China Merchants Securities has released a report forecasting that the securities market is likely to regain its upward trajectory and steadily rise in the second half of 2026. Driven by equity investment income contributing to earnings flexibility, along with the continuing "asset scarcity" in fixed-income markets and falling interest rates, brokerage firms are expected to maintain strong earnings growth. A significant mismatch currently exists between low valuations, low institutional holdings, and high earnings growth, making the sector's valuation highly attractive and highlighting a strategic window for allocation.
Market Review: Equity Styles Polarized, Bonds Strengthen
In the equity market, the AI sector led a rapid rally in the technology sector during the second quarter, driven by industrial trends, high-frequency data, and earnings results. The ChiNext Index rose 35.6% in the first half, significantly outperforming the CSI 300 and the Shanghai Composite Index. In the fixed-income market, supported by an overall loose liquidity environment and the return of the "asset scarcity" logic, the China Bond Total Return Index showed relative strength, gaining 2.2% in the first half. Market trading sentiment was high, with the average daily turnover of stocks and funds reaching 3.24 trillion yuan in the first half, up 101% year-on-year. The average daily margin balance rose to 2.75 trillion yuan, a 49% increase year-on-year.
Performance Overview: Industry Sentiment Boosted, but Internal Divergence is Significant
In the first quarter of 2026, 42 listed brokerages reported total operating revenue of 151.1 billion yuan, up 31% year-on-year and 15% quarter-on-quarter. Their recurring net profit was 59.5 billion yuan, up 39% year-on-year and 36% quarter-on-quarter. Cost reduction remains the main theme on the expense side, with the management fee ratio for the 42 brokerages at 47.2% in Q1, down 4.7 percentage points year-on-year and 6.0 percentage points quarter-on-quarter. Return on equity (ROE) performance showed significant divergence. Driven by client demand businesses, leading firms maintained ROE growth and orderly balance sheet expansion, with CSC Financial Co., Ltd., CITIC Securities Company Limited, China International Capital Corporation Limited, and GF Securities Co., Ltd. leading the industry. Performance among small and mid-sized brokerages varied widely. Changjiang Securities Company Limited and Founder Securities Co., Ltd. ranked among the industry's top in ROE, while Tianfeng Securities Co., Ltd. saw its ROE ranking dragged down by its proprietary trading business.
Positioning: Institutional Positions Cleared, Setting Stage for Re-entry
Using holdings by China Securities Finance Corporation (CSF) as a narrow proxy for major institutional investor positions, the market value of equity in listed securities companies held by CSF was 19.4 billion yuan as of the end of March 2026, with holdings concentrated in the top ten brokerages. As institutional positions have been cleared, a consensus on the severe mismatch between sector earnings and valuations is gradually forming, making a return of capital to the sector highly probable. Since mid-June, the Securities II index has stabilized and reversed its trend, with a significantly steeper upward slope than the Shanghai Composite Index. In contrast, the insurance sector, also heavily held by institutions, has shown a weaker performance during the same period. This divergence may confirm that the sector's position clearing is largely complete and capital inflows are underway.
Industry Trends: Technology-Driven, International Expansion, and Wealth Management Buildup
1) Technology finance is leading the way, transforming the investment banking sector. The current round of capital market reform on the financing side focuses on the "dual-innovation board" (STAR Market and ChiNext). In this context, competition among investment banks is evolving from basic underwriting and sales capabilities to a comprehensive competition involving industry understanding, target selection, capital utilization, valuation pricing, and distribution levels. As the technology sector rally intensifies, investment income from brokerages' alternative investment and private equity subsidiaries has become a key growth driver for profits.
2) Deepening international business is raising the ROE ceiling. With Chinese enterprises accelerating their global expansion, deep inversions in onshore and offshore interest rates, and a global tech rally, cross-border investment banking, financial investment, and wealth management are all supporting brokerages' international operations. Given the significant high-base pressure on cross-border investment banking and supply-side constraints in cross-border wealth management, cross-border investment, with its persistently strong demand and relatively looser supply-side constraints, is likely to be the biggest revenue growth driver for international business this year. It is also the core support for high leverage and high ROE in international operations.
