A-Shares' Sudden Shift: Two Key Drivers

The Shanghai Composite Index experienced a slight decline today, but the number of declining stocks was notably highInterestingly, the market seems to be shifting its focus towards dividend stocks, with major entities such as China National Petroleum Corporation, Sinopec, China Shenhua Energy, China National Offshore Oil Corporation, China Telecom, and China Yangtze Power seeing substantial ralliesThis trend within the context of the market has raised questions among analysts regarding the underlying reasons for this change in market sentiment.

Two major factors have been identified by market analysts as contributing to this abrupt shiftFirstly, the resurgence of interest in dividend-paying stocks is largely attributed to the performance of the energy sector, particularly strong showing by companies like China Shenhua and China National PetroleumThe surge in coal and oil prices appears to be linked to recent news indicating that OPEC+ is moving toward an agreement to delay the restoration of oil output by an additional three months

This information seems to function as a catalyst for the sector, influencing investor sentiment.

Secondly, the bond market has been experiencing significant gains these past couple of daysIn the morning session today, the rate for the 10-year treasury bond dropped by 1.7 basis points to 1.97%, while the 30-year treasury bond saw a decrease of 1.55 basis points, settling at around 2.1525%. The decline in treasury yields broadens the gap between bond yields and stock dividends, enhancing the appeal of dividend-paying stocks and inciting renewed interest in them among investorsThis relationship between falling bond yields and dividend stocks has been consistent in past data, particularly in the first half of this year when a similar phenomenon was observed.

Large state-owned enterprises have undoubtedly played a significant role in propping up the index amidst these fluctuations

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Companies like China National Petroleum, China Shenhua, Industrial and Commercial Bank of China, and China Yangtze Power have continued to support the market, effectively curbing its downward momentum to some extentThese stocks had shown promising positive returns in the first half of the year, but have seen relatively modest price movements since the end of SeptemberConcurrently, this collective rise in large-cap stocks has corresponded with steep declines in small to mid-cap stocks, evidenced by the significant losses in indices like the CSI 1000 and Guozheng 2000.

The inherent appeal of state-backed enterprises lies in two key opportunities for returnsThe first opportunity arises from the recent hike in international oil pricesReports suggest that OPEC+ has made progress towards reaching an agreement to delay a planned increase in oil production by an additional three monthsThis discussion centers around postponing previously set measures that aimed to raise output by 180,000 barrels per day beginning January of the following year

If left unchecked, the impending supply surplus may pressure depressed oil prices even further.

The Organization of the Petroleum Exporting Countries and its allies had announced a roadmap in June to gradually restore an average of 2.2 million barrels per day of suspended productionThis has been an ongoing effort since 2022 intended to prevent supply excesses and maintain price stabilityHowever, increases in supply from North America have placed continued pressure on global oil prices, forcing OPEC+ to postpone production restorations on several occasionsAs of now, Brent crude futures trading in London have fallen about 17% since early July, hovering around $73 per barrel.

The second opportunity for return is found in the continuous decline of treasury yieldsIn today's morning session, the rates for active medium to long-term treasury bonds commonly saw decreases exceeding 1.5 basis points, with the 7-year treasury bond rate falling to about 1.807% and the 10-year bond rate following suit

This ongoing trend in long-term government bond futures has been accompanied by a sustained increase in market yieldsDeclining treasury yields not only enhance yield spreads with stock dividends but also present a favorable case for dividend stocksNotably, during the first half of the year, the stellar performance of dividend stocks aligned with the upward trajectory in government bond prices.

Looking ahead, the actual performance of these burgeoning sectors remains contingent upon the persistence of the influencing factors outlined aboveSince mid-November, long-term interest rates and credit debt have experienced a generally smooth declinePrevious market concerns surrounding policy stimulus and peak bond issuance have begun to recede as the primary market has successfully absorbed most issuance through competitive bidding processesAs a result, interest rates have begun to decline at an accelerated pace.

Regarding liquidity, under the self-discipline mechanism coordinated by the central bank, interbank deposit rates have gradually aligned with policy rates

This reduction in interbank deposit rates is favorable for the bond marketFollowing the lowering of these rates, a significant amount of idle funds—common in money market funds and rural commercial banks—are expected to gravitate toward new investment avenues like interbank certificates of deposit and bond markets, thereby extending the trend of increased liquidity and leveraging in the debt markets.

According to Citic Jiantou Securities, upcoming key meetings at year-end are expected to unleash favorable policiesHowever, attention must also be given to the form and direction of fiscal and monetary coordinationOnce the Central Economic Work Conference sets the direction for fiscal policies, relevant proposals will still require approval through necessary channelsThe monetary policy, characterized by a preference for either immediate selection or ongoing adjustments, is likely to advance ahead of fiscal measures—potentially resulting in interest rate cuts, continued bond purchases, and increased adoption of various repo tools.

On a global scale, data compiled by Zhonglong Information highlights that the average price of Brent crude oil in November reached $73.42 per barrel, reflecting a 2.59% decline from October

However, the average price from January to November stood at $80.48 per barrel, which represents a 2.57% decline compared to the same period last yearHistorically, December shows a tendency to underperform, particularly in years unmarred by extraordinary events such as the COVID-19 pandemic in 2020. Yearly data indicates that in years marked by rising prices, gains typically fall between 5%-12%, while decline years witness losses often ranging from 5%-20%. Notably, in years marked by OPEC production cuts, declines appear to be more contained, resting below 5%-7%.

Moreover, Guotai Junan Securities posits that to prevent oil prices from remaining below the threshold for fiscal balance and to safeguard national financial surpluses, countries in the Middle East display a strong inclination to maintain elevated oil pricesAdditionally, production costs from U.Sshale oil and Russian crude may influence overall oil pricing, providing a supportive framework against price erosion.