The winds of change may be brewing within the Chinese stock market, often referred to as A-shares, as a seismic shift seems imminent. Recently, the market experienced its third "gravestone doji" pattern in just over a year — a grim indicator that typically signals indecision among traders. More significant, however, was the adjustment of the nation's monetary policy description from a "prudent" approach to a stance defined as "moderately accommodative." Many traders and analysts may have overlooked the profound implications of this policy shift. In the realm of stock trading, capital flow plays a crucial role; as more participants enter the market, stock prices tend to rise in a classic case of "a rising tide lifts all boats." This movement in the financial landscape is often dictated by monetary policy, which sets the underlying tone for market sentiment. Historical precedents, such as Japan’s Abenomics over a decade ago and the U.S. Federal Reserve's quantitative easing strategies implemented four years back, have demonstrated the face of a bull market when monetary policies favor liquidity.

With the recent loosening of monetary policy, a bear market in A-shares appears increasingly improbable. Analysts speculate that the next year or two may present minimal risks, prompting recommendations for investors to bide their time in the markets. After enduring a prolonged bearish environment, many investors eagerly anticipate a version of China's infinite quantitative easing (QE). However, it is imperative to maintain a level-headed perspective even amidst optimistic expectations. The current liquidity measures predominantly aim to revitalize the real estate sector and stimulate consumer spending to propel economic recovery. Solid companies with sound fundamentals may see valuation rebounds as their performance improves, but this does not automatically translate into explosive market rallies. As seen in the past week, a surge due to positive news was swiftly followed by a significant drop, highlighting the market's volatility and the fragility of investor sentiment.

The central goal of moderately accommodative monetary policy is to invigorate the economy and financial markets. By shifting expectations away from deflation and towards inflation, this approach raises the risk appetite among investors, encouraging them to withdraw cash from banks. Take Argentina, for instance, where hyperinflation over five years reached nearly 100 times. Holding onto cash during this period would have resulted in a staggering 99% loss in purchasing power; conversely, the Argentine stock market soared by 100 times. In essence, stock markets often serve as a refuge against inflation, leading to a significant influx of capital. While this is an extreme example, it illuminates a central lesson: if the expectation in our markets shifts from deflation to inflation, asset prices generally increase, while cash gradually loses value — a trend that is fundamentally irreversible.

The impending waves of liquidity promise a decreasing benchmark interest rate. In the present interest rate climate, traditional savings products like bank deposits and government bonds are becoming less appealing. Even gold is losing its edge as a store of value, and apart from prime real estate locations, property has limited upside. At this juncture, no asset holds a candle to quality stocks with high dividend yields. The recent swift movements in the market demonstrated that dividend-paying stocks are notably stable, a direct reaction to the confirmation of expansive monetary policy. In such an environment, it becomes essential to weigh the contrast in performance between corporate profit growth and GDP expansion against the dividends offered by stable stocks. While dreams may lean towards the former, the reality stands firmly with the latter. This explains why, despite anticipating that dividend stocks may peak shortly, we chose not to reduce our overall dividend exposure in the first half of the year, opting instead for tactical reallocations while maintaining a robust position in dividend stocks, which are poised to thrive in a low-interest landscape.

Recently, notable changes occurred when Changjiang Electric Power was removed from the CSI Dividend index. Such gestures affirm the index's rigorous standards regarding dividend yield, illustrating that even big names can fall from grace if their dividend rates decline. This action contrasts sharply with the more bullish, often speculative movements seen in the 50-Index. The current average dividend yield following this adjustment stands at an impressive 5.31%, significantly surpassing the previous average yield of 2.89%. The adjustments are both reasonable and stringent, ensuring that the index maintains a commendable dividend level. With an accumulated market value of around 60 billion, the impact from Changjiang Electric's removal — holding just over 1% of the dividend index — may impose a potential sell-off pressure of 600-700 million, but this is unlikely to disrupt day-to-day trading volume. This serves as a profound reminder that some previously touted blue-chip stocks may no longer present worthy opportunities for yield chasing. This development is likely to incite debates about the validity of dividends, as detractors often argue that dividends without substantial capital appreciation are worthless.

