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Four major factors are expected to boost the stock price of securities companies.
From the investment perspective of the securities and insurance industry in the second half of the year, our title is "The time window for strategic allocation." We believe that the securities industry and the insurance industry currently have both industry beta and industry alpha and are at a relatively low valuation level, and there will be a wave of relatively good market recovery. Looking forward to the securities industry, we believe that there are four major factors that are expected to help the stock price rebound.
First, the recent valuation of the securities industry is about 1.4-1.5 times the valuation. Compared with the relatively low period in history, in 2018, the stock pledge risk was booming, so the industry PB valuation reached a low of 1.08 times. But if the industry eliminates it at special time points, such as the period of 2018, including the high points of 2014 and 2015, and the first half of this year, the industry still has a relatively significant anchor for valuation. . The valuation of PB in the industry before 2014 was probably between 1.6 times and 2.5 times. From 2017 to 2018, it was at 1.7-2.5 times. Since 2019, it has been at a level of 1.6 times to 2.5 times.
The epidemic was superimposed in the first half of this year, especially in some developed areas such as Shanghai and Shenzhen. The epidemic was superimposed on the US interest rate hike , the Russia-Ukraine conflict and other factors, which made the capital market very pessimistic in March and April this year. Looking forward, we see that the economy is constantly recovering, liquidity is still relatively loose, and the impact of overseas factors on the country is declining at the margin. Therefore, back to the core position of valuation, for example, the range of 1.6 times to 2.2 times, currently 1.4-1.5 times, there is enough room for repair.
During the downturn this year, many stocks and stocks have broken through. As of June 14, there were 10 stocks. This number is even higher than the lowest point in 2018. Even after some leading brokerages have repaired their valuations, their valuations are still lower than the lowest point in 2018. From the perspective of valuation, we feel that the price/performance ratio is relatively outstanding.
Image source: GF Securities Development Research Center
Secondly, from the perspective of industry regulatory policies, if we look at regulatory policies over a longer period, there have been three complete regulatory cycles in the past fifteen or six years. Basically, A complete cycle takes about 6 to 7 years. Since 2019, our country has entered a new stage of high-quality development, driven by financing-side reforms and investment-side reforms. Looking forward to the second half of this year, our domestic reforms are still advancing as scheduled. We can choose a few important reforms. The first one is the comprehensive registration system and .
A comprehensive registration system was clearly proposed at last year's Central Economic Work Conference and this year's and two sessions , and we must fully implement it this year. When the comprehensive registration system is implemented this year, we estimate that corresponding actions will be taken in the second half of the year. If the comprehensive registration system releases a positive signal, it may have a relatively large impact on the securities industry and capital market. For example, the efficiency of investment bank approval will be improved; for example, under the registration system, the ecological environment of the capital market will be improved, which will accelerate the implementation of the delisting system and introduce more and better listed companies to . Thirdly, if the 20% increase and decrease system is liberalized with reference to GEM and Science and Technology Innovation Board , and the main board is also implemented, it will further help the overall market trading volume and activity.
We judge that the comprehensive registration system is the biggest policy since the capital market reform in the past two or three years. Other policies include the reform of the Science and Technology Innovation Board. The Science and Technology Innovation Board will be three years old on July 22 this year. The consultation stage for the Science and Technology Innovation Board's market maker trading system is currently underway. It is not ruled out that the Science and Technology Innovation Board may be launched in the second half of this year, especially in the third quarter. reform. The market maker trading system is very helpful in further enriching the non-directional asset allocation capabilities of securities companies. Overseas Wall Street 30%-50% of the income of top investment banks comes from market making business. We currently have market making in China on the New Third Board, public offerings REITs , and ETFs, but the volume is still very small. The Science and Technology Innovation Board is a relatively large and active market. If the securities industry starts to make markets in it and the scale expands in the future, we judge that the income from the market making business will continue to increase.
