According to reports, Sinolink Securities has issued research indicating that the deep-rooted reasons for this week's market adjustment include the current high ratio of U.S. financial assets to GDP, a weakening service sector, and the emergence of contradictions in the technology development process. The increase in A-shares since April has more closely aligned with overseas logic, suggesting that this round of adjustment marks the beginning of a structural shift. The changes in key sectors are accelerating, as the current high valuations of U.S. financial assets and the weakening service sector are putting pressure on the global tech boom, leading to a normal adjustment in Chinese assets, indicating that the true bull market for Chinese assets has not yet begun.
Sinolink Securities presents the following key views: adjustments are expected to slow down, but changes in main sectors will continue. The firm notes that its previous reports proposed an alternative view to the “golden pit” concept, suggesting that the core of the current market adjustment may not stem from shifts in trade relations. This week saw a substantial retreat in the A-share market, and the intensified trade conflict cannot fully explain the larger pullback in sectors that were originally expected to benefit from this logic. The firm believes that the deeper reasons for these adjustments are the already high ratio of U.S. financial assets to GDP, the weakening service sector, and the emergence of contradictions during the tech development process (for example, power shortages). The rise in A-shares since April has been more in sync with overseas trends, and this current adjustment represents the beginning of a structural shift.
In terms of the latest changes, communication between U.S. Treasury Secretary Yellen and Vice Premier He Lifeng, along with easing concerns regarding the bad debt issues of U.S. regional banks, spurred a rebound in overseas markets on Friday night, thereby lowering the probability of a sharp decline in the short term. However, it is important to note that the downward pressure on the service sector will not be reversed, although easing relationships could alleviate resistance against the recovery of manufacturing and global physical demand. The evolution in the market's main line continues. This showcases the underlying logic of the firm's earlier warning of market risk while simultaneously expressing the optimistic view that "the true bull market has yet to begin."
Domestic resilience and new focuses are also highlighted by the financial data: the changes in new medium- and long-term corporate loans in September align with seasonal trends, while new household medium- and long-term loans exhibited excess seasonal growth, indicating that the recovery in terminal demand may gradually increase, benefiting the midstream manufacturing sector and downstream profit recovery. M1 and M2 growth rates have further converged, and corporate fund activation continues to advance. Domestic PPI growth rates have rebounded year-on-year, with significant improvements noted in upstream industries; the ongoing anti-involution efforts are gradually stabilizing prices.
From the perspective of export data, China’s reliance on trade with the U.S. has further declined. Despite extremely low year-on-year growth rates of exports to the U.S., overall export growth has shown a noticeable rebound, suggesting that the recovery of physical demand from non-U.S. economies may have already begun. Since 2018, the contribution of emerging economies' domestic demand to China's value-added output has clearly increased. With the Federal Reserve initiating a rate-cutting cycle, the recovery of manufacturing activity in emerging markets could be a bright spot for China’s future economy.
Historically, when more export revenues are converted into renminbi-denominated assets through currency conversion, domestic price deflation pressure tends to ease. The increase in unconverted funds over past years has contributed to downward pressure on inflation. Thus, if the weakening of the U.S. service sector leads to significant volatility in financial markets, it will likely encourage more unconverted funds to flow back domestically, supporting the price level, which is of utmost concern in the market.
Regarding gold, from a mid- to long-term perspective, expectations of rate cuts, pressures for a weaker dollar due to geopolitical risks, and challenging government deficit reductions are all factors supporting gold's strength. These are also among the sectors that the firm strategically views positively from a mid- to long-term physical asset perspective. However, it should be noted that rapid short-term price increases of an asset can weaken the long-term narrative supporting it. Since mid to late August, the fast increase in gold has shown an interesting phenomenon where net inflows into gold ETFs seem to correlate with volatility starting in the equity markets across Europe, North America, and Asia. This change indicates that the importance of gold in asset allocation is being recognized by investors, leading to a shift during corrections in equities.
When a trend reaches consensus in a short time, excessive heating is inevitable: the current implied volatility of Shanghai gold options is approaching levels seen at the end of April, showing obvious positive bias, with concerns over emotional overheating and congested trading. Moreover, under the current circumstance of high U.S. financial assets and instability within the financial system, major risk events could lead to liquidity risk shocks. However, in the event of significant risk occurrences, gold may not completely serve as a safe haven in the short term. Nevertheless, in the mid-term, the correction dimensions of a 40/60 stock-bond portfolio still see the market value of investable gold assets significantly below levels prior to 1980, suggesting that this mid-term trend will not change (from 0.5% to 1.3% allocation).
The market's main line is accelerating: high valuations of U.S. financial assets and weakening service sectors are putting pressure on the global tech boom, and adjustments in Chinese assets during the driving shift process are typical, indicating that a true bull market for Chinese assets has yet to begin. Looking ahead, the downward trend in the service sector and the slowdown in U.S. financial asset expansion are certain; the recovery in global manufacturing and the rising physical consumption are also assured; and the slow-down in capital outflows from China amid this background is a mid-term trend.
Investors in the market should conduct structural adjustments according to mid-term trends. The firm recommends the following allocations:
First, attention to domestic industries should be the focus in the short term, particularly sectors with recent improvements in business climate worthy of interest, such as food and beverage, airlines, and coal. Secondly, in the mid-term, with the recovery of manufacturing activities in emerging markets and the acceleration of investments, physical assets will continue to outperform, suggesting a focus on upstream resources (copper, aluminum, oil, gold), capital goods (engineering machinery, power grid equipment), and intermediate products (basic chemicals, steel). Lastly, the process of corporate fund activation continues, benefitting non-bank financial institutions as overall social capital returns to a bottoming recovery.
Risk warnings include potential domestic economic recovery falling short of expectations and significant downturns in overseas economies.
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