clock proposed by Merrill Lynch in 2004 to verify the effectiveness of industry rotation in the A-share equity market from 2004 to 2012. According to Merrill Lynch clock logic framework, the industry rotation of A-Shares is sorted and reviewed. The specific conclusions are as follows:
1. In the stage of economic recovery, the economy rebounded from the bottom of the valley, and the growth is still below the long-term level, but the growth rate is accelerated. Driven by continuous interest rate cuts and loose monetary policies, the economy has warmed up and interest rate sensitive industries such as finance have benefited. Due to sufficient surplus capacity, the inflation level is still declining, and the demand is slowly rising. At the same time, the demand of infrastructure, real estate and other industrial chains is repaired from the trough, driving the demand for steel and nonferrous metals in the upstream of the industrial chain. At this stage, the marginal cost of production is low, the gross profit of the company increases rapidly, and the profit growth is strong. The expansion of production capacity is often accompanied by the development of new science and technology and material technology, and the growing industry has received certain market attention. At this stage, the financial and cyclical industries performed well. In specific industries, banking, mining, non-ferrous metals and other industries had sustained and stable excess returns;
2. In the stage of economic prosperity, the economic growth accelerated and exceeded the long-term trend level, and the output gap was negative; Due to resource and capacity constraints, inflationary pressure appears. With the commencement of industrial enterprises, driven by investment and overall demand, resource products and industrial enterprises began to occupy market advantages. With the landing of investment and production expansion, the rapid development of industry and the opportunity for innovation in the science and technology industry, the consumption and cycle industries perform well at this stage, and appropriate attention can be paid to the growth industries. In specific industries, non-ferrous metals, electrical equipment and other industries have sustained and stable excess income. At this time, the central bank should pay the same attention to the expected increase of interest rates in the financial industry and be cautious about the problem of inflation;
3. In the period of economic stagflation, the economic growth rate is at a high level, but it has shown a marginal decreasing trend. Due to the Limited surplus capacity, while the demand is declining, the inflation is still high, the income growth slows down, coupled with the high inflation level, the economic overheating is finally transmitted to the upstream resource products, and the profit growth of middle and downstream companies continues to decline. The market began to play a game, and the prices of various sectors no longer rose all the way. Due to the sharp rise in the previous prosperity stage, many sectors were at a high level, the market was worried about the prospect, and the sectors with too high growth began to fall. At this stage, the growth and consumer industries performed well, and the cycle still occupied the price advantage. In terms of specific industries, household appliances, textile and garment, mining and other industries have sustained and stable excess returns;
4. In the economic recession stage, the economic growth fell below the trend level and continued to decline to the trough. The emergence of a large number of surplus capacity eased the inflationary pressure and the company’s profit decreased significantly. The decline in economic expectations, combined with the decline in corporate profits, killed both valuation (PE) and earnings (EPS), which fell sharply after growing much longer. However, before the interest rate cut, the demand fell from overheating and stagflation to contraction, and rigid consumer goods and medicine were well defensive. The recession and began to cut interest rates, and the economy turned to the bottom. With the reduction of interest rates and economic stimulus, the advantages of interest rate sensitive financial industries and public utilities with high asset liability ratio began to highlight. At this stage, the financial and consumer industries performed well. In terms of specific industries, the media, medicine, biology, food and beverage, public utilities and other industries had sustained and stable excess returns. Similarly, at this stage, the demand declines and the upstream price declines, so the industry and resource products industry should be avoided.
\u3000\u Beijing Dinghan Technology Group Co.Ltd(300011) . Key indicators of 20042012 economic cycle and division of China’s economic cycle
The classic Merrill Lynch Investment clock usually divides the economic cycle according to the relationship between output gap and inflation. In the long run, economic growth depends on the availability of factors of production: the improvement of productivity brought by labor, capital and technological progress. In the short term, the economic fluctuation deviates from the path of sustainable growth due to the lag of investment, production capacity and inventory. The job of policy makers is to return to the path of sustainable growth. Economic growth under potential will make the economy face the pressure of deflation and eventually become deflation; On the other hand, sustained economic growth above its potential will lead to destructive inflation.
Generally speaking, the degree of economic output deviating from equilibrium can be measured by output gap, that is, the interpolation between actual output and potential output, while the degree of money supply deviating from equilibrium can be measured by inflation. Therefore, the two indicators can be divided into four intervals corresponding to recovery overheating stagflation recession, and the allocation of large categories of assets can be selected according to the characteristics of each interval.
Here, we use China’s macroeconomic prosperity consensus index, which is well traceable and released monthly, as the key index to describe economic growth, and use the annual cumulative year-on-year CPI to describe inflation. The economic cycle is divided according to the annual cumulative year-on-year trend of CPI, and from trough to trough is a complete economic cycle.
