The market experienced a day of consolidation and adjustment yesterday, with the three major indices opening lower and declining throughout the session. The ChiNext Index, the Shenzhen Component Index, and the STAR 50 Index all fell over 1%, with the ChiNext Index marking its fourth consecutive negative close. The total turnover for the Shanghai and Shenzhen markets reached 2.54 trillion yuan. Sector performance was mixed; industrial gases, green power, pharmaceuticals, computing power leasing, and coal were among the active gainers. On the downside, non-ferrous metals and tourism/hotel concepts led the declines. At the close, the Shanghai Composite Index was down 0.19%, the Shenzhen Component Index fell 1.1%, and the ChiNext Index dropped 1.43%.
In today's broker morning briefings, China International Capital Corporation (CICC) suggested that momentum-driven trading is poised to regain dominance. China Securities Co., Ltd. (CSC) highlighted that the introduction of carbon neutrality assessment measures adds further catalysts to the chemical sector's supply side. CITIC Securities expressed the view that pessimistic expectations have been largely priced in, suggesting attention should shift to the potential partial restoration of transit capacity.
CICC believes momentum trading may return to a leading role. High growth momentum is key for growth-oriented styles to counter global macroeconomic uncertainties. A point of confusion for many investors is that despite lingering uncertainties in the US-Israel-Iran conflict situation, strait transit disruptions keeping oil prices elevated, and stagflation risks remaining higher than pre-conflict levels, major global and A-share growth indices have advanced to new highs amidst this seemingly unfavorable macro backdrop. The decisive factors for growth stock rallies lie in strong industry trends and earnings delivery, whose importance often outweighs other factors like macro conditions, valuations, or fund flows. If the upward momentum in sector prosperity is clear, growth dynamism on the numerator side can potentially offset rising interest rates and risk premiums on the denominator side. The recent uptick in growth styles is significantly driven by breakthrough progress in AI since March. While Middle East tensions initially suppressed this momentum-driven trading, as the tail risks of conflict diminish, the momentum theme suppressed by risk aversion is expected to reassert leadership.
CSC notes that the release of carbon neutrality assessment methods provides another catalyst for the chemical sector's supply side. The market has not fully priced in the potential extent of the rise in the central price level of oil. Investors are advised to base their strategies on an assumption of higher average oil prices to guard against potential liquidity risks and first allocate to assets with clearer certainty. From a medium-term perspective, China's chemical industry's relative competitive advantage globally is strengthening. Furthermore, a market sentiment inclined towards inflation is more favorable for HALO assets, which have an earnings floor. After the oil price shock subsides, investors can then seek out core chemical assets with smooth cost pass-through and strengthening competitive advantages.
CITIC Securities states that pessimistic expectations have been sufficiently released, advising focus on the potential partial recovery of transit capacity. While the pace of strait transit remains uncertain during negotiation games, the pathway for a phased restoration of some transit capacity is becoming clearer. The initial phase should focus on the release of available shipping capacity within the Gulf, driven by strong inventory replenishment pressure. Some capacity shifting to the US Gulf has raised concerns about a correction in VLCC TD22 freight rates. As of the week of the 17th, VLCC capacity in the region west of Suez accounted for 22.3%, nearing previous highs, and there has been procurement of older vessels over 15 years. The impact of regional capacity adjustments on freight rates for US routes may have already bottomed out. Crude oil imports by major Asian consumers remain resilient, employing various methods to mitigate disruptions from Persian Gulf supply gaps. Under scenarios of strait transit blockages, conservative estimates suggest a conflict lasting over 50 days could lead to a cumulative inventory replenishment gap exceeding 300 million barrels. Against a backdrop of heightened energy security concerns, the potential for sustained high VLCC freight rates driven by subsequent inventory rebuilding demand may not be fully appreciated by the market. Short-term trading factors may present buying opportunities on dips.
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