In a climate where market risk aversion is on the rise, the intrinsic value of investing in bank stocks, particularly those offering high dividends, has become increasingly appealingThis is compounded by their low volatility characteristics, which continue to attract notable capital flowsThe recent trend showcases a growing optimism surrounding the investment potential of banks supported by high dividendsNotably, insurance funds, as highlighted in the first quarter statistics, have increased their stake in banks, indicating a marginal uptick in allocation towards this sectorEspecially, an evident enhancement in allocations towards smaller banks has been observed.

As we moved through 2023, the narrative of the stock market has been largely influenced by the "Central State Owned Enterprise Valuation" rally, which propelled the prices of major state-owned banks upward, usually lagging behind in the stock market performance

Looking ahead to 2024, it is expected that this momentum will accelerate and begin to extend its influence into medium and small-sized banks that also provide high dividendsThe distinctive advantage of dividend-focused investments has manifested primarily due to economic recovery being sluggish, investor sentiment dwindling, and an overall downturn in the risk appetite of the marketConsequently, the primary flow of new capital has come from insurance and low-risk preference institutions such as the CSI 300 ETF.

Despite the relative calmness in expectations regarding the Federal Reserve's potential rate cuts, significant uncertainty remains in the global landscapeThe speculation on whether the U.Seconomy will experience a soft or hard landing, and the extent of possible rate cuts, remains highly divided among economistsGiven this context, it is reasonable to predict that the slow pace of economic recovery and low-risk appetite, which have been crucial in shaping the dividend stock market, will continue to persist until there is clear aspect from the global arena

• Fengchao's Hong Kong IPO: Weighing the SF Express Factor
• AI is Making Collaborative Work Worse
• TCL's Urgent Need for a Strategic Acquisition
• Gold and Silver Expect Continued Volatility
• Changes in the Anchor of Government Bond Pricing

Low-earnings volatility stocks with substantial dividend payouts are likely to remain a key focus for capital allocation.

In the mid to long-term view, there is still a downward potential for the benchmark risk-free interest rateWith economic growth moderating, state-owned banks that offer high dividends and exhibit low earnings volatility remain quite favorable for investmentOn the flip side, smaller banks generally endure higher liability costs and show less stability in their earnings, making them less attractive compared to their larger counterpartsThe distinct transactional nature of capital allocations towards these smaller banks suggests a different investment mentality that does not always emphasize long-term growth.

In 2023, state-owned banks consistently showed strength, and as 2024 approaches, the trend began to extend to smaller banks recognized for their high dividend offerings

An analysis of stock performance from early 2023 to August 21, 2024, reveals impressive increases for major banks: Bank of Communications at 88.4%, Agricultural Bank of China at 87.9%, Bank of China at 74.8%, and Industrial and Commercial Bank of China at 62.8%. Certain small banks such as China CITIC Bank and Nanjing Bank have also reported notable increases in their stock prices year to date.

Why consider investing in bank stocks? The simplest rationale revolves around the unfulfilled expectations regarding economic recovery, a dip in market risk appetite, and the prevailing advantage of dividend strategiesThe lack of robust economic recovery post-pandemic has made high-dividend stocks increasingly attractive for traders looking for safety and significant returns amidst uncertainty.

Earlier in 2023, the narrative set by the resurgence of state-owned enterprises in the investment landscape showcased a considerable revaluation from investors

Following the comprehensive reopening from the pandemic, economic recovery proceeded at a slower pace than anticipatedThis drag resulted in significant cuts in market risk tolerance and highlighted the investment potential in high-dividend stocksOver the preceding years, the dividend investment style stood out remarkably, providing a noticeable excess return in both the A-share and Hong Kong equity markets.

The second half of 2023 witnessed investments and consumption recovering sluggishly, generally stunted by less-than-ideal economic growth policiesThe struggle of the real estate sector, growing increasingly frail, poses a backdrop of insufficient internal demand, necessitating counter-cyclical policies to boost market confidenceIn stark contrast, the strength of the U.Seconomy remains notable, creating a juxtaposition to China's contractionary monetary policies, thus putting additional pressure on policymaking efforts.

Meanwhile, the net interest margins in the Chinese banking sector have plummeted over the last two years, drastically impacting profitability and increasing the importance of maintaining interest differentials

The ongoing global stresses require a dual approach of stabilizing the currency externally while containing risks internallyThis dichotomy has led to a stalemate in monetary policy since August 2023, with very little movement until the recent rate cuts in July, which were minimal at best.

The recent surge of capital inflows from low-risk preferences primarily stems from the expansion of insurance capital and the CSI 300 ETFInsurance policies have fared favorably this year, making it a predominant source of new funds in capital markets, especially as high-dividend yielding state-owned banks continue to attract attention due to their predictable dividend returnsThroughout 2023, the substantial influx of insurance funds reaffirms the preference of institutional investors for banks that can deliver stable and substantial dividends.

Earlier in 2023, market volatility, including concerns over liquidity, initiated a significant pullback in capital markets

To mitigate fears and maintain stability, the Central Huijin Investment Corporation bolstered its ETF investments, marking a strategic emphasis on the CSI 300 index, which has grown significantly and prominently featured banks as leading constituents.

Looking at the allocations made by actively managed public funds, 2023 indicated a minor increase in holdings in bank stocks compared to 2022, marking the traction of this investment strategy even though overall trading in banking stocks remains limitedNotably, large banks continue to represent a higher proportion of significant public fund holdings despite the continued lower allocations to certain fast-growing small banks such as China Merchants Bank and PSBC.

In conclusion, despite underweighting in bank stocks by public funds, the rising momentum of ETFs is sure to enhance the allocation ratios in these financial institutions