From 2004 to 2012, China’s economy has gone through three complete Merrill Lynch cycles, namely, September 2003 to March 2006, March 2006 to August 2009 and August 2009 to February 2013. The average duration of the three cycles is 34 months. These three cycles are basically in line with the rotation trend of prosperity stagflation recession recovery. In the second round of economic cycle, the prosperity stage lasts for 19 months, and the stagflation stage of the third round of economic cycle lasts for 19 months, because China, as a developing country, is in the stage of rapid economic development at that time, The government and enterprises are more willing to maintain a year-on-year increase in CPI, which makes the CPI relatively high, and leads to more periods of prosperity and stagflation in China.
Overall, the three cycles show a slow recovery, a sustained period of high inflation and a rapid recession.
\u3000\u Centre Testing International Group Co.Ltd(300012) . Performance of industries in different stages of the economic cycle from 2004 to 2012
\u3000\u Centre Testing International Group Co.Ltd(300012) .1. Prosperity stage: Finance cycle consumption growth
In the prosperity stage, the economic growth accelerated and exceeded the long-term trend level, and the output gap was negative; Due to resource and capacity constraints, inflationary pressure appears. At this stage, the company’s revenue growth is still rapid. With the rapid economic development, the subsequent inflation and cost pressure will gradually drag down its performance. At this stage, the market is hot, the industry sectors are booming, and the market as a whole is dominated by synchronous sharp rise.
The first boom period was from the end of 2003 to the beginning of 2004. The increase of investment led to rapid economic growth, and the completed amount of fixed asset investment has maintained a growth rate of about 30% since the beginning of 2003; With the end of the SARS epidemic and the growth of consumption recovery, the total retail sales of consumer goods returned to over 9%. In January 2004, the State Council issued several opinions of the State Council on promoting the reform, opening up and stable development of the capital market (hereinafter referred to as Article 9 of the State Council), which recognized the problem of equity division in China’s stock market and said that it would actively and steadily solve the problem of equity division. The introduction of Article 9 of the State Council boosted market confidence and stabilized the decline caused by the previous implementation of the Interim Measures for the administration of reducing state-owned shares to raise social security funds.
From November 2003 to April 2004, the Shanghai Composite Index rose from 1307 points to 1783 points, an increase of 36.41%. Until early April 2004, the illegal construction of iron and steel projects by Jiangsu Tieben iron and Steel Co., Ltd. (Tieben incident) was verified. Since then, the government has strengthened administrative regulation and strict control of enterprises, resulting in the stranding of investment projects of many private enterprises, the decline of enterprise profits, the decline of economy and the end of this round of prosperity. At this stage, China’s strong real estate sales have induced overheating of fixed asset investment, driving industries such as household appliances, steel and building decoration to obtain high excess profits.
The second boom period began in March 2006 and ended in November 2007. It lasted 19 months and achieved a long and sustained boom. The Shanghai Composite Index rose 320.87% during this period. In 2006, the annual GDP growth rate remained at about 12%, and the quarterly GDP growth rates in the first three quarters of 2007 were 13.8%, 15% and 14.3% respectively. At this stage, net exports have become the main contributor to economic growth, while consumer demand has increased steadily, promoting sustained economic growth.
After the recovery period of the economic crisis, the second half of 2009 came to the third prosperity period. However, due to the regulators’ concerns about a large amount of money supply and the impact of tightening policies, the Shanghai composite index began to fall in August 2009. However, the growth continued to improve. After nearly a year of comprehensive stimulus, the economy basically came out of the crisis, the growth continued to improve, the industrial added value increased from negative to double-digit stable growth again, and the Shanghai composite index rebounded from September 2009.
In the prosperity stage, the theoretical logic is cycle Finance consumption growth. The main logical basis is: high-speed economic growth, the increase of investment drives rapid economic growth, drives the cycle resource products and industrial enterprises to occupy an absolute advantage, and then gives birth to the demand for downstream consumption and technology iteration under the background of the continuous expansion of industrial enterprises’ production capacity. The actual verification logic is: Finance cycle consumption growth. The order of industry rotation is mainly based on the policy inflection point.
From the perspective of the industry, nonferrous metals, mining and securities companies have the highest winning rate in the prosperity stage. If we classify the above industries by sectors, we can find that in the stage of economic prosperity, the industries that can obtain excess returns are mainly concentrated in the consumption driven by the continuous expansion of the cycle and the rapid growth of demand. After reviewing the performance of the industry in each recovery period, we found that in the prosperity stage, the cycle and consumption still maintained a high growth, and the growing electrical equipment steadily obtained excess returns three times driven by the cycle. In the boom stage, the economic boom is high and the business performance of enterprises continues to be good. Therefore, the demand for listing, additional issuance and loans increases, and the financial sector led by securities companies and banks benefits; At the same time, the increase of fixed investment has also driven the performance of cyclical sectors such as steel and mechanical equipment to rise.
