Today, the A-share market began to accelerate its divergence, confirming the previously mentioned trend from a "crazy bull" to a "slow bull" market.

As of the close, the Shanghai Composite Index rose by 1.32% to hold the 3300 mark, while the ChiNext board continued to decline by 2.95%; the total turnover for the day was 2.14 trillion yuan, a reduction of 796.8 billion yuan compared to the previous day. Although the ChiNext board seemed to have fallen quite a bit, the retracement was entirely within expectations, and the foundation of the bull market remains intact.

In fact, the market originally anticipated that the main board and all A-shares would continue to consolidate today, but a timely and significant announcement from the central bank in the morning changed the market landscape, making the dividend-paying sector (high-yield stocks) the best-performing sector in the market. Among them, the Dividend Low Volatility ETF (159525) and the Central Enterprise Dividend ETF (159332) both rose by more than 4.2% today, and the Hang Seng Dividend ETF (513950) increased by more than 3% today.

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According to the central bank's announcement, it supports qualified securities, fund, and insurance companies to exchange high-grade liquid assets such as bonds, stock ETFs, and constituents of the CSI 300 index for government bonds and central bank bills. The initial operation scale is 500 billion yuan, which can be further expanded depending on the situation. Applications will be accepted starting today.

This super package, which exceeded expectations, has also made high-yield stocks the most certain main line at present.

01

The Super Package Has Really Arrived

The 500 billion yuan asset swap quota allows securities, funds, and insurance companies to exchange their bonds and stock assets for high-liquidity assets such as government bonds and central bank bills held by the central bank. They can then pledge or trade these assets in the market to obtain funds, which can be used to invest in the stock market.

Following previous policy directives, the initial 500 billion yuan, plus the 300 billion yuan supporting listed companies' share buybacks and increases in loans, totals 800 billion yuan, and there may be a second and third batch later on.

Moreover, these funds can continue to apply for swaps after purchasing new assets until the quota is exhausted, and institutions themselves can also refinance through other channels (for example, pledging securities is already in line with policy support, although the interest rates and discounts may not be as favorable).In this scenario, as long as the institutions are willing, the potential scale of funds entering the market will be quite substantial.

It should be noted that since these quotas are for securities, funds, and insurance companies, including long-term funds such as social security pensions, their strategies for allocating equity assets require a more stable or even conservative approach. Most of their allocation directions will inevitably be to select high-quality assets that have stable high dividends over the long term and have lower stock price volatility (of course, a certain proportion will also be allocated to low-dividend but stable industry leaders, betting on future stock price appreciation gains).

At the same time, swap funds also come with costs. Even at the cheapest rate of 1.75%, plus other potential costs, the actual rate could easily reach 1.9% or higher. According to rumors circulating in small circles, several securities firms have already obtained pilot quotas with an interest rate of 1.8%.

If these funds are to be allocated to stocks and funds, considering the risk premium, the expected return rate must be significantly higher than this level, at least 4% or 5% or more.

So, narrowing down the choices, their allocation direction becomes clear—dividend assets (long-term stable high-yield stocks) are almost the only direction that meets the requirements.

Let's imagine, with the potential influx of a large amount of funds, the phenomenon of herding may be inevitable. Could those so-called super large-cap stocks from the past possibly stand up again?

However, how to use this loan remains a rather thorny issue, and institutions must carefully weigh the risks and rewards.

Because the current state of A-shares is not the best time for them to enter on a large scale.

On one hand, after a super surge, the valuations of almost all A-share companies have risen significantly, not only reducing their attractiveness but also increasing the risk of a short-term correction.

On the other hand, everyone is well aware of the state of the macroeconomic situation. Although the current counter-cyclical policy efforts are unprecedented, it will take more time to observe and verify whether the economy will stabilize and strengthen. When industry profits will rebound, thereby maintaining the market value and dividends of listed companies, is indeed a question that needs to be addressed.In this scenario, these institutions cannot be optimistic about blindly increasing their positions now. It is important to recognize that in recent years, with the dual impact of economic decline and stock market downturns, these institutions have fallen into significant pitfalls, especially with substantial losses in profit due to real estate and equity investments.

For instance, New China Life Insurance's profit in 2023 was 8.712 billion yuan, plummeting back to the level of 2018, primarily due to the drag from the investment side with a loss of 12.5 billion yuan from the difference in buying and selling investment assets that year.

In reality, the actual allocation ratio of institutions to equity capital (stocks/funds, etc.) has been kept at a relatively low level in recent years. According to a report by the chief of a well-known securities firm, currently, "the proportion of equity investment by our country's pension funds and insurance funds is only 10% to 20%, far below the international level of about 50%, and also significantly lower compared to the policy-mandated upper limits of 40% for social security funds and 45% for insurance funds."

