GF Securities: Why did the A-share market surge today?

GF SEC released a research report stating that the current overall A-share ERP is at a historical extreme position (+2X). Today's policies mainly affect liquidity and risk preferences, with policies leading the denominator to repair, while the changes in the numerator still need to wait for follow-up signals. As of September 23, the overall A-share equity risk premium ERP of 4.63% is near the mean + 2X standard deviation, also the historical second highest point since 2008 (second only to 4.7% in December 12 and June 13). Policy signals are driving liquidity and risk preferences to recover, and the market is entering a rebound window. Event: On September 24, the State Council Information Office held a press conference on financial support for high-quality economic development. Several policy announcements were made at the press conference, including lowering the reserve requirement ratio and policy interest rates, reducing existing housing loan rates and unifying minimum down payment ratios for housing loans, and creating new monetary policy tools to support the stable development of the stock market. GF SEC's main points are as follows: 1. Clear monetary policy tone: Last week, the LPR remained unchanged, and today's release announced a 50BP reserve requirement ratio cut and a 20BP reduction in the 7-day reverse repurchase rate (exceeding the adjustment in July); more importantly, it was announced that depending on the situation, further reserve requirement ratio cuts of 25-50BP may be implemented within the year, with a clear outlook that this adjustment will lead to a subsequent decline in MLF, LPR, and deposit interest rates. Thus, the tone of monetary policy is basically clear. 2. Real estate policies implemented, expected to affect the balance sheets of the household sector: Lowering existing housing loan rates, lowering the down payment ratio for second homes, and increasing the central bank funding support ratio for affordable housing refinancing, among others. According to GF Real Estate Group's calculations, from March 21 to June 24 in this cycle, China's overall burden rate for residential purchasing decreased from 97% to 59%, reaching a new low since 2006, with the mortgage burden rate, representing the continuous decrease in household leverage appetite. Currently, lowering existing housing loan rates will reduce the mortgage burden for residents, reduce resident interest expenses, and help stabilize the balance sheets of the household sector, although the transmission of this path still requires time. 3. Market performance in the morning session showed a broad increase in stock indices after the announcement that the "central bank has created structural monetary policy tools to support the capital market" signaling a stronger signal compared to the actual operational level: Firstly, "swap convenience" not only provides a way to leverage up and attract incremental funds but also implies the central bank's recognition of the value of long-term assets such as the Shanghai-Shenzhen 300, and provides a direct channel for injecting liquidity into non-bank financial institutions; Secondly, "stock buybacks, increased refinancing" indicates targeted broad credit, affecting listed companies/large shareholders' buybacks and increased stock holdings. If used for cancellation-style buybacks, it will benefit companies in stabilizing ROE by lowering net assets; if used for increased holdings, it provides incremental funds for companies with recognized intrinsic value; Thirdly, the operational scale of the above two tools (500 billion + 300 billion) was given, and it was acknowledged that the scale could be expanded in the future depending on the situation. 4. Changes in the expression of encouraging mergers and acquisitions. Compared to Chairman Wu Qing's mention of mergers and acquisitions at the Shanghai Lujiazui Finance & Trade Zone Development Forum in June about "encouraging the strengthening of mergers and acquisitions in the upstream and downstream of the industrial chain" (vertical M&A), this time it has been expanded to include "cross-industry mergers and acquisitions" (horizontal M&A), as well as "acquisition of non-profitable assets to strengthen the chain and improve key core technologies", providing a favorable environment for mergers and acquisitions in new and innovative areas, as well as strengthening the chain. Currently, the overall A-share ERP is at a historical extreme position (+2X), with today's policies mainly affecting liquidity and risk preferences, leading the denominator to repair first, while the changes in the numerator still require follow-up signals. As of September 23, the overall A-share equity risk premium ERP of 4.63% is near the mean + 2X standard deviation, also the historical second highest point since 2008 (second only to 4.7% in December 12 and June 13). The first step of policy signals is driving liquidity and risk preferences to recover, and the market is entering a rebound window. Referencing the ERP operational form from 2012-2014, policy changes can drive ERP from +2X to around +1X, but if it breaks through +1X to the mean and below, it still needs to wait for fundamental signals of profit improvement, such as the transmission effect of housing loan rate adjustments to consumption, the effect of cost reduction on broad credit for enterprises, whether fiscal policy can follow up with expansion to drive PPI and ROE, etc. In addition, the geopolitical risk, the magnitude and duration of global economic downturn, the pace and extent of Fed rate cuts uncertainty, uncertainty about the results of the US elections, the timing and form of China's monetary and fiscal policies, unexpected fluctuations in the profit environment, and unexpected fluctuations in the RMB exchange rate should all be taken into account. Investment suggestions: 1. Considering the financing cost of the central bank's newly created tools, dividend assets with superior dividend yields, after a period of valuation adjustment, are expected to benefit again from incremental funds. 2. Mergers and acquisitions supporting chain enhancement, risk preference recovery-driven, and response modeling that has significantly absorbed technological growth industries (semiconductor domestic substitution, computing power chain, Apple chain). 3. Dynamic valuations of 2024, with high certainty of the third-quarter report, in the "Asia-Africa-Latin America" export chain (buses, motorcycles, inverters, electric meters, wind turbine assemblies, injection molding machines). 4. For asset classes more sensitive to the business cycle on the numerator side, it is advisable to continue to observe the situation of the overseas elections in November and the tone of the domestic conference in December. Risk alerts: Geopolitical risks exceed expectations; the magnitude and duration of global economic downturn surpass expectations; uncertainty about the pace and extent of Fed rate cuts; uncertainty about the results of the US elections; uncertainty about the timing and form of China's monetary and fiscal policies; unexpected fluctuations in the profit environment; unexpected fluctuations in the RMB exchange rate.