The leading industry sectors in the three booms are also different. The number of industries that can obtain excess returns in the three boom stages accounts for 25%, 53.57% and 75% of the whole industry respectively. The industries with leading growth in the first boom period were mining, electrical equipment, non-ferrous metals, steel, communications, etc., and most of them were growth and cycle industries; Non bank finance, non-ferrous metals, real estate, national defense and military industry were the leading industries in the second boom period. The cycle and financial industries still occupied the main advantages. Among them, the growth rate of non bank finance in this range reached 998.38%. At the same time, growing industries such as national defense and military industry also achieved good returns; The dominant industries in the third boom period are mainly growth and consumption industries such as computer, medicine and biology, household appliances, electronics, media and leisure services. The reason is that the gem was opened on October 30, 2009, and the first 28 listed companies are mainly concentrated in electronics, medicine and modern service industries. Due to this advantage, the relevant growth industries have increased greatly. (report source: future think tank)
\u3000\u Centre Testing International Group Co.Ltd(300012) .2. Stagflation stage: consumption cycle growth Finance
In the stagflation stage, the economic growth is still above the long-term level, but the growth rate decreases. Due to the Limited surplus capacity, the inflation level continues to rise, the income growth slows down, and the inflation level remains high, the company’s profit growth rate decreases. The market began to play a game, and the prices of various sectors no longer rose all the way. Due to the sharp rise in the previous prosperity stage, many sectors were at a high level, the market was worried about the prospect, and the sectors with too high growth began to fall.
The first stagflation period was from April 2004 to September 2004. After the Tieben incident, the policy focus shifted from crisis response to regulating structure, suppressing investment and curbing economic overheating. Under strict policy control, the cumulative year-on-year growth rate of fixed asset investment fell to 30.50% from 53% at the beginning of the year. At the same time, CPI and PPI rose simultaneously. In order to prevent excessive credit growth, the central bank raised the deposit reserve ratio by 0.5 percentage points to 7.5% on April 25, 2004. The growth rate of M2 slowed down, and China’s long-term and short-term interest rates rose.
After the market saw a high of 1783 points at the beginning of the year and formed a typical horn form, the A-share market generally showed a continuous downward trend, and the Shanghai Composite Index hit a five-year low of 125943 points on September 13, 2004.
November 2007 to April 2008 was the second stagflation period. After the May 30 storm in 2007, there was a frenzied tide of speculation in Shanghai and Shenzhen stock markets. The Shanghai stock index reached an unprecedented 6124 on October 16, 2007. This irrational surge then ushered in a sharp decline. After 6124 points, the Shanghai Composite Index fell all the way to a low of 2990 points on April 22, 2008.
The third stagflation period is from February 2010 to September 2011. With the four trillion economic stimulus package reaching a high point, there has been a significant decline in infrastructure and industrial growth, and real estate investment continues to rise, causing further regulatory concerns.
The policy continues to be tightened. The fiscal policy focuses on structural adjustment and risk prevention, strictly eliminates backward production capacity, standardizes local government financing platforms, and emphasizes maintaining steady and rapid economic development. Therefore, in terms of policy, it has shifted from stimulating response to the sustainable development of new industries. However, inflation remained at a high level, with CPI and RPI fluctuating between 5% and 6%, and PPI reaching 7%. Therefore, the liquidity of China’s interest rate hike is tight, the new loans are relatively stable, and the interest rate rises as a whole.
In the stagflation stage, the theoretical logic is consumption cycle growth Finance. The main logical basis is: after the economy overheats, the contraction of enterprise investment and profit, high inflation and the peak of demand and price in the process of economic decline. At this time, the government carries out strict control, and its prominent features include: interest rate hike, liquidity tightening and other measures. The actual verification logic is: consumption cycle growth Finance. The rotation order of the industry is mainly based on ppi-cpi: cycle consumption.
From the perspective of the industry, the winning rate of agriculture, forestry, animal husbandry and fishery, household appliances and medicine is the highest in the stagflation stage. We can classify the industries that can be concentrated in the lower reaches of the economy and those that can obtain excess returns in the lower reaches of the economy. If we can find that the industries that can obtain excess returns in the lower reaches of the economy are mainly related to the stagflation. By reviewing the pork price and crude oil price in each stagflation period, we find that in the stagflation period, most of them are cost driven inflation upward. Therefore, the agriculture, forestry, animal husbandry and fishery industry performs well in the stagflation period. In addition, food and beverage, household appliances and medical biology also reflect a strong defensive nature in the stagflation stage. To sum up, when the macroeconomic cycle entered the stagflation stage, the overall performance of A-Shares was not excellent. Industries with relatively good performance in each stage were concentrated in defensive sectors such as consumption, agriculture, forestry, animal husbandry and fishery, medicine and so on.
\u3000\u Centre Testing International Group Co.Ltd(300012) .3. Recession stage: consumption growth Finance cycle
In the recession stage, the economic growth fell below the trend level and continued to decline to the trough. The emergence of a large amount of surplus capacity eased the inflationary pressure and the company’s profit decreased significantly. The decline in economic expectations, combined with the decline in corporate profits, killed both valuation (PE) and earnings (EPS), which fell sharply after growing much longer.
