Strategy from China Securities Co., Ltd.: The bottom is dropping, always be prepared.

China Securities Co., Ltd. released a strategic research report stating that the 50bp rate cut by the Fed in September exceeded market expectations slightly, the risk of a hard landing for the US economy has decreased, and China's policy space has further improved. The Hong Kong stock market has benefited more directly from the Fed's rate cut, coupled with attractive valuations, making it relatively strong in the near term. The A-share market has reached a point where sentiment and valuations are at a low, and if the policy bottom is further confirmed, the market will form a resonating rebound signal. It is currently not advisable to be bearish, and one should be prepared at all times. Additionally, it is important to note the historical pattern of the A-share market, where the market style in the fourth quarter differs significantly from the previous three quarters, so attention should be focused on potential high elasticity industries. Industries to focus on include internet, defense, home appliances, automobiles, and energy storage. This week, the Fed's 50bp rate cut was announced, slightly exceeding market expectations, marking the beginning of a global easing cycle of liquidity. Three major marginal changes to focus on are: Further opening of domestic policy space. Based on historical experience, after the Fed initiates a rate cut cycle, if the domestic economy faces pressure on its fundamentals, the central bank's monetary policy will also follow suit in easing. For example, in September 2019, the Fed made a preemptive rate cut, and following the weakening of the US dollar and easing of depreciation pressures, the domestic central bank followed with a rate cut in November. China Securities Co., Ltd. predicts that China will first lower OMO rates and then lower MLF and LPR rates. The risk of a "hard landing" for the US economy is decreasing, with the property market, which is sensitive to high interest rates, expected to marginally recover; and expectations for the prosperity of export-related categories in the country are improving. With timely rate cuts, concerns about a US economic recession are further alleviated, combined with the restoration of worries over trade policy sanctions under the "Harris trade", the rebound in the domestic export chain is expected to continue. Particularly for industries related to exports to the US, based on the latest data, industries such as household appliances, furniture, and hardware plumbing in the US are still at low levels in terms of inventory cycles. If the downward trend in interest rates drives a recovery in US property demand, there is still strong impetus for restocking. The rate cut cycle is beneficial for increasing market risk appetite. At the industry level, referring to the performance of industry indices in the A-share/H-share/US stock markets in the 1-6 months after the initiation of a Fed rate cut cycle in 2007, 2019, and 2020, pharmaceuticals and technology (Hong Kong internet) had a higher probability of achieving excess returns. However, a rate cut is not sufficient for a switch from value to growth styles, as there is still a need for cooperation from the industrial cycle or stabilizing economic demand (in the absence of a clear industrial cycle) to improve the probability of success for growth styles. In addition to the initiation of the Fed rate cut cycle, the fourth quarter will also see the US elections, important domestic meetings, and other catalysts. Currently, sentiment and valuations are nearing their lows, and if the policy bottom is further confirmed, it will signal a resonating rebound. Furthermore, based on historical trends, due to end-of-year fund reallocations and the need to protect returns, the fourth quarter's market style has more pronounced differentiation compared to the first three quarters. The first is the reversal effect, where the species leading in gains in the first three quarters do not have a high probability of continuing to lead in the fourth quarter; the second is the layout of prosperity, where sectors leading in performance in the following year's rankings often have strong performance in the fourth quarter of the current year. Considering the current macroeconomic changes and historical allocation patterns, one can gradually focus on positioning rebound high elasticity species, including energy storage, defense, and internet for cyclical reversal; as well as domestic demand such as automobiles (autonomous driving), home appliances, etc. Industries to focus on include internet, defense, home appliances, automobiles, and energy storage.