Prior to 2010, brokerage firms in the Chinese stock market exhibited a strong Beta characteristicThis meant that when the market experienced an upturn accompanied by increased trading volumes, the brokerage index significantly outperformed the CSI 300 index, which serves as a benchmark for large-cap stocks in Shanghai and ShenzhenAs time progressed into 2012 and beyond, while the Beta trait remained, the sector began to evolveTransformations in the capital markets, coupled with favorable policy implementations, introduced an Alpha attribute, allowing brokerage shares to carve out an independent trajectory and capitalize on unique opportunities prompted by regulatory changes and market dynamics.

The driving forces behind the brokerage industry have diversified considerably, enabling leading firms to benefit from independent market movements

Starting with the 2003 public listing of CITIC Securities, an essential milestone in the sector's revival, analyzed data reveals six distinct instances where brokerage shares outperformed the CSI 300. Each of these instances provides insight into the evolving relationship between market dynamics and brokerage firm performance.

The first three of these occasions align closely with conventional market cycles, demonstrating the inherent high elasticity of brokerage stocks primarily influenced by trading volumesThe underpinnings of these periods were relatively straightforward, with growth largely driven by fluctuations in trading amountsConversely, the later three instances displayed a shift in strategyWhile still tethered to high elasticity, these occurrences began to incorporate factors such as regulatory policies and business innovations

This shift created a more complex interplay of influences, embracing metrics like margin financing balances, underwriting scales in equity and debt, and investment returns.

Specifically, in years such as 2003, 2010, and 2012, brokerage shares saw marked excess returns driven by surges in trading volumesIn 2012, a notable distinction arose as the brokerage sector distinctively diverged from overall market trends, revealing an independent Alpha market segmentLate in 2018, the onset of a new wave of capital market reforms and cyclical industry upswing reinvigorated brokerage narratives, while 2020’s mixed financial expectations saw certain concept stocks ascend to new heightsBy 2021, wealth management-related brokerages emerged prominently, indicating a clear independent Alpha market within the sector.

Ultimately, the analysis delineates a pivot point around 2010, after which brokerage stocks transitioned from a stringent Beta characteristic to a synergistic Beta plus Alpha resonance.

Historically reflecting on events pre-2010, trading volume was the primary catalyst for brokerage performance

Notably, in 2003, a dramatic surge in trading amounts propelled brokerage stocks into significant returnsAt that juncture, only a handful of brokerage stocks existed, and the market primarily identified them through the lens of transaction volumesConsequently, as cyclical stocks began their ascent and overall market movements firmed, brokerages only started to deliver excess gains.

An illustrative example can be taken from mid-November 2003, when the CSI 300 commenced its upward trajectoryWith daily trading volumes reaching 14.1 billion CNY in November and dramatically escalating to 36.1 billion CNY by February 2004, brokerage shares began their rapid climb in mid-January, concluding their rally by early February with an average increase of about 55%. This surge transpired despite ongoing market advancements up to April, as the brokerage rally was relatively compressed.

October 2010 marked another measurable spike, wherein brokerage stocks attained a substantial rise of 48%. This rally unfolded nearly three months after the CSI 300 began its own upward movement, again anchored firmly in trading volume increases

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By the end of 2010, however, the industry was grappling with a decline in commission rates to below 1% of transaction valuesAs sustained trading elevation proved elusive, brokerage profitability faced setbacks, pushing valuations lowerMoreover, with several brokerages having gone public between 2009 and 2010, the scarcity factor began to diminish.

As the Alpha characteristics of brokerage stocks became apparent, it was evident that trading volume was no longer the sole driver of performanceThe remarkable growth from January to March 2012 was primarily propelled by rapid trading volume increasesHowever, by April and May of the same year, the advent of a new brokerage innovation conference unveiled a paradigm that significantly influenced independent market movements, marking the first explicit appearance of Alpha performance distinct from overall market trends.

Initiated in February 2012, the brokerage index lagged behind the CSI 300 by approximately one month

After May, when the CSI 300 experienced adjustments, brokerage stocks continued on their upward trajectory, indicating a divergence with strong excess returnsDividing this performance into phases reveals identical investment logic in the first two periods, emphasizing a rebound in trading volumesHowever, a shift materialized on May 7-8, when the brokerage innovation conference was convened, showcasing comprehensive relaxation across institutional, operational, and regulatory frameworks.