The first recession began in September 2004 and ended in March 2005. During this stage, with the expectation of equity reform becoming more and more obvious, the reform also kicked off at the end of April, and the market entered the final panic period. The market continued the decline in the second half of 2004 and continued to explore the bottom. After hitting a five-year low of 125943 on September 13, the Shanghai composite index rebounded briefly and rebounded to 146478 on September 23. However, the rebound trend was not maintained, and the downward trend remained unchanged for the next six months.
The second recession period was from April 2008 to February 2009. Affected by the financial crisis, the macroeconomic situation deteriorated sharply. During this period, the Shanghai Composite Index fell from 5497 on January 14 to 1771 on October 28. After that, it bottomed out and rebounded, but it remained low.
The third recession was from September 2011 to July 2012. The Shanghai Stock Index fluctuated downward, maintaining the downward trend in the past two years. By the end of 2011, the total market value of A-Shares in Shanghai and Shenzhen had dropped by 18.91 trillion yuan, down from the total market value of A-Shares in Shanghai and Shenzhen by the end of 2011, which was 18.91 trillion yuan. However, this round of rising market did not last long. At the beginning of March, the pre growth target of GDP in 2012 was lowered to 7.5%. At the same time, the high-level government conveyed the signal that the real estate regulation was not loose, which made the market’s expectation of policy rescue failed and the falling market reopened.
In the recession stage, the theoretical logic is consumption growth Finance cycle. The main logical basis is: before the recession and interest rate cut, from overheating and stagflation to the contraction stage, demand fell, and rigid consumer goods and medicine are well defensive. In the middle and later stages of the recession, the economy turned to the bottom. With the interest rate cut and economic stimulus, industry advantages such as interest rate sensitivity and high asset liability ratio began to highlight. The actual verification logic is: consumption growth Finance cycle. The order of industry rotation is mainly based on the tightness of monetary policy.
From the perspective of the industry, the winning rate of grasping food and beverage, medicine and biology and architectural decoration in the recession stage is the highest. If we classify the above industries by sectors, we can find that in the recession stage, the industries that can obtain excess returns are mainly concentrated in defensive consumer industries. In reviewing the performance of the industry in each recovery period, the industries with excess returns in the three recessions include media, medicine, biology and food and beverage. We believe that during the economic recession, the performance of the cyclical sector was depressed due to the impact of corporate performance, and investors began to turn their attention to the TMT industry with better growth. It is worth noting that in the second recession, that is, the period of financial crisis, the indexes of all industries fell, but compared with the Shanghai index, many industries still achieved excess returns. The top ten industries with excess returns are electrical equipment, medicine and biology, media, architectural decoration, mechanical equipment, computer, public utilities, national defense and military industry, communication and building materials, among which the science and technology growth industries account for the majority. Under the downward expectation of interest rate, the industries with strong growth are relatively limited to be affected by the crisis.
\u3000\u Centre Testing International Group Co.Ltd(300012) .4. Recovery stage: Finance cycle growth consumption
In the recovery stage, the economy rebounded from the bottom of the valley, and the growth is still below the long-term level, but the growth rate is accelerated; Inflation is still falling because of sufficient surplus capacity. At this stage, the marginal cost of production is low, the gross profit of the company increases rapidly and the profit growth is strong.
The first economic recovery period occurred from March 2005 to March 2006. The direct catalyst for this round of rise is the 7.21 exchange rate reform and the implementation of Article 9 of the State Council. In order to cooperate with the exchange rate reform, the central bank created a loose liquidity environment. In the first half of 2005, the year-on-year growth rate of CPI decreased, the inflationary pressure was relieved, and various interest rates fell.
The equity division reform kicked off at the end of April. The market entered a period of panic, and the stock index fell all the way to the 1000 point mark. Until June 6, 2005, the Shanghai Composite Index fell below the 1000 point mark, hitting the lowest point of 998.23 in the whole year. After the bottom of the 1000 point was confirmed, the market gradually began to rebound. In June 2005, under the influence of nine substantive measures to support the development of the capital market, such as the active implementation of the Ninth National article by relevant departments and accelerating the issuance of short-term financing bonds by securities companies, market expectations tended to converge and investor confidence gradually increased. During this period, the business of securities companies and securities investment funds has developed rapidly, and the index of non banking and gold industry increased by 23.30%.
The second economic recovery period occurred after the economic crisis. Affected by the global economic crisis in 2008, the Shanghai Stock Index experienced a huge shock from 2008 to 2009. The Shanghai Composite Index fell from its highest point of 6124 in October 2007 to 1664 in October 2008. On November 5, 2008, the executive meeting of the State Council launched a four trillion infrastructure investment plan (m2, fixed asset investment) focusing on further expanding domestic demand and promoting economic growth, involving ten measures, including affordable housing projects, rural infrastructure construction, major infrastructure construction such as railways, highways and airports, post earthquake reconstruction and ecological environment construction, Drive the economic recovery against the trend.
