Guotai Haitong released a research report stating that there are neither overly high expectations nor overly low expectations, and the broad market is moving sideways in a volatile range. After a sharp market decline, there will be some rebound, but the upside is limited and the market will remain weakly volatile. A more forceful market trend will require time. In terms of investment, investors should balance "healthy micro-structure" with "expectations that can be revised upward," favor a more balanced, more diversified, and "small but beautiful" approach, and remain bullish on domestic technology, strategic resource products, and large financial high-dividend sectors. The main views of Guotai Haitong are as follows.
Trend Assessment
There are neither overly high expectations nor overly low expectations, and the broad market is moving sideways in a volatile range. A large-scale market trend still requires time and patience. We are currently in a consolidation phase of a "transition bull market," and at this stage the broad market index has neither expectations of a major rally to new highs nor expectations of a major decline to new lows. First, after A-shares fully priced in industrial narratives in the first half of the year, there is temporarily a lack of new large-scale growth narratives and investment stories to drive an upward revision of overall expectations, and at the logical level the market has entered a "waiting period." Second, since August, the pace of incremental capital entering the market has slowed noticeably, and the market state has temporarily shifted from an incremental state to a stock-game state, so the impact of micro-structure on the market will increase. Short-term "gray rhino" factors such as Federal Reserve rate hikes, the inflation situation, tense international relations, and increasing technology sanctions and trade conflicts will also constrain risk appetite. The market is not unaware of these factors. At a stage when disagreement in expectations is not high but risk assessment has not declined, the stock market will rebound somewhat after a sharp decline in the short term, but overall it is currently a weak volatile market with limited upside. A more forceful and larger-scale market trend will still require time, conditions, and patience.
China's stock market has localized micro-structure problems, which still need further self-digestion by the market. However, localized problems create localized pressure, and the impact on the overall broad market and broad-based indices is controllable, so there is no need for excessive worry. After micro-structure problems emerge, stocks will at times temporarily stop expressing logic and instead be more affected by trading factors, and there will also be times when they are insensitive to good news and react more sharply to bad news. The market response to third-quarter reports will still be a window for us to observe whether this problem improves. This round of the stock market differs from 2015 and 2022 in that there is no overall micro-structure problem. It is mainly concentrated in a small number of heavily held stocks in certain technology sectors, while the trading structure of the overall market and the vast majority of stocks is healthy. In addition, it is not that industrial innovation and logical changes are no longer being expressed, but rather that under the current setup they will be expressed more in technology sectors and individual stocks with "healthy micro-structure" and "expectations that can be revised upward."
Second, micro-structure problems will not persist forever. After a period of sufficient turnover or the emergence of powerful new narratives and new expectations, the affected stocks can strengthen again. The market still needs to self-digest the related problems, and it is expected that the period around the end of the year and the beginning of next year will be a favorable node.
Sector Comparison
The current investment focus should be on sectors and individual stocks with "healthy micro-structure" and "expectations that can be revised upward," with a more balanced and diversified approach, and with obvious characteristics of "small but beautiful" and rotation. 1) Domestic supply chain technology: overseas sanctions and trade disputes are increasing, and the necessity of self-reliance and controllability is rising. In 2027, China's AI will have an independent development narrative. Recommendations: domestic chips, upstream components and materials for semiconductors, high-end equipment, pharmaceuticals, and others. 2) Strategic resources: U.S. Treasuries are no longer necessarily risk-free assets, and under complex international situations the demand for resource security is increasing. Geopolitical conflicts and AI construction demand will also tighten supply and demand for bulk commodities. Recommendations: precious metals, industrial metals, rare metals, oil and chemicals, agricultural products, and others. 3) Financials and high dividends: the demand for portfolio stability is increasing, and new insurance capital rules are raising the willingness to allocate to dividend assets. Recommendations: banks, brokerages, power and utilities, telecom operators, leading real estate companies, and others.
Risk Warning
Overseas economic and geopolitical risks, and the risk that individual stock performance falls short of expectations.
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