Dividend Assets Are in Demand Again

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In the ever-evolving landscape of the Chinese A-share market, notable shifts in investor sentiment and preferences are becoming increasingly evidentWhile the market remains volatile around the 3400-point mark, a clear transformation is occurring in both style and structural compositionOver the past couple of months, there was a rising preference for small-cap stocks and the technology sector, driven by a heightened risk appetiteHowever, as December unfolded, investors began to refocus their strategies, plunging back into high-dividend assets, with stocks from the "Big Four" banks representing prime examples, as their high dividends reached historical highs.

But what has caused this shift back towards dividend stocks? The answer lies in the sustained decline of government bond yields, resulting in an increased stock-bond yield spread

Following the central economic work conference that signaled a commitment to "moderately loose monetary policy," expectations for interest rate cuts have surged, prompting a stampede towards government bondsBy December, the yield on ten-year government bonds had dropped to approximately 1.7%, marking a decline of nearly 30 basis points in just one monthDuring this period, the dividend yield of the CSI Dividend Index surpassed 5%, enhancing the relative attractiveness of stocks when compared to bonds.

Bank stocks epitomize this high dividend and payout trendFor instance, based on the annual dividends for 2023 and the closing stock prices as of December 23, even amidst significant price increases throughout the year, these major banks maintain a dividend yield of around 4.5%. Additionally, their cash dividend payout ratio has remained consistently around 30% in recent years, with plans for mid-term dividends also on the horizon for 2024.

In this environment of declining interest rates, investment returns for insurers are under pressure

Consequently, extending duration or increasing allocation towards high-dividend equities has become an attractive strategy for insurance companiesAs of the third quarter, the investment scale of stocks and securities held by insurance firms surged to 4.1 trillion yuan, setting a new historical recordWith policies encouraging long-term capital into the market, it is anticipated that insurers' equity positions may continue to rise, thereby supporting the underlying momentum behind the dividend style.

For example, recent disclosures from the Hong Kong Stock Exchange showed that Ping An Asset Management has been actively increasing its holdings in the Hong Kong-listed shares of China Construction BankBy the latest report, Ping An holds a total of 12.054 billion shares, which accounts for 5.01% of the bank's total H-sharesFurthermore, Ping An has previously increased its stake in Industrial and Commercial Bank of China, achieving a holding ratio of 15%.

Regulatory policies are also providing crucial support for dividend stocks

On December 17, guidelines were set for central enterprises to firmly establish a culture of shareholder returnsThis policy encourages listed companies to enhance the stability, continuity, and predictability of cash dividends, aiming to increase the frequency and optimize the timing of dividend distributions to amplify the perceived gains for investors, particularly smaller shareholders.

Beginning January 1, 2025, an incentive measure will reduce the fees for dividend distribution on A-shares in the Shanghai and Shenzhen stock markets by half, applying a fee of 0.5‰ of the total cash distributedAny portion of the fees exceeding 1.5 million yuan will be waivedThese initiatives are expected to further bolster dividend distributions by listed companies, especially state-owned enterprises, significantly enhancing the allure of dividend stocks.

As the regulatory framework surrounding value management in A-share companies continues to evolve, key performance indicators for central enterprises are regularly updated to emphasize shareholder returns, including increasing the frequency and proportion of dividends

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Companies recognized for high dividend payouts among state-owned and central enterprises are likely to see substantial benefits from this focus.

In this whirlwind of financial market dynamics, late September emerged as a pivotal timeSimilar to receiving an adrenaline shot, the market experienced a remarkable rebound, with prices across different asset classes soaring, reigniting market enthusiasm and culminating in a bustling atmosphereYet, amidst this overall bullish backdrop, the performance of the CSI Dividend Index stood out as notably distinct

When analyzing the valuation shifts across different sectors and the broader market, it becomes apparent that the CSI Dividend Index had a notably smaller increase in valuation than the market average

Compared to other sectors that rapidly ascended, the changes in the dividend index appeared markedly more subdued and gentleThis relative “understated” adjustment in valuation unexpectedly opened up new opportunities for the CSI Dividend Index, significantly boosting its relative attractiveness

In the current market environment, investors often weigh options among various asset typesWhen the relative cost-effectiveness of an asset becomes apparent, it naturally draws more attentionAt this juncture, the CSI Dividend Index, with its relatively stable valuation amidst a chorus of market exuberance, manages to retain a rare composureFor investors prioritizing stability and value, it presents itself as an increasingly viable choice, enhancing its investment appeal

Focusing on the current state of the market, one can observe a slight decline in trading volumes

This suggests a cooling of the previously vibrant trading climate characterized by rapid capital inflows and outflowsAt one point, retail investors and speculative capital played a pivotal role in shaping market dynamics, their agile maneuvers and swift decisions driving a more aggressive and volatile market environmentAs time progresses, however, this previously dominant style led by speculative and retail funds is gradually receding, ushering the market into an adjustment phase

In contrast, institutional capital is starting to come into play, taking up the baton of market liquidityInstitutional investors typically possess more sophisticated research capabilities, rigorous investment strategies, and long-term perspectives, which fundamentally alters the landscape and could temper market sentiment towards a more rational and stable trajectory



Nevertheless, it must be emphasized that this change in market style is merely a temporary behavioral characteristicFrom a macro and long-term viewpoint, the true determinants of whether the market can sustain a steady upward trajectory hinge on a tangible enhancement in corporate profitability by 2025. After all, businesses form the bedrock of the marketIf companies can bolster their operational management, expand market share, and innovate in products and services, thus achieving steady profit growth, the market will have the solid foundation it needsThis instills greater confidence amongst investors, paving the way for sustained capital inflows that can foster a healthy and robust market developmentConversely, if corporate profitability cannot be effectively boosted, even with the current shifts in market trends, it will be challenging to maintain a promising upward momentum in the long term, and the market's prosperity may merely be a fleeting phenomenon.

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