Rate Hike, US Stock Turmoil, Nasdaq's Worst Start in 50 Years, A-Shares Eye 4,000 Points

High inflation in the United States and the actions of the Federal Reserve have stirred up global financial markets. This week, the Federal Reserve will hold its January interest rate meeting. Due to various uncertainties, the U.S. stock market has seen a continuous decline. So far in 2022, just over half a month, the Nasdaq index has already fallen by 12%, marking the worst start in 50 years. Under these circumstances, the founder of a well-known U.S. fund has even predicted that the S&P 500 index will fall by 45%. Whether or not influenced by the U.S. stock market, the start of A-shares this year has also been less than ideal, without the expected red start, and various indices have fallen. Many funds invested by everyone have fallen by more than 10% since the beginning of the year. Will A-shares be very poor in 2022? I believe that A-shares may have a good performance this year, and the most critical reason is that the monetary policies between China and the United States are completely different, which also comes from the different economic situations of the two countries. The reason the Federal Reserve needs to raise interest rates is because it is facing high inflation that has never been seen in 40 years. Although it was previously thought that this was just a short-term inflation, the inflation data is getting higher and higher, forcing the Federal Reserve to pay attention to this issue. Although the United States has always claimed to pay attention to both inflation and employment data to decide whether to raise interest rates, under the current circumstances, the United States has to temporarily ignore employment data. It seems that the Federal Reserve will definitely raise interest rates in March. Affected by this, high valuation growth stocks, especially technology stocks, will definitely be hit hard. Therefore, the decline of the Nasdaq index since 2022 is actually a very normal performance.In this scenario, many people believe that the decline in the U.S. stock market will cause global market turmoil, which will also affect the A-shares. As a result, an increasing number of people are losing confidence in A-shares.

However, China's economic situation is very different from that of the United States, so the performance of A-shares may also be very different.

02, Liquidity under Stable Growth

Faced with the risk of economic downturn, China has proposed stable growth. It is believed that in 2022, our liquidity will be relatively abundant, and the market is very likely to replicate the performance of 2020.

The most important thing to focus on here is the money supply.

China's M2 growth rate has been maintained between 8% and 8.5% since it fell below 10% in April 2017, until February 2020.

However, during the Spring Festival of 2020, China experienced a severe outbreak of COVID-19, and the economy was forced to press the pause button. In this situation, the higher-ups made decisive decisions to lower the reserve requirement ratio three times in a row, releasing liquidity to the market. As a result, starting from March 2020, the M2 growth rate returned to above 10%.

This growth rate has been maintained until December 2020. In January 2021, it fell to 9.4%, and in February, due to the Spring Festival factor, it returned to 10.1%. However, starting from March 2021, the positive N2 number has never returned to above 10%, and it has dropped back to the range of 8% to 8.5%.

Therefore, the entire year of 2020 maintained an A2 growth rate above 10%, which is a very important indicator.

03, A-shares in 2020It is precisely for this reason that, despite the impact of the pandemic, the A-share market experienced a significant decline in March, but it quickly regained its momentum and ushered in a rapid rise at the end of June and the beginning of July.

Many may still recall that the pandemic had already erupted during the Spring Festival. Therefore, immediately after the Spring Festival, when the A-share market reopened, it saw a sharp decline. However, by the end of February, the A-share market slowly reclaimed its losses.

But as we entered March, the pandemic also erupted in Europe and America. Within a short span of a month, the United States experienced four circuit breakers, and the A-share market was affected, leading to another significant decline.

Subsequently, from April to June, the A-share market gradually rose.

In the first half of 2020, one comprehensive reserve requirement ratio cut and two targeted reserve requirement ratio cuts were implemented, releasing ample liquidity into the market. Finally, by the end of June, this was reflected in the stock market, with the Shanghai Composite Index experiencing an explosive short-term increase.

On June 30th, the Shanghai Composite Index started from 2,965 points and reached its highest at 3,456 points by July 9th. In just eight trading days, it consecutively broke through the 3,000, 3,100, 3,200, 3,300, and 3,400 integer thresholds, and the fundamental reason lay in liquidity.

04, Reasons for the sluggish A-share market in 2021

Entering 2021, the economic situation was relatively optimistic, and China also began to experience some inflation. Although the CPI was not high, the PPI was still quite high.

Under these circumstances, after the Spring Festival in 2021, the central bank began to withdraw liquidity.

The M2 growth rate was above 10% for the last time in February, dropped to 9.4% in March, fell to 8.1% in April, and for the rest of the year, it remained below 8.5%.It wasn't until the first reserve requirement ratio (RRR) cut in the second half of the year that the M2 growth rate briefly rebounded to 8.7% in October, but it fell back to 9.5% by November.

In December, another RRR cut was implemented, and the current M2 growth rate has finally reached 9%.

To summarize simply, the M2 growth rate for the entire year of 2021 was very similar to the range between 2017 and 2019, basically staying between 8% and 8.5%.

Under such circumstances, the stock market performance in 2021 was not very satisfactory; the market was merely engaging in a game of existing funds, with a very obvious structural nature, and no single sector could last throughout the year.

In that year, although the average return of funds was 8%, many investors' funds did not achieve the average return and even incurred losses.

If the M2 growth rate continues to remain at a relatively low level in 2022, it is believed that the performance of A-shares in 2022 will not be very good either, and it will still be a structural market.

However, after two consecutive comprehensive RRR cuts, the one-year LPR decreased last month, and this month both the one-year and five-year LPRs have decreased simultaneously, which leads to the belief that liquidity this year will be quite good.

The M2 growth rate in December has already reached 9%, and if the M2 growth rate can be maintained above 10% in the next few months, this year's situation will be very close to that of 2020.

Last year, liquidity was not ideal, and the Shanghai Composite Index fluctuated between 3,400 and 3,700 points throughout the year, but if liquidity is abundant this year, there is a chance to take a step up like in 2020, so this year the Shanghai Composite Index is expected to challenge the 4,000-point mark.

05, A-shares become the first choice for foreign capital.Of course, the current situation is quite grim, so the predictions above may seem like wishful thinking.

However, the most pessimistic times are often when the market is about to rebound. The recent phenomenon of new stocks breaking issue price and the slow issuance of new funds are the best reflections of the market's low spirits. Yet, such situations are often signals that the market has bottomed out and is about to rebound.

The Federal Reserve's interest rate hikes will inevitably cause turmoil and even a bear market in the US stock market, but they will not necessarily lead to a decline in the A-share market. There might even be a seesaw effect.

After all, while the US stock market continued to rise last year, the A-share market was already in a downward trend. In other words, the US stock market has room to fall, while the A-share market has limited room for decline.

On the other hand, after the Federal Reserve's interest rate hikes, funds need to choose a new direction. The A-share market is almost the most attractive target in the global market. Look at the current market; although it continues to decline, the A-share market continues to receive capital inflows, which also explains this phenomenon.

Under the backdrop of stable growth and abundant liquidity, with continuous inflows of foreign capital, and the A-share market occasionally breaking issue price to reach an emotional low, these factors combined make the market relatively optimistic in 2022.