Last week, mainstream market indices generally declined, with growth and small- to mid-cap sectors experiencing larger corrections. Among the Shenwan Level 1 industries, banking, petroleum and petrochemicals, and food and beverages performed relatively well, while telecommunications, electronics, and computers were weaker.
Macro Analysis: The Federal Reserve Holds Steady in October
Overseas, the Federal Reserve released its October policy meeting decision, maintaining the policy rate at 3.75%-4.00%, in line with market expectations, though the market still anticipates a December rate hike. The Fed's decision to hold steady this time was mainly driven by three considerations: first, the Fed believes short-term financial conditions have already tightened; second, the Fed faces the need to balance the economy and inflation, with recent employment data showing some weakness; third, energy prices are a fast-moving variable, and the Fed needs to remain flexible. The market's expectation for a December rate hike stems mainly from two factors: on one hand, the U.S. federal funds rate futures market shows December rate hike expectations have reached around 80%; on the other hand, short-term shocks to inflation from both the supply and demand sides in the U.S. (energy and AI demand, etc.) have not yet shown signs of reversal, making it difficult for inflation to descend smoothly in the short term, possibly still requiring rate hikes to combat inflation. However, there remains significant uncertainty regarding the Fed's monetary policy in 2027; if geopolitical tensions ease and a divided government emerges after the midterm elections, a turning point for liquidity reversal may arrive.
Domestically, the October PMI edged down, mainly affected by the combination of demand being released early before the holiday, a shift in the pace of external demand orders, and a slowdown in construction activity. Specifically, the October manufacturing PMI was 49.3%, down 0.8 percentage points from the previous month; the services business activity index was 50.0%, down 0.2 percentage points from the previous month; and the construction business activity index was 48.0%, down 2.3 percentage points from the previous month. Structurally, large enterprises and high-tech and equipment manufacturing sectors still have support, while small and medium-sized enterprises and traditional industries performed relatively weakly; external demand was affected by the pullback after Christmas orders were front-loaded, but still showed short-term resilience, and continued attention must be paid to disruptions in the trade environment. The breadth of price increases narrowed with industry divergence, and cost pressures eased marginally; going forward, the key lies in the replenishment of new orders, the conversion of construction into physical work volume, and the efficiency of fiscal transmission.
Investment Strategy: Focus on Sectors with Healthy Microstructures
This week, financial regulatory authorities held a symposium to study and promote the use of tools supporting the capital market, which is expected to stabilize market sentiment. In the short term, the broad market may remain range-bound, with the banking sector potentially relatively favored. First, alongside the adjustment in Chinese stocks, market stabilization forces have strengthened in tandem, sending a signal of managing downside risks and limiting the downside space, suggesting the broad market may not see overly low expectations in the short term; second, although pressure on China's market microstructure still exists, the deterioration in stock market structure this round is mainly reflected in certain heavily-weighted technology stocks; third, there is currently a lack of a major growth narrative, market-driven incremental capital is tending to wait and see or even stall, and risk assessment—especially uncertainty in the international situation—has not substantially declined, so the short-term market may enter a phase of consolidation and stabilization after bottoming out.
In terms of direction, focus on sectors and individual stocks with "healthy microstructures" plus "expectations that can be revised upward," pay attention to the direction of capital inflows, and seize opportunities to accumulate in the technology sector on dips. 1) Stable dividend plays: with domestic risk-free yields declining, the cost-effectiveness of dividend assets is recovering, and combined with policy-driven capital inflows, attention can be paid to banks and non-bank financials. 2) Emerging technology: waiting for positions with good cost-effectiveness is needed. The second derivative of overseas AI capital expenditure has temporarily slowed, and industry chain profits are concentrating toward the software end; thematically, more attention should be paid to the self-controllable direction, but short-term pressure from overseas mapping still exists. Attention can be paid to computers, media, domestic chips, upstream equipment and materials, and pharmaceuticals. 3) Cyclical reversal: pay attention to opportunities from cyclical reversals brought by capacity clearance in certain industries under sustained losses, such as hog farming.
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