【周末荐读】市场见底：何时何地（附英文原文）
本文作者为交银国际董事总经理兼首席策略师洪灝，原文刊载于其个人微信公众平台（“洪灏的中国市场策略”）。
对于把市场底部定义为市场指数运行轨迹上特定的一点的普遍共识，作者提出了不同的见解，认为市场底部的定义应该相对于经济的长期增速。也就是说，底部的定义应该引入时间的元素。通过量化分析揭示了上证综指与时间之间的对数线性关系，作者指出在过去的二十年，上证一直在以每年7％的速度增长，约每十年翻一倍。
作者发现，这个7％的指数基本增速和自1986年以来中国多个五年计划里制定的增长目标一致。这条以7%为斜率的上升基线连接着1996年，2005年和2014年时中国市场经历的三个历史性底部。
针对近期有关中国经济增长路径的争论，洪灏认为上证指数里隐含的这个显著的时空关系也解释了为什么最近市场的波动倍受这些争论的干扰。他提到，上证越是接近上升基线，基线的支持也就更显著。如果中国的经济增长速度进一步下行，那么由基线定义的支持区间将更低。然而，指数接近基线运行也并不一定意味着v形反转在即。
作者的长期量化择时模型也交叉证实了这些底部。这个模型经历过实战考验，并具有良好的历史成绩。同时，作者在对恒生指数的研究中上也发现了类似的关系。
本文是中文报告《市场见底：何时何地》的英文版，点击文末“阅读原文”，查看中文版报告全文。
英文原文如下：
Summary: The search for a market bottom is a perennial quest. Consensus often defines it as a specific point on the trajectory of the index. I disagree. Market bottom should be defined relative to a long-term economic growth rate. This is equivalent to defining bottom with the element of time. Indeed, our analysis demonstrates a log-linear relation between the Shanghai Composite and time: the index has been growing at 7% p.a., and doubling roughly every decade for the past twenty years.
Note that the 7% approximates the growth target set out in China’s Five-Year-Plan since 1986. It defines the slope of a rising base line delineating the important market bottoms seen in 1996, 2005 and 2014. This significant relationship explains why the market recently has been vulnerable to the debates of China’s growth path. The closer the index is to the base line, the more significant the base line’s support. If China’s growth rate falls, the bottom support range as defined by the base line will be lower. But the proximity towards the base line does not mean an immediate v-shaped reversal.
Our long-term timing model, with an excellent track record, confirms these bottoms. Similar relationship can be shown for the Hang Seng, with the slope, or growth rate of 4.5% equal to Hong Kong’s average GDP growth since 1987. If so, Shanghai should be approaching an important base range of ~2,450 ~ 4Q, which roughly equals the lower end of the trading range of 2,500 we laid out in our 2016 outlook last December. And Shanghai plunged to 2600 in January and February before recovering.
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“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist”. – Kenneth Boulding
Shanghai grows 7% p.a., doubling every decade – a rising linear bottom: The recent pell-mell of China’s growth trajectory contrasts the singsong of the country’s stock market. Just as the rabble of speculators was disenchanted, the market jolted into hurly-burly to show some signs of life. We were asked when and where the market would bottom. It is a perennial quest.
Focus Chart 1: Shanghai doubles roughly every decade for the past twenty years, forming a rising base line.
We do not believe valuation that consensus always refers to could answer the question, as valuation has been making new lows due to the underperformance of banks. We believe that bottom is a relative term. Indeed, the bottom of the index should be compared with a sustainable long-term economic growth rate. When the slope of the index falls to the sustainable growth rate, the economy’s long-term prospects will then have been fully discounted. And hence the market bottom emerges. With the “rule of 70”, we can then convert the growth rate into the number of years for the index to double. As such, the quest for market bottom is to find a long-term growth rate. In essence, this is equivalent to defining the slope of the index base line, and is indeed defining the index against time.
The meaning of time varies for different entities. For Chuang-Tsu, it is a circular flow; Hawkins reckons it begins with the “Big Bang”; St. Augustine pondered “what did God do before he created the universe?” Physicists see the flow of time from the past to the future as increasing entropy; for Pink Floyd, it is an older id relative to a constant sun. And in our analysis, time is the slope of the Shanghai Composite’s rising base line. It is a line connecting the composite’s most significant bottoms in 1996, 2005 and 2014 (Focus Chart 1).
