A-Share Market Aims for 15-20% Returns Amid Challenges

In 2022, the CSI 300 index fell by 21%, and the market hardly showed any performance except for a bottoming rebound at the end of April. The average public equity fund fell by 21%, making it one of th...

In 2022, the CSI 300 index fell by 21%, and the market hardly showed any performance except for a bottoming rebound at the end of April. The average public equity fund fell by 21%, making it one of the historically poor-performing years.

In 2022, my account suffered an overall loss of over 12%. Although it hurt, when viewed in the context of the entire market, such a drawdown is still reasonable. For 2023, I expect the A-share market to bottom out and rebound, hoping that my account's returns can reach 15%-20%.

In my view, it is highly likely that the domestic macroeconomy will recover in 2023. The stock market, as a barometer of the economy, has strong vitality and potential for rebound. In terms of sectors, I am optimistic about the healthcare, consumer, and new energy sectors, hoping to achieve stable returns from these long-bull sectors. In terms of investment plans, I will continue to persist in fixed investments in equity funds, try to balance the risks of my account, and build a more stable investment portfolio.

01 It is expected that the macroeconomy will rebound overall in 2023

At present, the domestic macroeconomy is generally stable, with business operations slowly recovering and overall demand showing a weak recovery trend. The GDP grew by 3% year-on-year in the third quarter, and by 2.5% in the first half of the year, overall stable and improving; stable growth policies have formed physical work volume, with infrastructure driving the construction industry higher. In the medium and long term, although the economic recovery process is inevitably affected by short-term disturbances, it has entered a melting stage. As the effects of various stable economic policies continue to emerge, more physical work volume is expected to appear, and China's economy may gradually recover.

The economic work conference is key to our judgment of the macroeconomic trend for the year. At the end of 2022, the economic conference made a relatively objective estimation of the domestic economic situation, believing that "the foundation of economic recovery is not yet solid, and the triple pressures of demand contraction, supply shock, and weak expectations are still relatively large, with the external environment being turbulent and unstable." On this basis, the higher-ups gave the economic direction for 2023, "adhere to the general tone of seeking progress while maintaining stability," and made a strategic judgment that "the economy is expected to rebound overall next year."

It can be said that the higher-ups' judgment of the economic situation in 2023 is accurate, and the blueprint is beautiful. Looking forward to 2023, it is expected that corporate profits will recover and grow. On the one hand, the macroeconomic stabilization and recovery and the growth of corporate revenue are interrelated, and it is expected that the growth rate of corporate revenue will moderately increase; on the other hand, after the PPI growth rate slowed down from November 2021, it is expected to bottom out and rebound in the second quarter of 2023, which will bring about a "quantity and price rise" situation. Considering that the prices of upstream resource products may fall in 2023, the corporate profit margin is likely to recover from a low average level to a central level, jointly driving the profit growth rate of enterprises, especially in the middle and downstream industries in 2023, with an expected profit growth of the CSI 300 of about 10-15%.

02 A-shares are highly likely to undergo a repair market

In 2022, the equity-mixed fund index fell by more than 20%, a drop that is second only to 2008, 2011, and 2018 in history. The entire fund market can be described as a scene of desolation. However, it is worth noting that after the above three bear market years, the equity-mixed fund index ushered in a 2-4 year market warm spring. In fact, since 2006, there has been no precedent for the equity-mixed fund index to fall for two consecutive years. We can be moderately optimistic about the fund performance in 2023.

On the one hand, the current valuation level of A-shares is very low. Data shows that the overall dynamic P/E ratio of A-shares is 16.05 times, and the overall dynamic P/E ratio of the CSI 300 is 10.67 times, with 378 individual stocks trading at a price below their net assets, and the break-even rate of the A-share market is 7.63% (excluding stocks with negative net assets).Looking at the overall valuation level of the current A-share market, both the price-to-earnings (P/E) ratio and the price-to-book (P/B) ratio are at a low point in recent years, offering high allocation value. Specifically, when examining the valuation percentiles over the past three years, among the major domestic indices, the Shanghai 50 and the CSI 300 are in relatively lower ranges. Observing the historical data of the CSI 300 Index, it fell by 65% in 2008 and then rose by 96% in 2009; it declined by 25% in 2011 and increased by 8% in 2012; it dropped by 25% in 2018 and rebounded by 36% in 2019.

On the other hand, A-shares stand out globally in terms of investment cost-effectiveness. The inflation issues in European and American countries may continue into next year, and the economy could evolve from stagflation to recession. A global economic downturn could be a risk point for our economic development, but from another perspective, it also highlights the investment value of A-shares.

The cyclical nature of bull and bear markets is an immutable law of the stock market. Stock market investment is always like this: "When mountains are heavy and waters are complex, it seems there is no way out, but then willows are dark and flowers are bright, and another village appears." Rationality suggests that the bottom of each bear market is also the beginning of the next bull market. In the low tide of the market, we should not lose confidence in the market; instead, we should believe that people will eventually recognize the market value during the low tide!

03 Long-term investors should increase the proportion of equity assets in their portfolios

Data shows that since 2007, if one were to buy into equity fund indices when the Shanghai Composite Index fell below 3,000 points, there have been six historical opportunities to do so, and over time, these have yielded good returns. For example, buying in February 2007 and October 2018 would have resulted in returns of 251% and 51%, respectively, if held until now.

Opportunities are always created by declines. From the current point in time, I believe that true long-term investors should let go of their timidity and increase their allocation to equity assets.

Looking at specific sectors, I am optimistic about the new energy sector and the pharmaceutical sector.

In terms of the new energy sector: The policy dividend is far from over. Under the "dual carbon" background, the higher-ups place great importance on the development of the new energy sector. The "14th Five-Year Plan" clearly mentions focusing on strategic emerging industries such as new energy vehicles, and implementing future industry incubation and acceleration plans in industries such as hydrogen energy, along with the introduction of multiple policies to promote the development of the new energy industry.

Regarding the pharmaceutical sector: From an investment perspective, healthcare is a counter-cyclical sunrise industry with long-term investment value. Data supports this conclusion—both domestically and internationally, the pharmaceutical industry is one of the industries with the most bull stocks and the best overall performance in the market.

Personally, I will continue to persist in fixed investments in funds of the aforementioned two sectors, waiting patiently for the flowers to bloom. Of course, although I am optimistic about the A-share market trend in 2023, I also respect the market and believe that market fluctuations are inevitable. To balance account fluctuations and enhance the experience of fund investment, I will also increase my holdings in bond funds and allocate some fixed-income assets. I hope that 2023 will be gentle to me, and I hope that everyone's investment wishes can be fulfilled.