During this period, non-ferrous metals, real estate, mining and other industries took the lead in revenue, with range increases and decreases of 81.63%, 51.32% and 37.06% respectively.
The third economic recovery began in July 2012. Infrastructure investment rebounded, consumption rose, corporate profits increased significantly, liquidity became loose, the 18th National Congress made a smooth transition, and the basic concept of the government returning to the service and supervisor standard was supported by the majority of investors and boosted market confidence.
In the recovery stage, the theoretical logical order is Finance cycle consumption growth. The main logical basis: macroeconomic repair is mainly driven by investment. For the purpose of expanding domestic demand and promoting economic growth, continuous interest rate cuts and loose monetary policies promote the recovery of the demand of infrastructure, real estate and other industrial chains from the trough, and then drive the rebound of the demand of the upstream and downstream of the industrial chain, Downstream consumption then recovered. The actual verification logic is: Finance cycle growth consumption. The order of industry rotation is mainly based on the policy landing and the expected inflection point of fundamentals.
From the perspective of the industry, banks, real estate, nonferrous metals and mining have the highest winning rate in the recovery stage. If we classify the above industries by sectors, we can find that in the stage of economic recovery, the industries that can obtain excess returns are mainly concentrated in the financial industry with interest rate sensitivity and the real estate infrastructure industry chain related to promoting economic recovery. In reviewing the performance of the industry in each recovery period, the industries that can obtain excess returns in the three recovery periods are mining and banking. China’s macro-economy is driven by investment, especially when the economy is in recession, it is more necessary for investment to drive economic recovery. A typical example is that after the 2008 financial crisis, exports suffered a huge blow and the economy fell into recession. Four trillion infrastructure investment led to economic recovery against the trend, and real estate, non-ferrous metals, mining and other industries took the lead in benefiting.
\u3000\u Jiangsu Xinning Modern Logistics Co.Ltd(300013) . Summary: Merrill Lynch clock represents mean regression driven by macro aggregate
Looking back on the industry rotation of China’s stock market from 2004 to 2012, we believe that it is basically carried out around Merrill Lynch’s investment clock, with mean value regression as the core driven by macro aggregate. From the pricing framework of P = PE EPS, at this stage, from the perspective of fundamentals, the economy will rebound at the bottom and decline at the peak, and the EPS end is more relevant to the economic cycle; From the perspective of economic cycle, the relationship between PE and valuation is more fundamental. At that time, the so-called rise when falling more and fall when rising more were more related to fundamentals. Davis double click / double kill became an important representative of the industry’s rotation thinking and prediction at that time.
Further, we summarize some laws of the rotation of China’s A-share industry under the Merrill Lynch clock model from 2004 to 12:
1. In the stage of economic recovery, macroeconomic repair is mainly driven by investment. Especially when the economy is in recession, investment is more needed to drive economic recovery. A typical example is the national nine articles and exchange rate reform in 2005. After the financial crisis in 2008, exports suffered a huge blow and the economy fell into recession to expand domestic demand With the introduction of the four trillion yuan policy focusing on promoting economic growth and the promotion of continuous interest rate cuts and loose monetary policies, the economy has warmed up and interest rate sensitive industries such as finance have benefited. Market expectations tend to converge and investor confidence gradually increases. The demand for iron and steel industry in the upper reaches of the industrial chain is still rising slowly due to sufficient inflation, while the demand for capital construction and other non-ferrous industries is still declining. Financial and cyclical industries performed well. In specific industries, banking, mining and non-ferrous metals industries had sustained and stable excess returns. In addition, the expansion of production capacity is often accompanied by the development of technology and materials, and the growing industry has received certain market attention;
2. In the stage of economic prosperity, the economic growth accelerated and exceeded the long-term trend level, and the output gap was negative; Due to resource and capacity constraints, inflationary pressure appears. The increase of investment drives the rapid economic growth. The good performance of fixed asset investment and industrial added value indicates that the economy is moving towards prosperity. In 2003, the completed investment in fixed assets maintained a growth rate of about 30%. In 2009, after nearly a year of comprehensive stimulation, the economy basically came out of the crisis, the growth continued to improve, and the industrial added value increased from negative to double-digit stable growth again. At this stage, China’s strong real estate sales have induced overheating of fixed asset investment, driving industries such as household appliances, steel and building decoration to obtain high excess profits. With the commencement of industrial enterprises, driven by investment and overall demand, resource products and industrial enterprises began to occupy market advantages. At this time, the central bank should pay the same attention to the expected increase of interest rates in the financial industry and be cautious about the problem of inflation;
3. In the period of economic stagflation, the most typical feature is high inflation, but the economy has peaked. In 2004, CPI and PPI rose simultaneously, but the cumulative year-on-year growth rate of fixed asset investment fell to 30.50% from 53% at the beginning of the year. Similarly, the 10-year CPI is close to 6%, while the PPI is more than 7%. After the overheated economy, the contraction of enterprise investment and profits, high inflation and strict government control are prominent features. On April 25, 2004, the central bank raised the deposit reserve ratio by 0.5 percentage points to 7.5%, and the growth rate of M2 slowed down. Raising interest rates, tightening liquidity and raising China’s interest rates as a whole are common means of government control. At this stage, the growth and consumer industries performed well, and the cycle still occupied the price advantage. In terms of specific industries, household appliances, textile and garment, mining and other industries have sustained and stable excess returns;
4. In the economic recession stage, the economic growth fell below the trend level and continued to decline to the trough. The emergence of a large number of surplus capacity eased the inflationary pressure and the company’s profit decreased significantly. The decline in economic expectations is superimposed on the decline in corporate profits. However, before the interest rate cut, the demand fell from overheating and stagflation to contraction, and rigid consumer goods and medicine were well defensive. The recession and began to cut interest rates, and the economy turned to the bottom. With the reduction of interest rates and economic stimulus, the advantages of interest rate sensitive financial industries and public utilities with high asset liability ratio began to highlight. At this stage, the financial and consumer industries performed well. In terms of specific industries, the media, medicine, biology, food and beverage, public utilities and other industries had sustained and stable excess returns. Similarly, at this stage, the demand declines and the upstream price declines, so the industry and resource products industry should be avoided.
