As we delve into the data surrounding the financial landscape as of late October 2023, distinct patterns are emerging, shedding light on both the performance of various sectors and broader economic trendsThe cumulative financial results for A-share listed companies in China seem to indicate a positive turning point, with profits likely reaching a bottom in the second quarterSectors such as cyclical industries, electronics, and pharmaceuticals are poised for recovery.

By October 31, the quarterly earnings reports for a majority of A-share companies had been released, revealing that the overall net profit for the third quarter displayed a tentative year-on-year growth of 0.2%, while excluding the financial and oil and petrochemical sectors, this figure increased to 1.8%. These numbers signify a significant upturn from the second quarter, representing a respective rise of 9.7 percentage points and 14.7 percentage pointsThis recovery in profitability, however modest, hints at improving economic conditions and market sentiments.

Looking ahead towards the fourth quarter of 2023 and into the first half of 2024, there is an optimistic projection that the pressures from international trade, notably those stemming from inventory surpluses in the United States, will begin to easeThis shift might herald a more stable environment for Chinese businesses, with expectations of an annual profit growth rate for non-financial, non-oil and petrochemical segments settling around -5% to 0%. This forecast, while cautious, reflects a cautiously optimistic outlook for the coming periods.

Since the beginning of the year, micro-cap stocks have demonstrated substantial overperformance, greatly aided by their low correlation with the prevailing economic weaknesses, a relatively low foreign ownership, and favorable industry trends

Advertisements

By analyzing stocks with a market capitalization of no more than 2.5 billion RMB as of January 1, 2023, these micro-cap stocks have reported remarkable gains, significantly outperforming the broader A-share indexThis trend underscores a snapshot of recovery and opportunity amid an otherwise turbulent economic environment.

The micro-cap stocks are noteworthy not just for their performance, but also for their more favorable “chip structure.” These smaller companies, often referred to as 'small but beautiful,' are gaining traction among investors and institutionsThe current market environment, characterized by a lack of dominant narratives, frequent rotation of hot topics, and emergent industrial cycles (notably driven by AI technology) point towards greater thematic investment opportunitiesIn particular, micro-cap stocks with thematic links to AI, specialized niche markets, and domestic alternatives are ripe for exploitation.

In terms of consumer behavior, there has been a measurable improvement in both household income and consumption tendencies, indicating that the lingering “scar effect” from the pandemic is starting to waneThe third quarter saw a year-on-year GDP growth rate of 4.9%, supported largely by a remarkable contribution from final consumption expenditure, accounting for 94.8% of this growthFurthermore, the disposable income per capita increased by 5.9%, and when discounting for baseline effects, the compound annual growth rate reached 6.2%, surpassing the second quarter’s performanceNotably, the consumption propensity among residents has witnessed a sequential recovery, now standing at 69.8%, surpassing the level observed in the third quarter of 2019.

This enthusiasm translates into the third quarter’s financial narratives, evidencing a vigorous recovery in travel and service-related consumption

Advertisements

The shift towards a service-oriented consumption recovery is anticipated to transition into a broader consumer goods spending surge as the economy stabilizesThe various elements of the travel chain have also showcased resilience, indicating continued progression in consumer confidence.

A deeper look into the results from the third quarter reveals staggering increases in the profitability of several sectors, such as steel, industrial metals, and refining/trading, with quarterly net profits soaring by 175.1%, 26.6%, and 40.5%, respectively, compared to the same period last yearThis data indicates a substantial rebound from the figures reported in the second quarter, with improvements of 265.2, 56.7, and 60.1 percentage points, respectively.

The dynamics of global oil production cuts and the slight resumption of operations in the coal industry have contributed to a gradual recovery in inventory levels across a variety of sectors, including industrial metals, while low inventory levels in basic steel and petrochemical sectors have created supportive conditions for future price performance and corporate profitability.

When examining the sector performance in terms of year-on-year profit growth for the third quarter, a notable deceleration in the performance drop of cyclical sectors is evidentStability continues to shine through in sectors deemed essential, such as thermal power, aviation, and high-speed railOn the financial and real estate fronts, overall profitability remains subdued, and demand pressures in the real estate market seem to have limited elasticityHigh-end manufacturing retains its resilient profitability amid internal variances, while the automotive sector has performed surprisingly well, largely driven by price adjustments aimed at achieving better sales volumes.

Despite the prosperous outlook for some sectors, negative pressure persists, notably within traditional manufacturing and certain technology domains, particularly within the electronics sector

Advertisements

Advertisements

Advertisements