Guotai Junan Securities Strategy: Bottom area, what is the market hesitating about? How to respond?

, Industrial Development Strategy issued a research report saying that since late May, the market has continued to fluctuate and pull back, with the Shanghai Composite Index once falling below 2700 points, returning to the lows for the year. Moreover, from the perspective of valuation and risk premium, the current market has once again reached a bottom area. Although it is already at the bottom area, the long-awaited rebound has not been seen. The team believes this is due to external uncertainties such as the US presidential election, market expectations for the US Federal Reserve interest rate cuts, etc., as well as concerns about third quarter earnings. In the short term, with the market at the bottom area, it is possible to look for sectors with high cost-performance ratio along the lines of crowding and prosperity, such as new energy, innovative medicine, etc.; at the same time, dividend sectors may regain attention after experiencing adjustments and digesting their own crowdedness, amidst unclear market trends. I. The current market has once again come to the bottom area Since late May, the market has continued to fluctuate and pull back, with the Shanghai Composite Index once falling below 2700 points, returning to the lows for the year. Moreover, from the perspective of valuation and risk premium, the current market has once again reached a bottom area. In terms of valuation, as of September 13, the Shanghai Composite Index had a PE valuation of 12.01 times, which is at the 23.9% percentile since 2010. At the same time, the PB valuation of 1.119 times has reached a new low with data. Regarding the risk premium, since mid-August, the market has accelerated its pullback, combined with a significant decline in risk-free interest rates, leading to a rapid increase in the A-share risk premium level. The equity risk premium level of the Shanghai Composite Index has risen to more than the 3-year rolling average + 2 standard deviations. II. In the bottom area, what is the market hesitating about? Although the market is already in the bottom area, the long-awaited rebound has not been seen yet. What is the market hesitating about? We believe there are mainly two points: Firstly, there are still strong external uncertainties. 1) On one hand, the current US presidential election remains tense. In particular, topics such as Sino-US trade and US-China relations still disturb the domestic market. 2) On the other hand, despite the resilience of the current US economy, changes in pace and expectations are still important variables affecting the market. The increasing recession expectations from mid-July to early August had caused global market turmoil and hindered the domestic market. 3) In addition, there is a deviation between the market's more optimistic expectations for a US Federal Reserve interest rate cut and the Fed's relatively cautious guidance. If the market's expectations align with the Fed's guidance later on, it may also cause temporary market volatility. Secondly, there is concern about third quarter earnings. Concerns about fundamentals have been one of the important factors suppressing market performance this year. Since late August, earnings growth expectations of listed companies have once again encountered significant downward revisions. As the window for third quarter reports approaches in October, considering the significant economic pressure in the third quarter, coupled with the not-so-low base of last year's third quarter, third quarter earnings of listed companies are likely to continue to be under pressure, sustaining concerns about earnings and inhibiting the rebound of risk appetite. III. How to deal with the current bottom area? In the short term, in the market's bottom area, it is possible to look for sectors with low cost-performance ratio based on crowding and prosperity, such as new energy, innovative medicine, etc. Positions and valuations in sectors such as new energy and innovative medicine have fallen to historical lows, coupled with marginal changes in fundamentals in recent weeks, such as a slight stabilization in lithium carbonate prices and profitability turning points for innovative pharmaceutical companies amid the Fed's interest rate cuts, making these low cost-performance ratio sectors worth considering. At the same time, dividend sectors may regain attention after experiencing adjustments and digesting their own crowdedness, amidst unclear market trends. The previous adjustment in dividend sectors was mainly due to overcrowding, but after the adjustment, the crowdedness in these sectors has decreased to a low level, with sectors like banking, transportation, utilities, oil and petrochemicals, coal, etc. having relatively low crowdedness among all primary industries. Combined with unclear market trends, adjusted dividend sectors may regain attention. Looking ahead, after the fourth quarter situation settles, the market may enter a window for recovery, but it should be emphasized that a more significant recovery may require policy support. On one hand, after the third quarter reports, the pressure on market risk appetite from financial report earnings is expected to ease. On the other hand, the US presidential election will be resolved by November 5th, and the path of interest rate cuts will be clearer, reducing disturbances from external uncertainties. However, it should be emphasized that a higher level of recovery will require policy support. In terms of structure, the broad market and leading companies are the beta of the times, and the "15+3" with the three highs properties is the primary trend in the medium to long term. We have been emphasizing since the beginning of this year that the market has entered an era of high win rate investments. In the 2024 Mid-term Strategy Report "Beta of the Times," we further propose that the broad market and leading companies are the beta of the times. "15+3" represents the intersection of high dividend, high ROE, and high prosperity assets, enhancing the style of the broad market, and is expected to become a consensus direction in the medium to long term. This year, the Industrial Development Strategy team first proposed "15+3" (achieving or approaching 15% net profit growth and 3% dividend yield) as the screening standard for core assets in the new era. Compared to traditional core assets, "15+3" combines high prosperity, high ROE, and high dividend, making it a more suitable core asset for this era. The "15+3" asset provides a simple and clear screening standard, the screening conditions are as follows (based on "15+3" with some relaxation): 1) Constituents of the CSI 800, with a market value not less than 300 billion; 2) Net profit growth rates for the first half of 2024, 2024E, and 2025E not less than 10%; 3) Dividend yields for 2023 not less than 2.5%. The specific list of "15+3" assets is available upon contacting the Industrial Development Strategy team. Risk warning Fluctuations in economic data, policy tightening beyond expectations, unexpected interest rate hikes by the Federal Reserve, etc. This article originated from the public account "Yao Wang Hou Shi", GMTEight Editor: Liu Xuan.