\u3000\u3000 2. Why did the effectiveness of Merrill Lynch clock in the stock market gradually decline after 2012
No capital market law can be drawn once and for all. After 2012, whether in research or actual combat, all kinds of investors found that Merrill Lynch’s explanation for the rotation investment in the A-share industry decreased significantly.
Through our combing of historical details and framework research, we believe that the core reason has the following two dimensions and four key points, but the most important point is that Merrill Lynch clock ignores the change of industrial trend and the enhancement of fundamental heterogeneity at the medium and micro level.
\u3000\u Dayu Water-Saving Group Co.Ltd(300021) . Historical verification: after 2012, the effectiveness of Merrill Lynch clock in the stock market decreased significantly
Some investors once said that after 2012, Merrill Lynch clock has turned into an electric fan in China. They have no choice but to express the dilemma of Merrill Lynch clock in the process of rotating the use of A-share industry after 2012. The biggest embarrassment is that when we reach a certain consensus on where the current economic cycle is, A-share often has entered the discussion of the next cycle.
After 2012, the effectiveness of Merrill Lynch clock in the stock market began to decline, mainly reflected in the following two aspects:
The first is growth and consumption.
At the end of 2012, the financial and consumption style indexes were basically at the same starting line, and the growth and cycle style indexes were basically at the same level. In 20122020, all indexes and industries have grown, but investors give higher evaluation to consumption and growth stocks. Since 2013, consumption has increased by about 246% and growth has increased by about 239%. The excess growth gap between consumption and finance reached 147.31%, and the relative growth gap between growth and cycle reached 121.36%. The deterministic advantage of consumer stocks and the high growth advantage of growth stocks are gradually highlighted.
Second, the correlation between industries has decreased significantly. We calculate the correlation of the market trend of all Shenwan level industries in the first ten years and the next ten years respectively. The correlation coefficient of each industry in the first ten years is located in the lower left triangular matrix of the correlation matrix, and the correlation coefficient of each industry in the last ten years is located in the upper right triangular matrix of the correlation matrix. It can be seen from the correlation matrix that between 2003 and 2012, that is, the stage when Merrill Lynch clock is more effective, the correlation between the market prices of various industries is generally between 0.85 and 0.99. There is no industry with obvious negative correlation, and the overall performance of each industry is highly positive correlation, and the phenomenon of rising and falling together is obvious. However, ten years after Merrill Lynch clock, the status, pattern and track attributes of various industries have undergone earth shaking changes, and the correlation between the trends of various industries from 2012 to 2021 has not become so close. The correlation of various industries not only has positive correlation, but also has negative correlation, and the correlation has decreased significantly.
\u3000\u Gifore Agricultural Science & Technology Service Co.Ltd(300022) . Explanation for the decline in the effectiveness of Merrill Lynch clock after 2012
\u3000\u Gifore Agricultural Science & Technology Service Co.Ltd(300022) .1. Endogenous slowdown of economic cycle fluctuation under transformation and upgrading
The direct reason for the sharp decline in the effectiveness of Merrill Lynch’s clock is the weakening of economic endogenous demand and the stagnation of the movement of inflation cycle. Since 2012, China’s economic operation has entered the new normal, economic growth has slowed down, from factor driven to investment and innovation driven, the economic and industrial structure has been continuously optimized and upgraded, and the status of the tertiary industry and consumer demand has been continuously improved. In addition, since the financial crisis, the global water release and excessive currency have triggered a flood of liquidity. Under the background of the flood of liquidity, the relative position and role of inflation are gradually weakening. From 2004 to 2012, the year-on-year fluctuation range of CPI was – 1.2% – 8.2%, and the fluctuation rate was 2.23%. From 2013 to July 2019, the year-on-year fluctuation range of CPI was 0.76% – 2.64%, and the fluctuation rate was only 0.42%. There was an obvious narrowing of fluctuation in the inflation cycle.