By 2018, smaller brokerage firms clearly represented the sector's Beta attributes; conversely, leading brokerages began to exhibit pronounced Alpha characteristicsThe cycle of growth from late 2018 into early 2019 can be subdivided into two segments: the initial upturn in October 2018 stemmed from a reduction of risks associated with share pledges, alongside improved social financing data, thereby amplifying trading volumes

During this time, smaller and regional brokerages benefitted in a pronounced mannerThe subsequent wave realized gains fueled by deeper capital market reforms, with larger firms accruing significant profits through policy advantages, reinforced by mature investment banking operations, allowed them to command the limelight.

In late 2018, two major policies initiated a recovery in brokerage valuations, pushing industry values from a price-to-book ratio of 1.0 times to 1.4 timesSingled out during this period, CITIC Securities similarly mirrored this upward trendJanuary 2019 witnessed a surge in social financing data, stimulating market growth, leading to the initiation of a third phase rally on February 12, ultimately culminating on March 7 with brokerage shares climbing 42%, contrasting the 14% rise seen in the CSI 300, yielding an excess return of 28 percentage points.

In February of that year, average trading volumes surged to 629.6 billion CNY, marking a remarkable 95% sequential increase, further peaking at 928.5 billion CNY in March, resulting in a 47% uptick

This rebound occurred synchronously with the escalation in the brokerage index, indicative of the heightened market activityBy reviewing valuation trends, industry valuations soared from 1.2 times in early January to 2.0 times by early March, with CITIC Securities similarly witnessing appreciation from 1.3 times to 2.1 times.

June 2020 catalyzed an independent rally in the brokerage sector, buoyed by expectations surrounding mixed business operations and industry consolidation, registering gains of 46.2% from mid-June to early July, significantly outperforming the CSI 300 by 23.8 percentage pointsThe confluence of factors central to this upswing included propelling sentiments based on anticipated policy shifts.

August 2021 heralded the reevaluation of wealth management, spurred further by reductions in benchmark rates, propelling various brokerage stocks into Alpha territory, generating significant excess returns with the brokerage index increasing around 21%, surpassing the CSI 300 by 17 points.

Through a comprehensive review of six distinct instances highlighted, it is evident that before 2010, brokerage stocks functioned under a predominantly Beta characteristic

The sector thrived amid overall market advancements alongside heightened trading activity, consistently outpacing the CSI 300 resultsPost-2012 demonstrated a continued Beta presence within the sector, paralleling a maturation of the capital market, fostering an environment conducive to independent Alpha narratives.

In an era marked by vibrant trading climates, brokerage valuations local the potential for additional recoveryAs a decisive factor, surges in trading volumes often signify an uptrend for brokerages, as observed from historical data correlationsA retrospective of the index from 2006 onwards underscores this trend; specific instances substantiate the almost synchronous movement between trading volumes and the brokerage index during volatility peaksFor example, in December 2006, and again in early 2009, both indicators mirrored each other's ascent.

As historical data points to the implications of trading dynamics, analysts observe occasional discrepancies where the brokerage index may not reflect immediate trading volume fluctuations

Nevertheless, periods marked by rapid trading increases suggest heightened investor sentiment that typically translates into bullish brokerage conditions.

Consequently, while an apex in trading volumes may not necessarily dictate the conclusion of bullish themes within brokerages, vigilance towards other indicators such as turnover rates remains pivotalA review of the last six episodic trends from 2005-2007, 2012, 2014-2015, 2019, 2020, and 2021 demonstrates that even as transaction volumes plateaued, brokerages often had one final upward move, assuming volumes and turnover maintained high central levelsConversely, conditions observed in 2012 and 2021 wherein significant shifts in financing activities coincided with market plateaus marked the endpoint of bullish brokerage movements.

Comparatively analyzing current brokerage valuations sheds light on overall market dynamics

As of October 22, 2024, the average daily trading volume across the two exchanges registered at 1913.9 billion CNY with a turnover rate of approximately 2.52%, leaving substantial room for growth relative to historical peaks since 2012. The brokerage sector alone accounted for around 849 billion CNY of this volumeNotably, financing balances surged to 1622.7 billion CNY, indicating robust market leverage still holds potential to elevate the sector.

Historical valuations revealing the reconciliations on commission margins below twice the price-to-book threshold reveal common trendsDuring phases where the daily turnover exceeded 1 trillion CNY, brokerages typically traded below 2 times PB, with a boundary at a low of 1.05 times PBThis broadens further into higher ratios indicating ample headroom for evaluation increases.

The atmospheric lift generated following waves of pro-market policies rolled out since late September 2024 revives market sentiments, a fact exemplified by the trading volumes escalating from lows of 481.7 billion CNY in mid-September to peaks exceeding 3.5 trillion CNY by early October