Outlook for CICCA stocks: The year 2025 has already passed the heavy mountains.

CICC released a research report stating that in recent years, the impact of the global macro paradigm shift has become more profound. The domestic economy is facing low inflation concerns. Since the beginning of 2024, the performance of A-shares has been subdued and then risen. Since September, there has been a turnaround in weakness under positive policy changes. This year, the opportunities in the A-share market outweigh the risks. The index performance may be stable in the beginning and then rise. The key to the outlook for A-shares in the second half of the year lies in policy enhancement. As of now, the performance of the A-share market since the beginning of the year, the narrative rhythm under policy responses, and the main structural themes are all in line with expectations. Looking ahead to 2025, it is still necessary to face the challenges posed by the macro paradigm shift to the economic fundamentals, but the bottom may have passed. Investor risk appetite in 2025 is expected to be overall better than in 2024, with more structural opportunities emerging. CICC's main points are as follows: The bottom may have passed, and investor risk appetite in 2025 is expected to be overall better than in 2024, with more structural opportunities emerging. Looking ahead to 2025, it is still necessary to face the challenges posed by the macro paradigm shift to the economic fundamentals. The mid-term bottom of the market may have occurred in 2024, and whether there will be a trend reversal depends on whether policies can ultimately reverse the low inflation environment and improve investor expectations. The main drivers of the market in 2024 were valuation repair. It is crucial to see if the market can successfully transition from valuation-driven to fundamentals-driven in 2025. After experiencing a long period of correction, the demand for asset allocation for domestic residents and global funds may see more positive marginal changes. Specifically: 1) Macro view: China's internal dynamic cyclical improvement still faces the challenge of a macro paradigm shift. The bank believes that, under the joint impact of the internal financial cycle downturn and external deglobalization, the main contradiction that needs to be addressed is still the relative lack of domestic demand and low inflation. Escaping the negative cycle requires more proactive policy support than before. The current uncertainty in China's economic recovery, price pressures still exist, and real estate remains a key to expected stabilization. The policies of the new US president may affect China's exports and overseas enterprises. Against this backdrop, the policy support in China since September has helped boost growth expectations and is key to reversing the low inflation environment. 2) Medium-term narrative: From valuation repair to the shift to DRIVE driven by improving profit expectations. The performance of A-shares in 2024 was mainly driven by valuation repair. After the visible easing of market undervaluation, the bank believes that the focus in 2025 will shift to whether valuation-driven can smoothly transition to profit-driven. During the process of economic cycle demand-supply rebalancing, the bank expects that next year, corporate profit growth may still be lower than nominal GDP growth, but overall it is expected to be better than in 2024. Based on top-down estimates, the year-on-year profit growth rates for the full A / non-financial sector in 2025 are expected to be + 1.2% / + 3.5%, and the improvement turning point is expected to occur around the middle of 2025. In terms of structure, as more industry demand-supply contradictions are alleviated, profit expectations are gradually improving, and the bank judges that structural opportunities for A-shares are expected to increase further next year. 3) Changes in funding: Incremental funds are an important factor propelling the current round of A-share rally. The number of new investor accounts and margin balance have recently increased significantly, with the turnover and trading volume currently at the most active level in the past nine years since 2015. Looking ahead to 2025, considering that Chinese residents have been accumulating savings in recent years, the investment environment for A-shares has been preliminarily restored, and foreign investment in A-shares is still relatively low, the bank believes that the demand for asset allocation for domestic residents and global funds may see more positive marginal changes, which could support the index performance. In terms of momentum, the frequency of market changes in 2025 may be higher than in 2024, but the magnitude may narrow. The period from the end of this year to the beginning of next year is still a critical window for policy efforts. Expected changes may impact the pace of valuation repair, and the mid-term market performance depends on the confirmation of inflection points in performance and the transition from valuation-driven to profit-driven. The process is also bound to face challenges. The bank believes that the frequency of market changes may be higher than in 2024, but the magnitude may be smaller than this year. In terms of investment allocation, returning to a positive outlook for the economy and repositioning on the track. Some industries in China have undergone years of adjustments to their fundamentals, and capacity is expected to clear under policy guidance and the industry's own trends. Industries benefiting from economic recovery are expected to increase next year. Combined with the improvement in investor risk appetite, investment philosophies of the past three years may face adjustments. Focus on four main themes: 1) Economic growth: Focus on growth industries with continued valuation contraction and the potential inflection point in fundamentals, or areas supported by policies and the catalysis of AI trends, including lithium batteries, high-end manufacturing, semiconductors, consumer electronics, software, and other technology hardware and software sectors; 2) Resilient external demand: With the inauguration of the new US president and the possibility of the Fed's rate cuts leading to a soft landing of the US economy, but with increased uncertainties in trade and other areas, focus on areas with relatively small potential impacts and strong resilience in external demand, such as the power grid, commercial vehicles, household appliances, and globally priced commodities; 3) New dividends: High-dividend companies focusing on cash flow and dividend yield allocation, with a new perspective focusing on the consumer goods and beverage sector; 4) Policy support: Focus on the impact of mergers and acquisitions, restructuring, distressed asset rehabilitation, as well as local government debt and other areas on policy certainty and capital market reform. The bank also lays out six major themes to watch: 1) mergers and acquisitions; 2) artificial intelligence and new quality productivity; 3) benefits of debt rehabilitation; 4) oversold high-quality industry leaders; 5) policy incentives for product renewals and consumption scene repair; 6) Fed rate cuts. Risk warning: Downside risks include difficulties in improving fundamental indicators such as real estate and inflation, as well as uncertainties in policies after the inauguration of the new US president; upside risks include the market entering a positive feedback loop of funding and stock price increases, with stimulus policies being greater than expected.