The impact of dividends on stock prices is evident when analyzing the divergent trajectories between dividend ETFs under different scenarios. Firstly, we must clarify the mechanics of share exclusion and adjustment. Exclusion refers to stock price changes post-dividend, while share adjustment can be split into two categories: pre-adjusted and post-adjusted prices. Pre-adjusted prices reduce historical prices based on current values, while post-adjusted prices apply historical pricing as a base to elevate current valuations. The latter incorporates dividends more effectively into yield calculations, presenting a more accurate representation of total returns. In scenarios involving dividend exclusion, the divergence becomes stark; for instance, in the last ten years, dividend ETFs have displayed minimal price growth, leading to investor losses. However, when considering post-adjusted returns, it becomes clear that these funds represent substantial growth, recording a 90% increase since early 2016.

This discrepancy hinges on dividend payouts; dividend ETFs consistently distribute significant profits, dynamically shifting their indexing based on constituent companies’ yields. Such a strategy sharply contrasts with the standard practice of merely evaluating market cap and simple price appreciation. Consequently, dividend indices sustain elevated yield levels, enabling ETFs that track them to deliver consistent returns for investors. In the context of A-share regulations regarding dividend exclusion, as long as stock prices remain stable, these dividend earnings are essentially a bonus for investors. Moreover, the constituent stocks in the dividend index mainly comprise stable enterprises with robust shareholder returns, which, over recent years, have witnessed valuation recoveries supporting stock price increases. Thus, the CSI Dividend index has grown to become a formidable benchmark for domestic indices. However, absent dividends, the post-exclusion trajectories could be likened to enduring low-yield debt instruments akin to banks.

In the previous bullish market cycle, we maintained that the dividend yield of our stock portfolio should never drop below the yield of money market funds. This approach effectively safeguarded against losses, even if holdings experienced stagnation over long periods. However, with the ongoing decline in benchmark interest rates, prevalent money market funds are offering annual yields around 1.5%, while ten-year government bonds and long-term bank deposits have slipped below 2%. As such, fixed income now emerges as a less effective allocation strategy. I contend that current portfolio dividend yields should aim for alignment with the dividend index, targeting at least a 3%-4% yield — it ought not to trail Changjiang Electric's dividend yield, especially considering its recent omission from the index.

Nevertheless, we must reiterate that lauding specific holdings or indices does not equate to encouraging immediate purchases. Undoubtedly, when enthusiasm builds around a stock, it often has already increased in value. The best strategy with dividend ETFs tends to involve waiting for optimal price points aligned with moving averages. For instance, stocks such as Changjiang Electric, Ningbo Huaxin Expressway, and China Mobile were previously robust positions now residing at elevated levels, thus I do not advocate direct purchases at this time. Dividend stocks may increase slowly, resulting in frustration for those entering at high prices, compelling most to sell prematurely, despite the awareness that future growth may persist. Dividend stocks embody a mindset of long-term growth, as the market hive mind occasionally neglects numerous sectors beyond the key dividend stocks, still presenting ample investment avenues across diverse sectors.

In an unpredictable market, bold investment choices become increasingly challenging. Following significant downturns, the prospect of renewed monetary easing and an uptick in liquidity may signal an abundant opportunity within A-shares. Nevertheless, lingering hesitations become pronounced in the wake of prolonged suffering, engendering a loss of trust in the markets. Just as the ascent to 3400 appears elusive, the sentiment can often feel relegated to a depressive 2400. Regardless of A-shares' enchanting volatility, a reality remains: this market still includes quality core assets trading at 10x PE multiples. Even amid disarray, robust growth companies exist that provide stable returns without requiring further capital injections. Reflecting on the last bullish cycle, one could easily misinterpret the broader market signals. In the dynamic, speculative world of tech stocks, it's often prudent to align oneself with firms in financially sound positions that leverage dividends and share repurchases.

Consistently fixating on price fluctuations in A-shares may lead to disillusionment, as tangible returns are what ultimately materialize in the investment journey. The intrinsic focus should center on dividend consumption; as dividends compound over time, underlying company values gradually appreciate, ultimately leading to a valuation uplift. Dividends and stock price appreciation are not mutually exclusive; rather, they tend to complement each other over time. As economic conditions stabilize, more excellent companies will emerge, showcasing their growth potential through dividends and repurchases, resulting in a rise in overall valuations. Global equity markets serve as a testament to this dynamic, while Chinese consumer stocks are now exhibiting similar characteristics. One only needs to examine the impressive performances of companies like Midea and Gree over the past few years to witness this trend. The dawn of a new era for domestic long-term equities is upon us.