Reviewing historical patterns, during periods when the A-share market was bottoming out and fluctuating, industries with strong industrial trends that benefited from policy and external event catalysts, as well as improvements in their shareholding structure, tended to relatively outperform.
During past bottoming phases of the A-share market, there were 7 instances where TMT sectors exhibited strong industrial trends, 2 instances for cyclical sectors, 1 instance for pharmaceuticals, and 1 instance for new energy and electric power equipment. In all these cases, these sectors delivered excess returns relative to the CSI 300 Index.
Industries with strong industrial trends that are driven by policy and external event catalysts, and that also experience improvements in their shareholding structure, tend to relatively outperform during A-share market bottoming periods. First, strong industrial trend sectors catalyzed by policy and external events are likely to outperform. Second, strong industrial trend sectors with improving shareholding structures are also likely to outperform. Specifically, valuation percentiles may fall to relatively low levels below 30%. Additionally, fund holding ratios, foreign capital holding ratios, and margin financing balances may all decline to relatively low levels. Finally, in most periods, the trading volume share of strong industrial trend sectors fell to relatively low levels.
From the current perspective, oversold technology growth sectors and certain cyclical industries may relatively outperform during the short-term bottoming and fluctuating phase. First, the industrial trends and policies for short-term technology growth and certain cyclical industries may continue to improve. On one hand, the industrial trends or business conditions for short-term technology growth and certain cyclical industries may be on the rise. Specifically, the short-term industrial trend for technology growth may continue to strengthen. On the cyclical side, oil prices remain elevated, and the business conditions for petrochemical-related industries may improve. Furthermore, soaring AI demand may keep the business conditions for AI-related minor metals at a persistently high level. On the other hand, policy catalysts for short-term technology, certain cyclical, and consumer industries may continue to emerge. Second, the short-term shareholding structures of technology growth and certain cyclical industries have already shown significant improvement. The historical valuation percentiles of TMT and non-ferrous metals are already relatively low, and margin financing balances and trading volume shares have fallen considerably.
The short-term bottom may have already appeared. The A-share market may fluctuate, but the long-term slow bull trend remains unchanged. First, the short-term economy and corporate earnings may recover and rebound. On one hand, the short-term economy may recover from a low level. Specifically, the growth rate of real estate investment may stabilize in the short term but remain relatively weak, while the growth rates of manufacturing investment and infrastructure investment may stabilize and rebound. Additionally, the short-term consumption growth rate may stabilize and recover somewhat. Finally, China's short-term export growth in year-on-year terms may continue to maintain a high pace. On the other hand, short-term corporate earnings may continue to be on an upward trend. Specifically, the profit growth rate of industrial enterprises may continue to rebound in the short term. Moreover, A-share earnings for the third quarter report may maintain high growth. Second, short-term liquidity may remain accommodative. On one hand, short-term macroeconomic liquidity may remain loose. Specifically, the Federal Reserve is unlikely to hike rates in October. Furthermore, overseas factors have a relatively small impact on domestic liquidity easing, and the domestic environment may remain accommodative. On the other hand, short-term capital inflows into the stock market may improve marginally. Specifically, margin financing outflows may decrease or even turn into inflows. Additionally, the scale of newly issued funds may continue to maintain a recovery trend in the short term. Finally, share buybacks by listed companies have increased notably recently. Third, short-term policies and external events may be relatively positive. First, short-term policies may remain relatively proactive. Second, short-term external risks may be relatively small. Specifically, the short-term risk from the US-Iran conflict may remain limited. Furthermore, China-US relations may remain stable in the short term. Fourth, short-term A-share valuations and sentiment are already relatively low.
Sector Allocation: Short-term focus on oversold technology growth and certain blue-chip industries.
First, among growth industries, sentiment has declined noticeably in electronics, communications, machinery, and non-ferrous metals, as well as in non-bank financials within the large financial sector. Second, other electronics, batteries, consumer electronics, energy metals, and diversified financials currently have relatively low valuations and relatively high revenue growth rates. Third, short-term recommendations include buying on dips in the following: first, electronics (semiconductors, AI hardware), communications (AI hardware), non-ferrous metals, machinery, media (AI applications, gaming), computers (AI applications), defense (commercial aerospace), pharmaceuticals (AI drug discovery), and new energy and electric power equipment (AI power), which have upward policy and industrial trends and are oversold; second, low-valuation blue-chip industries such as securities firms and consumer sectors.
Risk warnings: Historical experience may not necessarily apply in the future, policies may change beyond expectations, and economic recovery may fall short of expectations.
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