This is a singular line. It delineates the minimum annual growth rate for the Shanghai Composite since 1996. If you simply connect the starting level of 500 on the composite in 1996 with anywhere on the composite’s historical trajectory, the slope of the ensuing line will be steeper than the base line at 7% annual growth rate. That is, your return will inevitably be higher than 7%. You will get the same results using the year 2005 as your starting point. And 2014, too, if this log-linear relationship persists for another decade.
Cross references with our long-term timing model and historical events:Our discovery could be spurious. It could be a happenstance, a fluke, a simple twist of fate. But our long-term timing model appears to confirm this intuitive finding – the model enters its bottom range, and lingers for around two to three years - until the significant bottoms on the Shanghai Composite’s rising base line are reached. This phenomenon is shown clearly in the green areas of the lower chart in Focus Chart 2. For instance, our long-term timing model stays in green between 1994 and 1996, between 2003 and first half 2005, and from 2012 to first half of 2014, before the Shanghai Composite touches its rising base line in 1996, 2005 and 2014. The model’s current reading suggests that the status of oversold is intense, but has not reached extremes (the green bottom range).
Focus Chart 2: Long-term allocation model for Shanghai, with an excellent track record, has not bottomed.
The years that mark the significant bottoms on the Shanghai Composite’s rising base line, 1996, 2005 and 2014, are all decorated with historic events. For instance, after the “3-27” incident in February 1995 that brought down one of the largest brokerages then and shut down the bond futures market for nearly two decades, the rivalry between Shanghai and Shenzhen Stock Exchanges intensified. By September 1996, the Shenzhen Composite had tripled, and its turnover had surpassed that of Shanghai.
Under the direct order of the Shanghai municipal government, Shengyin-Wanguo, a brokerage rose from the ruins of the “3-27” incident, bought with its own proprietary capital in order to nudge the Shanghai Composite above 1000. And for September 1996, the broker’s trades equaled 1/3 of the total turnover on the Shanghai Exchange for the first 9 months of 1996, and were almost twenty times the firm’s capital. The rivalry triggered waves of speculative frenzies, till the “12 imperial orders” from the central government that culminated with a People’s daily editorial to quench rampant speculation in December 1996.
In 2005, the Shanghai Composite sank to 998, slightly below the psychologically important round-number level of 1000. But the stock ownership reform that rendered a final resolution of the state-owned and restricted shares ignited the strongest bull market in China’s history. Meanwhile, the relentless anticorruption campaign after the Plenum and monetary easing were conducive to the 2015 bubble. The significant market bottoms in 1996, 2005 and 2014 subsequently saw the market rising 4.5x, 6x and 2.5x till 2001, 2007 and 2015, respectively. Interestingly, these peaks are roughly 8 years apart.
Focus Chart 3: Hong Kong has a rising base line, too. But because of QE, the latest market cycle is extended.
Focus Chart 4: Long-term timing model for Hang Seng, with an excellent track record, has bottomed in February 2016.
We also have found a similar log-linear relationship in the Hang Seng index – the Hang Seng has been growing at 4.5% per annum, and bottoms roughly every half decade since 1987. The slope roughly equals Hong Kong’s average GDP growth rate of ~4.3% since 1987. And the significant bottoms are also confirmed by our long-term allocation model (Focus Chart 3-4). That said, due to QE, the Hang Seng has deviated from its base line beyond the time predicted by history. Or the presence of QE has made it possible for stock prices to decouple from the long-term growth rate of 4.5%.
Why 7%? Our log-linear analysis above essentially adopts a technical chartist approach. It is graphically intuitive. Messrs Edwards & Magee once described technical analysis as “the science of recording in graphic form the actual history of trading (price changes, volume of transactions, etc.)”. They believe the market price reflects “not only the differing value opinions of many orthodox security appraisers, but also all the hopes and fears and guesses and moods, rational and irrational, of hundreds of potential buyers and sellers, as well as their needs and the resources”. As such, “the study of price action is all that is required”, remarked the great John Murphy later.