Some other policies include soliciting opinions on CSI 1000 stock index futures and stock index options, further enriching derivative financial instruments, and promoting relevant guidelines for the healthy and high-quality development of the public fund industry, including the current Hong Kong stock market interconnection continues to expand, can obviously feel In recent times, especially since mid-June, there has been a signal that capital market reforms are accelerating. For the securities industry, the reform is more about fundamentals and will be helpful to the new models and new business characteristics of the securities industry.
The overall fundamentals of the third industry are repairing and the trend is upward. Since 2019, the securities industry is no longer as highly homogeneous as in the past, and has shown more differentiated characteristics. In particular, the continuous enrichment of businesses such as wealth management and investment bank capitalization has brought great changes in profitability between large and small companies in the securities industry. big change. At the same time, especially after the wealth management business is in full swing, we can clearly feel that the proportion of income from wealth management business in the securities industry is constantly increasing, which supports the stability and continuous improvement of the valuation of the securities industry. overseas Goldman Sachs , Morgan Stanley , have vigorously developed wealth management business since 2009, and the valuation of PB has been significantly improved under the same ROE level. Comparing Goldman Sachs and Morgan Stanley, Morgan Stanley, which has a better wealth management business, has a valuation premium of about 30% compared to Goldman Sachs.
Let’s look back at the fundamentals. In the first half of this year, valuations have declined significantly. From a fundamental perspective, the performance of listed companies in the first quarter should have dropped by more than 40% year-on-year. The main factors for the decline are some factors that are in sync with the market, such as a moderate contraction in trading volume, a somewhat sluggish public offering data, and more importantly, a decline in the pan-self-operated business including the primary market, , and the secondary market. A certain amount of loss. However, we regard these factors as a synchronized indicator. The market continues to recover upwards. The Shanghai Composite Index has also increased from a low of 2863 to over 3300 points. Under this background, the fundamental profitability of the securities industry is constantly improving. It is expected that the second quarter will have a larger increase than the first quarter;
fourthly, from the logical perspective of liquidity, because the securities industry itself is an industry with strong beta attributes. Basically, if the Shanghai Composite Index rises by 1 percentage point, the securities industry can logically rise by between 1.5 percentage points and 3 percentage points. From the perspective of the securities industry, liquidity is more about the trading volume or turnover rate of the secondary market. If we look at it from a larger perspective, it is the mobility of the whole society. In fact, the liquidity of the stock market is not inconsistent with the liquidity of the whole society, because the liquidity of the stock market is a small pool of social liquidity. When the economy is in the process of continuous repair and liquidity is loosening, it is in a relatively early stage. In fact, social mobility will spread to stock market liquidity . Therefore, the capital market will flow from macroeconomic recession to recovery. Under the background of relatively loose environment, the pricing environment of equity assets is very meaningful, and the securities industry has also benefited.
looks forward to liquidity in the second half of the year. Whether it is from the perspective of social financing or the D2007 indicator, liquidity should continue to be loose for a relatively long time. Because our current monetary policy orientation not only stabilizes prices, but also stabilizes economic expectations and also has corresponding requirements for maintaining employment. We judge that inter-bank liquidity and social liquidity will be relatively loose for a relatively long time in the second half of the year. We have done corresponding analysis and judgment before. When we used the upward growth rate of social financing as an indicator, we found that every time liquidity eased and the growth rate of social financing stock increased, the stock price performance of the securities sector It is still quite good, at a level of 1.5 to 3 times compared with the Shanghai Composite Index.
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Three logics for the brokerage sector in the second half of the yearMain line
The logic of industry fundamentals Every investment opportunity will have a different performance. For example, what has been traded in the past three years has been "dilemma reversal". After the phased suspension of deleveraging, which companies have pledged risks? Relatively large, but there is room for valuation repair; the wave of speculation in 2020 was based on the logic of mergers and acquisitions, and there was an expectation of integration between banks and securities firms; the transactions in the third and fourth quarters of last year were based on the logic of the growth of public funds, and both have relatively clear main lines. . But this year we have an outlook for the second half of the year. First, the liquidity environment is good. The liquidity environment will have a greater impact on the performance flexibility of brokerage business and proprietary business. In addition, when we talked about the policy outlook just now, we also mentioned that the reform is expected to accelerate. , under this situation, it will indeed give a relatively big boost to institutional businesses in the securities industry such as investment banking business , wealth management business, and derivatives business.
