After the window period, A-shares are expected to converge with Hong Kong shares?

Core Conclusion Tactically, we need to be a bit more optimistic, and strategically, we need to wait for policies to land rather than expect them. The time window in which Hong Kong stocks continue to outperform A-shares is still open, and after this window period, A-shares may converge towards Hong Kong stocks. 01. Trends and Styles The Fed's unexpected rate cut landed, attention is on the implementation of domestic growth-stabilizing policies. The Fed's unexpected 50bp rate cut on Thursday was the focus of the market this week. On one hand, historically, a 50bp rate cut operation at the beginning is not common, and only occurs in emergencies, such as during the tech bubble, the 2008 financial crisis, and times of epidemics; on the other hand, Powell changed his previous guidance and cut rates by 50bp, which cannot be used as a new benchmark for further cuts, believing that the neutral rate is significantly higher than before the epidemic. We believe that this unexpected rate cut does not mean a hard landing for the US economy, and the dot plot after the meeting is expected to see another 50bp cut within the year, slightly lower than market expectations; secondly, Powell stated that he has not seen any signs of a recession. The rise in US bond yields, the strengthening of the US dollar, and the drop in gold prices also reflect the market's preference for a soft landing of the economy. For A-shares, the market generally believes that as the Fed initiates a rate-cutting cycle, the domestic monetary policy space will also open up. However, the LPR did not cut rates as scheduled on Friday. We believe that with the unexpected landing of the rate cut by the Fed, the impact of monetary easing on A-shares may weaken, and the current bottleneck in the domestic economy mainly comes from the transmission of credit from money, and whether future demand can stabilize more depends on the progress of fiscal policy. Considering that the effective implementation of growth-stabilizing policies takes time, the window for policy adjustments may be between September and October; combined with the statements of relevant departments such as the NDRC this week, we still need to further monitor the implementation of domestic growth-stabilizing policies. 02. Medium-Term Industry and Business Environment Improvements on the domestic and international margins, overseas rate cuts implemented, domestic policy expectations rising again. Benefiting from the expectations of domestic policy improvements, the real estate industry has once again experienced a significant rally ahead of time, driven by incremental policies such as stabilizing real estate and lowering existing home loan rates. Industries with higher increases are more influenced by the rebound in overseas markets driven by rate cuts, such as the high level of dependence on foreign demand in the non-ferrous and home appliances industries. Boosted by the hot sale of the new phone series, Huawei concepts have performed well, but the supply chain has shown a significant correction, the electronics industry has lagged behind this week, and the pharmaceutical industry performed poorly this week as the drug procurement conference was held. Currently, we are still in a window period where Hong Kong stocks outperform A-shares. However, since August, Hong Kong stocks have been outperforming A-shares, with the Hang Seng Index rising continuously while the A-share index continues to decline. The significant divergence between AH stocks have raised concerns in the market, whether Hong Kong stocks have completely emerged from a historical low, and whether the rebound in Hong Kong stocks indicates that A-shares have also bottomed out and are about to rise. We have summarized three reasons why Hong Kong stocks are leading A-shares: 1) Hong Kong stocks have benefited more from the improvement in overseas liquidity following the Fed's rate cut operation, as the pricing denominator for Hong Kong stocks is outside, so a larger boost to short-term prices is reasonably expected. 2) Before September, heavyweights in A-share banks and other sectors have experienced a certain over-rally due to capital driving factors. After the excess buying pauses, there is pressure for the A-share index to return. 3) Hong Kong stocks' weight in pro-cyclical industries, such as the internet industry, with better profit improvements and stronger buyback efforts compared to A-share pro-cyclical weights like electronics and consumption, have a greater pressure on profit and profit expectations. All these advantages logically lead to more short-term funds flowing into Hong Kong stocks in the current stock market. Historically, the significant divergence trend between Hong Kong and A-shares is difficult to last for more than three months (except for the longer divergence seen in 2021 due to factors such as the pressure on internet stocks in Hong Kong due to policies and the strong demand for clean energy stocks in A-shares). The current divergence has lasted for nearly 2 months. In the short term, the logic for Hong Kong stocks is smoother on both the denominator and capital side compared to A-shares. However, in the longer term trend, the numerator side is unlikely to diverge from A-shares for too long. In the short term, we still believe that tactically, we need to be a bit more optimistic, and strategically, we need to wait for policies to land rather than expect them. The time window in which Hong Kong stocks continue to outperform A-shares is still open, and after this window period, A-shares may converge towards Hong Kong stocks. In the non-banking financial sector, there are still many high cost-effective dividend tracks. Since the beginning of 2024, the dividend style has received continuous attention from the market, with many high dividend tracks having seen significant gains. In comparison, the non-banking financial sector, including leasing, financial holdings, and securities industries, also has a high dividend yield, with relatively limited gains since the beginning of the year, and still has a high cost-effectiveness. In terms of stability in profit, the high dividend industries that have seen gains since the beginning of the year often have strong profit stability. Compared to industries such as decoration, road freight, and coking coal which have high profit volatility, the various sub-industries of non-bank finance, including insurance, securities, financial holdings, and leasing, have relatively low ROE variations in the past five years, showing good profit stability. The non-banking financial sector currently has positive policy catalysts. On September 11, the State Council issued the "Several Opinions on Strengthening Supervision, Preventing Risks, and Promoting High-Quality Development of the Insurance Industry", systematically planning and arranging reform and development of the insurance industry in China for the next 5 to 10 years. The new "Guidelines" propose that by 2029, a framework for the high-quality development of the insurance industry will have been formed, covering a steadily expanding coverage, increasingly comprehensive protection, continuously improving service, stable and balanced asset allocation, sufficient solvency, and effective governance and internal control. The new "Guidelines" are expected to lead to a new period of high-quality development in the insurance industry. In addition, since the Central Financial Work Conference in October 2023 first proposed to "cultivate first-class investment banks and investment institutions," related policies have been frequently released, and the new "Guidelines" once again emphasize "supporting leading securities companies to improve core competitiveness through mergers and acquisitions, organizational innovation," driving policies, since 2024, the merger and acquisition process of the brokerage industry has accelerated. 03. Weekly Market Overview, Portfolio Performance, and Hotspot Tracking Risk warnings: Policies may not land as expected, and macroeconomic fluctuations may exceed expectations.