This week, the Shanghai Composite Index fluctuated widely below 3000 points, and the market is eagerly looking forward to the gradual formation of the bottom of the stage. During this period, various analysts discussed the formation law of the market bottom from the dimensions of fundamentals, policies and capital trading behavior, among which the concept of “risk premium” was repeatedly mentioned.
“risk premium” refers to the excess rate of return that investors expect to produce by holding risky assets relative to risk-free assets for a period of time. It is generally considered to be derived from the fed model (Federal Reserve valuation model), that is, the yield of the stock market minus the yield of long-term government bonds, so as to obtain a stock bond spread
The industry believes that, compared with the direct observation of PE valuation, the stock bond spread takes into account the impact of changes in risk-free returns in the market, which has more reference significance.
Taking the Shanghai and Shenzhen 300 index as an example, the calculation formula of the stock bond spread is: the reciprocal of the price earnings ratio (TTM) of the Shanghai and Shenzhen 300 index minus the yield of 10-year Treasury bonds. The higher the interest rate difference between stocks and bonds, the lower the valuation of the stock market, and the higher the excess return of the stock market relative to the bond market in the future, that is, stocks are more worthy of investment.
Looking back on history, the peak of stock bond spread often corresponds to the important bottom of a shares, and the low of stock bond spread often indicates that the market has entered a high range.
Figure: change in interest rate spread of CSI 300 index stocks and bonds from January 2013 to March 2022
Still take the Shanghai and Shenzhen 300 as an example. The historical peak of the stock bond spread of the CSI 300 index appeared in June 2014, which was about 8.2%. At that time, the Shanghai Composite Index hovered at 2000, and then opened a bull market in the second half of the year; The historical low of the stock bond spread of the CSI 300 index appeared in June 2015, which was 1.7%, and the Shanghai Composite Index peaked at 5178 points that month.
Figure: in June 2014, the interest rate spread of CSI 300 index stocks and bonds saw the highest value in history
Figure: in June 2015, the interest rate spread of CSI 300 index stocks and bonds saw the lowest value in history
Back to the moment, as of the closing on April 26, the PE (TTM) of the Shanghai and Shenzhen 300 index was 11.25 times, a new low since April 2020. Taking the reciprocal minus the yield of ten-year Treasury bonds (2.8277%), the latest stock bond spread of the Shanghai and Shenzhen 300 index was 6.06%, which entered the top 30% of the history, reflecting that the current market may have been in a relatively low range.
In addition to the CSI 300 index, the current stock bond spread of the Shanghai Composite Index has entered the top 10% of the past decade, and the stock bond spread of the China Securities 500 index has set a new high in the past decade. From this point of view, whether the overall market or local companies, the current allocation cost performance is in a historically high range.
Figure: change of stock bond interest rate spread of Shanghai Composite Index and China Securities 500 index in the past ten years
Wu Kaida, deputy director and chief strategist of deppon Securities Research Institute, said that historically, ERP (equity risk premium) has certain guiding significance for the excess return of Shanghai and Shenzhen 300 in the next year. Since 2002, the average of ERP shares has exceeded 1 times the standard deviation of a shares. According to historical statistics, when ERP exceeds double the standard deviation, the one-year winning rate of A-Shares is 85% and the median rate of return is 20%.
“From the perspective of the current interest rate difference between China and the United States, which is close to the lowest level since 2010, the space for China’s bonds to continue to decline in the next few months may be limited. From the medium-term perspective, the excess return of Shanghai and Shenzhen 300 is expected to rise, and the downward space of superimposed Guokai bonds is limited. Therefore, the absolute return of Shanghai and Shenzhen 300 is expected to rise, and the value of A-share allocation is highlighted.” Wu Kaida stressed.
Gf Securities Co.Ltd(000776) chief strategist Dai Kang believes that considering that the current round of China’s risk-free interest rate is lower than that at the bottom of the historical market, the current round of equity risk premium is closer to the limit position than PE valuation.
Dai Kang sorted out the situation of “V” reversal in the market after six rounds of A-share ERP peaking in history. He concluded that after ERP peaked, the main driving force driving the market reversal was “China US monetary easing” or “A-share profit morning glory”.
“The current odds ratio of A-Shares is not a strong constraint of the market. China needs to observe whether there is a possibility of further overweight after the change of the epidemic. We maintain the view that the value style is dominant. The ERP of market growth and market value has experienced differentiation for three consecutive years, and is moving towards convergence in 2022.” Dai Kang said.