Therefore, we think that in the second half of the year, from the perspective of investment opportunities, the aspects and points may be more scattered, with different logical main lines. We think there are three main lines worth paying attention to. The first logical main line of is wealth management. Because our domestic residents’ wealth has entered the market, even though the performance of the stock market in the first half of this year was very poor and the return rate of public offerings was also unsatisfactory, we can see that the asset allocation structure of residents is still changing from investment real estate to non-standard assets. A process of transforming financial management into standardized financial assets.
htmlAt the beginning of 2000, the balance of public funds was 25.7 trillion at the end of December last year, and it was 25.2 trillion at the end of April this year. It seems to be hundreds of billions less, but we must take into account that the net value of equity funds shrank significantly from January to April. Other types of funds, especially fixed income +, also experienced retracements. The lack of these hundreds of billions is actually far less than the funds that have declined in net worth. In other words, from January to April, a relatively large amount of funds have entered the business scope of public funds, but the structure may be more inclined to enter fixed income. product type.With the trend of residents' wealth entering the market and the state of standardized financial assets in the securities industry, securities companies still have relatively large business space in agency sales and asset management. In fact, we have also calculated the agency business income plus asset management business income of different securities companies. We compared it with the operating income of securities companies, that is to say, looking at its proportion in operating income, we found that there are quite a few The company is already above 30%. This logical line is that as the sales of public funds return to a relatively normal level in the second half of the year, or in the process of the rebound of the capital market, the subscription-to-redemption ratio of existing products will evolve towards net subscriptions, and wealth management in the second half of the year will The logic will be smoother.
If you want to look at longer comparative data, you can also take a look at the stock price performance of financial stocks in the United States from 2006 to 2020. We have made statistics on more than 250 U.S.-listed financial stocks. In fact, only about 15% can consistently outperform the S&P 500 during this period. However, a relatively large proportion of the 15% outperform is in wealth management or asset management. Listed financial targets.
The second line can focus on investment banking and capitalization business. Because continuously increasing the proportion of financing is an important function of our domestic capital market, the comprehensive registration system will definitely further increase the corresponding business income of securities companies. In fact, we see that the proportion of investment banking business income in the report is constantly increasing. Before 2019, it was about 10%-12%. In the past year or two, it has risen to about 13%-15%. It must be considered that other business incomes are actually rising. The relative value of the proportion can also increase, which means that investment banking income is higher than wealth management or wealth management. The rate of increase is greater than other comprehensive increases such as brokerage business. Investment banks not only underwrite sponsorship business income from , but also invest in the primary market. Because there are basically two primary market investment companies under the securities company, one is its own funds, and the other is a PE equity investment subsidiary. Most of the funds of this company are raised from outside, and the self-owned funds are not allowed to exceed 20%. . The profit contribution of these two platforms to securities companies has been increasing in the past two years.In last year's annual report, some companies' primary market business accounted for more than 30% of the entire consolidated statement, which is a particularly high proportion.