At the same time, Merrill Lynch clock operates with the logic that the demand side drives periodic changes. After 2012, China’s supply side factors increased. After 2012, we not only focused on aggregate demand, but also continued to promote supply side structural reform, eliminate backward production capacity, resolve overcapacity, and shift from extensive economic growth to high-quality economic development. China officially launched the supply side structural reform in 2016. Under the policy guidance of “three deletions, one reduction and one compensation”, the backward production capacity continued to withdraw. The impact of supply side reform on commodities is based on the supply side, which can not be fully explained by the traditional Merrill Lynch clock logically.
\u3000\u Gifore Agricultural Science & Technology Service Co.Ltd(300022) .2. The central bank’s monetary policy actively irons the economic cycle
In terms of the trend of interest rate in the past two decades, the first ten years of Merrill Lynch clock: interest rates fluctuated sharply, with obvious cyclical fluctuation characteristics. In the decade after 2012, the trend of interest rate has changed significantly. Especially in recent years, from the perspective of ten-year Treasury bond yield, the long-term interest rate center has the characteristics of continuous fluctuation and downward.
Compared with the Fed’s dual target system of giving consideration to inflation and employment, the level of economy and inflation will affect the interest rate through monetary policy, thus affecting the relative performance of large categories of assets. However, the Central Bank of China is concerned about the multi-objective system at the macro level. The interest rate is not necessarily the role of economy and inflation, but may be the result of the active regulation and control of the central bank. In October 2013, the year-on-year growth rate of China’s GDP reached a high of 12.20%. Since then, the economy has shown a downward trend of fluctuation. The year-on-year growth rate of GDP in December 2019 was only 5.8%. Similarly, the monetary adjustment mechanism is also gradually strengthened, mainly through the release of money and liquidity to smooth the economic cycle.
Since 2004, China’s macro-economic environment has changed several times. From 2004 to 2008, China’s overall economic growth maintained a fluctuating upward trend. In 2007 Q2, China’s GDP grew by 15% year-on-year. After the financial crisis, China’s GDP growth rate fell to 6.4% in Q1, 2009. Driven by policies and market sentiment, the economy began to recover, and there was a short recovery in M2 and GDP growth. After the 2008 financial crisis, the global sustained low interest rates and ahead of schedule easing have led to recovery and recession becoming the main theme of the US economy, and the rotation law has weakened. Subsequently, China’s economic growth shifted gears. After 2011, the overall economic growth began to show a downward trend, and China’s macroeconomic environment entered the stage of slowdown. In addition, in terms of monetary policy, the Central Bank of China will continue to carry out countercyclical monetary policy adjustment and adopt a variety of flexible monetary policies and control means under the established monetary objectives. From the monetary policy of steady growth to controlling the general valve of money supply and not engaging in “flood irrigation”, it indicates the central bank’s regulation and attention to money circulation. (report source: future think tank)
\u3000\u Gifore Agricultural Science & Technology Service Co.Ltd(300022) .3. The heterogeneity of fundamentals is enhanced, the industrial trend is rising, and the correlation between emerging industries and economy is weak
Generally speaking, the macroeconomic environment changes, and the monetary policy regulation affects the interest rate level and enterprise credit level, which makes the decision-making changes of investors and enterprises reflected in the performance, profitability and management decision-making of each company, and transmits the value evaluation of investors on the whole industry and industrial competition, which finally corresponds to the result of asset allocation. Therefore, in the process of mapping the logic of Merrill Lynch clock from changes at the macroeconomic level to assets, it is naturally required that the industry and economy are highly related, and the fundamentals are quite consistent.
Before 2012, China’s economy and various industries and industries were generally in a stage of prosperity and loss. In that environment, as long as we promote the real estate industry chain, we can drive the profitable development of various industries up and down. After 2012, China’s economy has entered the new normal, with economic structure transformation, economic growth shifting, and continuous upgrading and optimization of industrial structure. New industries continue to rise, the status of traditional industries has been impacted and weakened, and the prosperity of various industries is no longer unified.
From the perspective of corporate profits, the profit changes of all index sectors were basically the same before 2013, and the profit cycle was about 3 years. Since 2006, the status has stabilized. The profit growth rate of Shanghai Stock Exchange reached 88.75% in Q1, peaked and fell, and the subsequent profit in Q1 reached the bottom of 23.84%, ending this round of profit cycle. The next three years are a new cycle, ending between 2012q1-q2. Subsequently, although the profit recovered, on the whole, the profit fluctuation became narrow after 2012, and the profit of each index began to differentiate. Before 2013, the profit volatility of each index was about 25.4% – 27.6%. After 2013, the profit volatility of the index narrowed significantly. Except that the gem was affected by Q4 in 2018, the profit volatility was 23% (excluding the profit volatility was 17.1%), and the profit volatility of other indexes was 7.9% – 19.1%.