In 2023, among the investment portfolios of the five listed insurance companies on the A-share market, New China Life Insurance, which had the highest proportion of equity market assets in total assets, only accounted for 14.2%, followed by China People's Insurance and China Life, with proportions of 11.4% and 11.23%, respectively.

Data shows that in the first half of 2024, the balance of funds used by life insurance companies was 27.71 trillion yuan, of which 13.36 trillion yuan was invested in bonds, accounting for 48.22%. They would rather buy bonds and earn a stable return of about 2.5% than to allocate more to stocks and funds.

This is not because they lack funds to invest in equity assets, but purely out of risk considerations. Of course, if the future economy and stock market move in the expected direction, these institutions will be the biggest winners.

In fact, the market currently tends to believe in them, which is why insurance stocks have risen against the trend today, with New China Life Insurance and Ping An Insurance briefly attempting to hit the daily limit.The Most Certain Main Direction

As mentioned earlier, the proportion of long-term capital invested in A-shares is insufficient, and there is still a significant gap compared to international standards. Their allocation ratio will be adjusted with market conditions, but it is always difficult to reach the upper limit of the ratio.

From the perspective of the interests of long-term capital, the risk-return ratio of A-shares urgently needs to be improved in order to have the willingness to increase the allocation. However, this part of the funds is the ballast stone to maintain the stability of the stock market and give full play to the role of value discovery. They themselves are the necessary participants to improve the risk-return ratio.

But the potential arbitrage opportunities are there.

The remaining question is: How will long-term capital capture such opportunities to fully benefit?

The answer is also very clear, which is to continue to increase the investment in high dividend assets.

In fact, ordinary investors may still have some obvious misunderstandings about this round of market conditions, the first of which is that anything can rise.

In the past year, funds have favored high-dividend stock assets because they have already risen many times before. Due to their own defensive attributes and the conflict with the risk preference of the bull market, they were left behind in this round of market conditions.

Some dividend stronghold sectors have clear policy benefits, such as banks that are about to increase core capital, steel and chemical sectors full of broken net stocks. Compared with the overall market gains, some have unsatisfactory growth, but sectors like transportation, coal, and public utilities are obviously the tail-enders.

However, after this round of rapid market rises, the dividend yield of the dividend sector has not been significantly adjusted. That is to say, there is no need to worry about losing the value of allocation due to excessive growth. On the contrary, there is relatively more room for catch-up growth.Although the dividend yields of the broad market and the CSI 300 adjust more significantly with the rise, the dividend yields of the CSI Dividend and Chinese companies in Hong Kong stocks enjoying the AH premium do not change much.

Let's do a simple calculation: if the cost of funds for swap convenience is around 2%, 12 sectors such as coal, banking, petrochemicals, textiles, home appliances, etc., can enjoy the interest arbitrage benefits, and can at most achieve a net dividend return of 3.5%. Most traditional dividend sectors still maintain a stable dividend yield.

On the other hand, in the long run, the policy face has increased supervision over the dividends of listed companies, requiring an increase in operational quality to reward shareholders. In the future, enterprises that meet such aesthetics will continue to emerge to varying degrees, which is an improvement on the demand side of the allocation. Therefore, there are definitely many investment opportunities in this area.

There are many high-dividend, dividend stocks, and it is difficult to select individual stocks. Directly investing in related index ETFs is one of the choices that are both offensive and defensive. For example, the Hang Seng Dividend ETF (513950) focuses on high-dividend Hong Kong stocks with a very advantageous dividend tax rate; the Central Enterprise Dividend ETF (159332) focuses on the layout of high-quality leading enterprises of central and state-owned enterprises; the Dividend Low Volatility ETF (159525) has the dual "BUFF" of high dividends and low volatility.

It is worth mentioning that when investing in the Hong Kong market, QDII products are tax-free for dividends of local Hong Kong enterprises; for dividends of H-share companies, QDII products only need to pay a 10% dividend tax. If participating through the Hong Kong Stock Connect, the dividend tax is generally around 20% or 28%. In comparison, buying QDII dividend strategy products has a higher cost-performance ratio.

The Hang Seng Dividend ETF (513950) is a relatively rare ETF in the market that invests in Hong Kong dividend assets through QDII, with T+0 trading.

For investors who are optimistic about Hang Seng dividends but have not opened a stock account, the Hang Seng Dividend ETF has an off-exchange linked fund (Class A: 019260, Class C: 019261).

03

This short-term rebound is seen by many as a correction in the long-term bull market. When valuation expansion significantly compresses the space for fundamental improvement, we will not say that such stocks are worth investing in.From the perspective of market patterns, it is only natural for prices to fall after a significant increase. At such times, defensive assets often have their own value in allocation, as their performance is less affected by economic cycles. They are our preferred choice when seeking stable returns and avoiding market risks. Although there are fluctuations, they will by no means be the worst-performing assets in the long run.