Image source: GF Securities Development Research Center
The third is the ability to allocate non-directional assets. Since 2017, the proportion of financial assets in the securities industry to total assets has been rising rapidly. In 2017, the leading securities companies basically accounted for about 20%, and last year and the first quarter of this year, was close to about 50%, which is equal to half of a securities company's total assets invested in the self-operated field. Therefore, the impact of fluctuations in self-operated business on revenue and profits is increasing. Under the background of , can you start a non-directional business and constantly smooth out the fluctuations in performance so that the overall return is on the rise or stable? The secondary market will definitely give a higher valuation to such companies. value premium. We pulled a data. In the five years from 2017 to 2021, the average return on investment of leading securities companies CITIC, Guojun, and CICC in the past few years can reach 8-10 points. Other securities companies generally have 5.5-6.5, we estimate that some small and medium-sized securities firms may have worse stability and greater volatility.
non-directional asset allocation capabilities are actually reflected in the business through the size and strength of market-making business capabilities, as well as the size, strength and weakness of quantitative hedging trading capabilities, and derivatives business capabilities. The advantages of businesses such as the CSI 1000 stock index futures and the market maker system of the Science and Technology Innovation Board will be further strengthened and consolidated among leading securities firms, so we judge that it is better to continue to nurture these. A clue to an investment opportunity.
03 The life insurance sector has great flexibility and an inflection point is expected.
Life insurance can be more optimistic when we look at the second half of the year or the first half of next year. Because at this point in time, with residents having a relatively strong willingness to save , we can clearly feel that there is a better sales environment for security products. Especially this year, the insurance company's hot-selling incremental whole life has gained greater recognition. People of a certain age begin to consider the issue of retirement, which is also a very real issue. They hope to obtain a stable and expected return. If the incremental whole life has a rate of return of more than 3 points in the long term, it will be more attractive. Because the interest rate is expected to decline in the long term, the rate of return in the early 30s is still good. In addition, the returns from the equity market or financial products are too volatile, and their stability is far less than that of some life insurance products.
At the same time, we see that agents in the insurance industry are beginning to stabilize. has been falling off in the past two years, but it should bottom out after it reaches a certain level. We have seen that the dropout rate of agent stock data of various insurance companies has been significantly declining since March this year. From a statistical perspective, we can see that agents with a bachelor's degree or above have indeed grown rapidly in recent years. In 2019, only 23% were less than 23%. Last year, nearly 30% of agents had a bachelor’s degree or above. This has a positive impact on improving the quality of the agent team and stabilizing the number of existing agents. .
In the insurance industry, we can see that production capacity will continue to improve. The production capacity of itself is very strong and relatively high among those who have stayed behind. In addition, the proportion of high-quality personnel it is attracting is increasing. Therefore, production capacity has indeed increased faster than before in the past two years. Therefore, we believe that new policy premiums may gradually converge in the second half of the year, and some insurance companies should be able to achieve positive growth. In fact, in the first half of this year, some insurance companies have experienced positive year-on-year growth for several consecutive months. This kind of data is a big change compared with the monthly year-on-year growth in 2021 and 2020, which is basically around -30%. So from this perspective, we do see a relatively strong marginal improvement.
Whether it is long-term interest rates, the stock market, or real estate factors, some positive changes are taking place.Interest rates This year, the 10-year treasury bond interest rate has been stable at 2.8%-2.9% for a long time. There is still a certain pressure on the replenishment of insurance liability reserves. This year, insurance liability reserves will be replenished. , but with Compared with last year, the intensity of supplementary withdrawals has slowed down significantly, and the magnitude has dropped significantly.
If there is a relatively good improvement in equity assets, because 10%-15% of insurance assets are allocated in equity, it will also directly help improve investment income. We also know that the real estate-related business is in the process of improvement, and policies are being introduced continuously under the "housing for living, not for speculation" situation and "policies are implemented according to the city", and some cities have also seen a rebound in transaction data. Under this background, the business quality of real estate companies will improve, and the assets invested by insurance companies through equity, debt, non-standard and other methods will also improve. The assets invested last year will also improve. The third and fourth quarters of last year were a relatively pessimistic time window. Looking back now, there should be a trend of marginal improvement, so the payment ends of insurance should be improving.
In summary, the property and casualty insurance industry is in the process of Davis’s double-click, and the life insurance industry has entered a state of welcoming an inflection point. The current valuation level is very low, and valuation restoration can also bring relatively large investment opportunities.
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