3) The shift of deposits from banks is penetrating, setting the stage for wealth management. With the arrival of the low-interest-rate era and the decline of real estate as an investment vehicle, capital is seeking new asset vehicles. Unlike the previous bull market, where mass affluent investors were the main force moving deposits into public funds, the current rally is seeing high-net-worth individuals as the primary drivers of this shift. On one hand, with extreme market style performance and limited variety and scale of OTC derivatives, margin financing has become the preferred tool for high-risk investors to amplify returns. On the other hand, private equity funds, with their strategy flexibility, position freedom, absolute return focus, and scale management flexibility, are offering significantly better returns than public funds, making them the main tool for investors with moderate risk appetite seeking excess returns.
Industry Structure: M&A Accelerates, Competition for Top-Tier Brokerages Intensifies
The integration of securities licenses under the same controlling shareholder has accelerated. Since late 2025, Central Huijin has driven the absorption of Dongxing Securities Co., Ltd. and Cinda Securities Co., Ltd. by CICC. The Shanghai SASAC has pushed for Shanghai Securities Co., Ltd.'s absorption by Oriental Securities Company Limited, and the Jiangsu SASAC has driven Soochow Securities Co., Ltd.'s cross-city acquisition of Donghai Securities Co., Ltd.. All three transactions bear distinct characteristics of administrative leadership. Furthermore, competition among top-tier brokerages is becoming increasingly intense. With the "Guotai Junan + Haitong Securities" merger achieving an initial "1+1>1" integration effect and CICC's "three-in-one" merger entering substantive regulatory review, it is expected that CITIC Securities, GTJA Haitong, and CICC have largely secured the top three spots in the industry. GF Securities and Huatai Securities Co., Ltd., as leaders in the second tier, are continuing to make strides in capital strength, business innovation, and international expansion. Among China Merchants Securities, 申万宏源, China Galaxy Securities Co., Ltd., CSC Financial, and Guosen Securities Co., Ltd., it remains to be seen which will break away from the pack first.
2H26 Outlook
Since July, the Shanghai Composite Index has corrected significantly, reaching a low of 3,741, with margin balances declining by 312.2 billion yuan. Amid this backdrop, regulators have restarted market stabilization mechanisms, demonstrating a firm commitment to maintaining stable market operations. With regulatory support for the secondary market, adjustments in the primary market are likely not to be absent. Capital demand is expected to be relatively flexible, and capital supply is expected to remain stable. The report believes the market's capital supply-demand balance will be relatively stable in the second half of the year. Looking ahead, the firm believes it is highly probable that the market will regain its upward trend with a steadily rising central tendency.
Investment Recommendations
Considering the sustained equity market sentiment this year, the earnings flexibility provided by equity investment income, the ongoing "asset scarcity" in fixed income, and falling interest rates, the brokerage sector's earnings are expected to grow strongly. The report forecasts total industry revenue of 674.6 billion yuan for 2026, up 25% year-on-year, and net profit of 276.6 billion yuan, up 26% year-on-year. As of July 22, 2026, the brokerage sector's price-to-book (PB) ratio was 1.32 times, at the 34.7th percentile of the past five years. Institutional holdings in Q1 2026 were only 0.52%, significantly below the standard allocation of 3.25%. The current significant mismatch between low valuations, low holdings, and high earnings growth makes the sector's valuation highly attractive, emphasizing this allocation window. For individual stock recommendations, in the short term, the market anticipates the continued realization of the tech-driven investment banking narrative. In the medium to long term, it favors international development to raise the ROE ceiling and the arrival of a "singularity moment" for wealth management. The firm recommends GF Securities, GTJA Haitong, CITIC Securities, and CICC.
Risk Factors
Risks include a prolonged market downturn, policy effects falling short of expectations, policy tightening, liquidity tightening, and a continued decline in business fee rates.
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