In our log-linear time series analysis, we may have enough evidence for the purpose of “identifying trend changes at an early stage and to maintain an investment posture” (Martin Pring). The Shanghai Composite is full of quirks and whims. For instance, in my earlier report titled “The Market Top: When and Where” on March 23, 2013, I wrote about how Shanghai tended to peak when its free-float market cap reached 15% of M2. The report predicted the market’s peak and its dramatic plunge during May and June due to the liquidity crisis in 2013, as well as its dramatic rebound from 1,849. As a fundamental analyst, I am curious when confronted by such oddities on charts, as the number 7% somehow evokes the feeling of déjà vu.
Indeed, 7% has been either specifically stipulated, or implied as an economic growth target in many of China’s Five-Year-Plans (FYP). The 7th FYP drawn in 1986 was the first time in China’s history that an encompassing plan for social and economic development was created. The plan called for gross national output to grow an average 7.5% p.a. The combined gross annual output growth target for industries and agriculture was 6.7%. The 9th FYP in 1996, the inception year of the rising base line for the Shanghai Composite, aimed at quadruple per capita GNP by 2000 as compared with 1980 – a growth of 400% over 20 years implies 7% growth per annum. The plan also called to double 2000’s GNP by 2010, suggesting again an annual growth rate of 7%. When it came to the 10th FYP in 2001, average GDP annual growth rate was explicitly set at 7%. In 2016, it was between 6.5% and 7%, and was the first time a range was in place of a specific target.
In summary, average annual growth rate target for the Chinese economy, implicitly or explicitly, has not deviated much from 7%. This “obsession” with 7% annual growth, or doubling the size of the economy every decade, has evolved into a rising base line that connects the significant bottoms of the Shanghai composite roughly every decade.
Market Forecast - Shanghai’s bottom range ~2,500; timing ~4Q: In his seminal work “A Brief History of Time”, Stephen Hawkins describes that a good theory “must accurately describe a large class of observations on the basis of a model that contains only a few arbitrary elements, and must make definite predictions about the results of future observations”. Our log-linear analysis of the Shanghai Composite versus time largely satisfies the first criterion – it is a rising base line connecting the significant market bottoms for the past twenty years. The composite doubles roughly every decade, and its return roughly equals the growth target of 7% set by China’s FYPs since 1986. Despite extreme elations and depressions that have punctured the market in the past twenty years, this rising base line remains intact.
Further, the closer the composite approaches this base line, the more significant its resistance will be. For example, despite the state-owned and restrictive stocks became tradable and increased supply dramatically, the Shanghai Composite touched the base line at 998 on June 6, 2005. The level of 1000 has been a significant reference point ever since. During the liquidity crisis in June 2013, when the overnight repo rate touched an unprecedented level of 30%, the Shanghai Composite plunged to its lowest level of 1,849 before rebounding. But our base line holds right at around 1,850.
If our theorem continues to work, and the 2,000 level seen in 2014 is the bottom for the current cycle till 2023, then the rising base line of the Shanghai Composite should reach 2,000x1.07x1.07x1.07= 2,450 by 4Q2016. Note that this level is not dissimilar from the 2,500 bottom range that I derived from my earnings yield/bond yield model and set forth last December (please refer to my report “The Chinese Curse” on December 09, 2015).
Meanwhile, in my previous reports, I have discussed how China’s real interest rate, after considering consumer and housing inflation, consistently leads stocks by ~6 months (“The Chinese Curse” on December 09, 2015, and various other reports). Real rate appears to be troughing recently and if so, stocks should follow ~6 months later, if history is a guide(Focus Chart 5). Such timing and the approximate range of a market bottom in 4Q are confirmed by the rising base line, and thus satisfying the second criterion of Hawkins’s test of a good theory to make a definite prediction.
Focus Chart 5: Real rate, which generally leads stocks by ~6 months, is bottoming.
In this paper, we have discussed that market bottom should be defined relative to a sustainable long-term growth rate. We can show that the market bottoms whenever the slope of its rising base line equals the growth rate. This is the time when the prospects of the market are fully discounted. The developments in the Shanghai and Hong Kong markets have empirically validated our theory. I hope this new perspective will contribute to the perennial quest of that elusive market bottom.
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