This confirms what we mentioned before: under the current new overall economic pattern and environment, industries in various industries begin to change from the form of common advance and retreat, showing a trend of game competition, and industry profits tend to differentiate from rising and falling at the same time.
\u3000\u Gifore Agricultural Science & Technology Service Co.Ltd(300022) .4. Increase the proportion of institutional investors and weaken the power of traditional mean return
Since 2012, public funds have developed rapidly, institutional investors have gradually begun to occupy a dominant position, opportunities in the cycle industry and the financial industry have weakened, and the focus of institutional investors has gradually shifted to higher growth technology industries and relatively stable consumer industries. Since 2004, the number of institutional and retail investors has been mainly on the rise. Around 2013, institutional investors continued to grow, and the scale of asset management of public funds accelerated. Since 2013, consumer stocks have begun to highlight their advantages and continue to be favored by investors. The rise has been led all the way. Growth stocks have also surpassed the cycle and financial industry with the support of several waves of major market, forming an industry rotation trend dominated by growth + consumption.
\u3000\u3000 3. Combined with the changes before and after, the ten enlightenment of Merrill Lynch clock on the industry rotation
\u3000\u30001. Today, it should be recognized that Merrill Lynch clock in the stock market is still the most classic, self consistent and market recognized industry rotation system to solve the industry rotation. Once the Merrill Lynch clock in the stock market plays a role in industry rotation, it is often decisive.
2. Pursuing the industry rotation winning rate of A-Shares based on the clock of Merrill Lynch, many people believe that the core is to improve the ability to accurately judge and predict the economic cycle and inflation. This idea of emphasizing cognitive differences may be wishful thinking. The speed of the clock is uneven or even jumping. When the market has no consensus on the two, the so-called clock is only the moon in the mirror and flowers in the water.
\u3000\u30003. The key to the use of Merrill Lynch clock in the stock market is to do the right thing at the right time. Generally speaking, the best window period is from the first half to the next month when important economic data are verified.
\u3000\u30004. Under the clock of Merrill Lynch, most of China’s economic cycles show weak recovery, rapid prosperity, long inflation and slow recession. Each stage lasts from May to August on average. During the boom period, raise the position and take decisive action to seize the opportunity; During the recession, lower your position and look for opportunities in a slow pace. The main line of economic development is seen in the recovery period, the marginal growth rate of demand in the boom period, the level of price growth in the stagflation period, the rigidity of demand in the early recession and the reversal of prosperity in the late recession.
\u3000\u30005. The core basis of industry rotation under the clock of Merrill Lynch is prosperity, which has nothing to do with marginal trading funds. The first decade focused on the direct indicators of prosperity with revenue and profit growth as the core, that is, the higher the current growth rate, the more obvious the rotation growth; In the last decade, more attention was paid to the indirect indicators of prosperity with core input-output ratio and ROE as the core, that is, the higher the sustained growth rate, the more obvious the rotation increase.
\u3000\u30006. In the recovery stage, in the first decade, the style level finance cycle growth consumption, and the industries with high winning rate include banking, nonferrous metals, real estate, automobile, non bank and mining. In the next decade, the ranking of style level has changed significantly, growth consumption cycle finance, and the industries with high winning rate include electronics, computer, food and beverage, chemical industry and nonferrous metals.
\u3000\u30007. In the prosperity stage, the core theme is the cycle style, which is ranked as cycle consumption Finance growth. At the industry level, the winning rates are nonferrous metals, steel, building materials, food and beverage, machinery, household appliances and banks.
\u3000\u30008. In the stagflation stage, the style is ranked as consumption cycle growth Finance. Necessary consumption is better than optional consumption. Food and beverage, household appliances, nonferrous metals and chemical industry have a high winning rate at the industry level.
\u3000\u30009. In the recession period, the style is mainly based on the rotation of consumption and scientific and technological growth, with growth consumption Finance cycle. Computers, food and beverage, medicine, electronics, media and banks have a high winning rate at the industry level.
\u3000\u Doushen(Beijing) Education&Technology Inc(300010) . In 200412, China’s rotation was dominated by the cycle and financial industry, and after 2012, it was dominated by consumption and growth. Reflected in the context of economic transformation and industrial structure upgrading, China shifted from simple factors of production to technology driven and brand driven. The core of the decline in the effectiveness of Merrill Lynch’s clock in the stock market after 2012 lies in the neglect of the medium and micro level, especially the change of industrial trend and the enhancement of fundamental heterogeneity, which makes the correlation between valuation and profitability complex. In other words, if we analyze the industry rotation without the operation law of the industry, the judgment is likely to be one-sided.
