A-Shares: The Value vs. Growth Battle

The excitement surrounding Deepseek has led to a considerable surge in the computer and semiconductor sectors, suggesting a potential resurgence in growth stocks reminiscent of the post-"9·24" market waveBut what exactly does this mean for investors? Could this mark a new era for growth stocks?

When delving into the world of growth stocks, it's essential to clarify what we're truly examiningIn various discussions, we've explored the immense potential within specific industries such as computers, robotics, and semiconductorsWe've also looked at broader indices, like the ChiNext and the Sci-Tech 50, noting their fluctuating performance over recent years.

Yet, these discussions often feel indirectTo truly grasp the trend of growth stocks, we need to revert to the fundamental components that underscore their performanceThe Jiangsu Securities Strategic Data Group's release of the industry-neutral series indices has been particularly insightfulThis index series, updated daily, allows for a more nuanced examination of factor performance by removing industry biases.

Understanding whether a factor is strengthening necessitates comparative analyses with the broader A-share marketMy approach involves utilizing what I call the "Rotational Prism" to compare several industry-neutral factors against the broader Wind All-A indexThis method offers a clearer view of market dynamics and the shifting tides between growth and value themes.

The ongoing debate about growth versus value is not new; it essentially encapsulates the differentiating trends between these two investment stylesHence, let's start our examination with value factors, as these segments have dominated discussions in recent years.

I have been an ardent supporter of dividend strategies, particularly since the onset of the A-share bear market in 2022, which saw a notable strengthening of dividendsThis resurgence is visible in the Rotational Prism, where the relative value curve broke above the annual Bollinger Bands in 2022.

However, the strength of dividends begs the question: has this phase come to an end? Observing the relative decline that occurred last October, where the dividend ratio slipped below the lower Bollinger Band, we might be witnessing the first signs of weakness

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Interestingly, that dip was short-lived as the market quickly rebounded, differing from earlier scenarios where sustained declines persisted for months—indicating that any current dips must be viewed in a broader context.

If we seek definitive proof of a relative weakening in dividends, we must hold off until the comparative ratio underperforms relative to the Wind All-A index, particularly sinking below the previous "9·24" low.

Over the past few years, dividend and low volatility factors have been popular, especially when combinedThe performance of industry-neutral low volatility indices mirrors this trend, showing rebounds after experiencing similar drops post-September 24. Thus, my sentiment towards these factors aligns wellIt's important to note that despite traditional low valuation indices not garnering as much attention compared to dividends and low volatility, they maintained their resilience during last year’s downturn.

Now, turning to the growth framework, we find ourselves at a pivotal junctureThe industry-neutral growth ratio relative to the Wind All-A index has seen considerable suppressive movement since the beginning of 2023. It almost reached the mid-band during the wave triggered by "9·24," but ultimately failed to break throughThis lackluster performance affirms that aside from a few standout sectors, the broader A-share market's growth potential remains unfulfilled.

Having recognized the performance of low volatility sectors, it’s essential to contrast it with high volatility sectorsThe industry-neutral high volatility index has somewhat fared better, successfully breaking through the middle Bollinger Band during the "9·24" surge, yet still struggles to breach the upper bandAdditionally, the high volatility indices have been diminishing since 2020 without any substantial recovery, indicating a broader malaise in this category.

With a comprehension of growth versus high volatility, we must also evaluate related indices, particularly focusing on high profitability quality

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This factor illustrates some level of security; despite a significant spike at the end of 2020 followed by a rapid correction, it has avoided the persistent lows characterized by growth and high volatility indicesInstead, it has remained relatively stable, hinting at a lower risk profile currently, which may present opportunities should the market shift towards prioritizing profitability metrics.

Within the A-share landscape, the rise and fall of different factors can significantly influence investment successThe recent performance of Jiangsu industry-neutral factors indicates that we may be entering a chaotic periodWith once-strengthening dividends and low valuation factors starting to retract, and the historically underperforming growth and quality factors showing signs of revival, there lies a potential for resurgence in trading performance, particularly when underpinned by fundamental selection strategies.

In this environment, a robust Smart Beta index can offer enhanced investment opportunities by integrating additional filters over traditional factorsNoteworthy in this regard is the previously discussed 500 Quality Growth ETF (560500), which aptly illustrates this strategy.

This ETF tracks the 500 quality index, known as the China Securities 500 Quality Growth Index (930939), which was introduced on November 21, 2018. The dual focus on quality and growth positions this Smart Beta index for potential advantage.

Specifically, the index consists of 100 superior stocks selected from the China Securities 500 Index, which encompasses stocks ranked 301 to 800 in terms of market capitalizationPicture these 500 stocks as a large pool from which the 100 most robust candidates are gleaned.

The screening criteria are stringent; companies must not only be profitable but also exhibit stability and growth potentialThe initial step involves eliminating firms with declining profits over the past three years or those that were unprofitable within the last year

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