CITIC Securities released a research report stating that before any unexpected changes in domestic demand emerge, market volatility and sector rotation will remain the norm. The revaluation of global pricing power for resources and traditional manufacturing sectors remains an underestimated area with potential. Since the "9.24 rally" last year, the two rounds of overall market upticks were accompanied by systemic increases in financing activity, totaling a net increase of RMB 1.11 trillion—far exceeding the total issuance scale of actively managed long-only public and private funds since October last year. During these two rallies, major broad-based indices and high-growth sectors achieved most of their gains. Excluding these financing-driven surges, the market largely moved sideways, with only a few sectors—quant-driven small caps, insurance-driven banking, commodity-driven materials, and globalization-driven biopharma—managing to rise effectively during consolidation phases.
The current market volatility may persist until unexpected fundamental changes emerge. Bond market adjustments have posed challenges for balanced equity-bond strategies, potentially raising requirements for volatility control and indirectly impacting equity allocation strategies. A potential appreciation pressure on the yuan could lead to unexpected monetary easing, which might break the current consolidation pattern. Until then, CITIC Securities recommends maintaining allocations in two key directions: the revaluation of global pricing power for resources/traditional manufacturing and corporate globalization.
Key Observations: 1. **Two Rounds of Financing-Driven Rallies**: - The first surge occurred from September 24 to November 13 last year, with margin debt rising by RMB 483 billion (+35.2%), coinciding with a 25% gain in the Shanghai Composite Index. - The second surge took place from June 20 to September 25 this year, with margin debt increasing by RMB 623.5 billion (+34.2%), while the Shanghai Composite rose 14.6%. Both rallies were triggered by major surprises—first by unexpected policy shifts and later by the framework of U.S.-China trade talks restoring confidence in Chinese firms' global competitiveness.
2. **Performance Across Indices and Sectors**: - Broad-based indices (excluding small caps) and high-growth sectors achieved most gains during financing expansions. Outside these periods, markets trended sideways or declined. - Quant strategies outperformed actively managed funds during rallies (26% vs. 14% in the first phase; 20% vs. 16% in the second). - During consolidation, only small caps, banking, materials, and biopharma posted gains, driven by quant funds, insurance inflows, commodity prices, and overseas pipeline expansions, respectively.
3. **Challenges for Balanced Strategies**: - Bond market adjustments have disrupted traditional equity-bond strategies, potentially slowing equity allocation by conservative funds seeking lower volatility.
4. **Potential Catalyst: Yuan Appreciation & Monetary Easing**: - As China’s manufacturing gains global pricing power, RMB appreciation pressures may prompt unexpected monetary easing, potentially revitalizing domestic demand and breaking the consolidation cycle.
**Allocation Recommendations**: - **Resources/Traditional Manufacturing**: Focus on leaders in sectors like metals, chemicals, and renewables, benefiting from domestic supply discipline and overseas demand. - **Corporate Globalization**: Prioritize industries like engineering machinery, biopharma, power equipment, gaming, and defense, transitioning from local to global exposure. - **Low-Crowding Rotations & Dividends**: Consider sectors like cinemas, securities, airlines, liquor, and hotels, or directly increase allocations to high-dividend plays (banks, utilities, energy).
**Risk Factors**: Escalating U.S.-China tensions; weaker-than-expected policy support or economic recovery; tightening global liquidity; geopolitical conflicts; prolonged property market adjustments.
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