Sinolink: Market rebound in the fourth quarter is expected to continue, with significant room for increase in the contribution of "buybacks".

Sinolink released a research report stating that the domestic fundamentals are expected to improve in the fourth quarter of 2024, and the boost effect of fiscal policy on the domestic economy is expected to further increase, potentially supporting a market rebound. In terms of quantity, the growth rate of fiscal policy in the fourth quarter is expected to marginally improve, and the increase in the deficit space in the next fiscal year and the expected enlargement of support for two new and two old projects are expected to further increase the growth rate of fiscal expenditure. In terms of structure, the proportion of fiscal policy exerted on the "asset side" is expected to gradually increase, thereby driving improvements in corporate profitability, creating a positive and sustainable cycle of domestic demand. Based on the comparison between China and the United States, there is a significant potential for the "share buyback contribution" in the A-share market to increase, and with policy support, there is a lot of room for development. Sinolink's main points are as follows: Review of previous viewpoints: Confidence is rising, and funds favor "offense". Active equity fund managers in this quarter are "favoring" financial stocks, such as CKH HOLDINGS, and optional consumer goods categories, while "underweighting" in cyclical and essential consumer goods categories. The bank believes that: 1. In the short term (fourth quarter), due to the pursuit of "return on investment" targets, there is still an opportunity to "get on the bus" even after a high level of adjustment; 2. In the medium to long term, the high levels of profit-taking by some funds also reflect institutional investors' concerns about the sustainability of the market's rapid rise. With the assistance of various policies and fiscal subsidies, optional consumer goods (electronics, automobiles) continue to be favored by public funds. Considering that fiscal policies are expected to continue to focus on boosting domestic demand, sectors such as consumption and pharmaceuticals are still worth paying attention to. The improvement of domestic fundamentals in the fourth quarter of 2024, combined with the expected increase in the growth rate of fiscal expenditure, will support a market rebound. On November 8th, the office of the National People's Congress held a press conference, where the Minister of Finance announced the implementation of a new round of fiscal policies. Sinolink estimated the domestic fiscal support for the economy in FY2024 as follows: 1. The calculated debt-to-equity ratio supports a total of 12 trillion; 2. Fiscal expenditure for FY2024 is expected to increase by approximately 3.6%, with the growth rate in the fourth quarter showing signs of improvement; 3. FY2024 special bond issuance adds up to 11.7 trillion, of which around 3.6 trillion is for investment, accounting for only 3% of nominal GDP; 4. The narrow fiscal deficit rate is slightly increased in FY2024, while the broad fiscal deficit rate has been decreasing for three consecutive years; 5. This time, local government special bond issuance is about 11.7 trillion, accounting for 9% of GDP, with investment accounting for about 3%. In conclusion, the bank believes that given the current situation, the boost effect of fiscal policy on the domestic economy is expected to further increase. In terms of quantity, the growth rate of fiscal policy in the fourth quarter is expected to marginally improve, and the expected increase in the deficit space in the next fiscal year and the enlargement of support for two new and two old projects are expected to further increase the growth rate of fiscal expenditure. In terms of structure, the proportion of fiscal policy exerted on the "asset side" is expected to gradually increase, thereby driving improvements in corporate profitability, creating a positive and sustainable cycle of domestic demand. On the overseas front, on one hand, the outcome of the US election has limited impact on the domestic balance sheet, while on the other hand, under the framework of the Fed, the unchanged interest rate cycle suggests lingering risks. Keeping an eye on the forecasted median level of 4.4% unemployment rate, once exceeded, it indicates that overseas risks are likely to escalate again. In the short term, the anchor for market pricing is the actual improvement of domestic fundamentals, especially if M1 shows a rebound, it will enhance the momentum of market gains and increase the slope of market upswing. The bank maintains that with the support of loose monetary policy + expansionary fiscal policy focusing on the debt side of the national economy, there is potential to restore cash flows and balance sheets of local governments, enterprises, and residents, thereby driving an improvement in domestic demand in the fourth quarter of 2024. Coupled with the marginal increase in the growth rate of fiscal expenditure, it will support the repair of fundamentals and drive further market rebound. In addition, the key factor for the future market turning point is whether the "profit bottom" can accelerate, pointing towards further efforts in the total amount and structure of fiscal policies towards the "asset side". Considering that the "profit bottom" has not yet appeared, it is expected that there will be limited rotation of sectors such as "technology-consumption-cyclical", presenting an overall trend of "financial setting the stage, growth taking the lead" and "large caps setting the stage, mid and small caps performing" trends. Therefore, it is important to focus on the direction of "growth > consumption" with mid-cap, oversold, undervalued, buyback, and M&A expectation stocks, structurally focusing on "technology bull". How to build a buyback portfolio for excess returns? Compared to the United States, there is a significant potential for the contribution of "buybacks" in the A-share market to increase, and with policy support, there is significant room for development. The bank has constructed a "top 10 buybacks" and "top 20 buybacks" portfolio, which has delivered absolute returns of 41% / 29% from 2023 to date (November 6, 2024), compared to the outperformance of 35% /24% against the CSI A500, with lower drawdowns, showing practical significance. There are three financial implications of buyback companies: 1. Better capital structure and cash flow situation; 2. Higher growth rates and stronger profitability; 3. Higher dividend willingness, forming a positive cycle with the buyback. Screening logic steps: (1) Construct a buyback stock pool with 5 factors; (2) Eliminate companies with poor fundamentals from the stock pool with 3 factors; (3) Score the stock pool with 3 factors to construct a top 10-20 buyback companies portfolio. Sector allocation for November: Focus on the technology theme. (1) Top choice for growth: 1. TMT, especially electronics and computers; 2. National defense military; 3. Pharmaceuticals and biotechnology. (2) Secondary choice for consumption: 1. Social services; 2. Medical aesthetics; 3. Liquor; 4. Light industry. (3) Bottom holdings still include gold and innovative drugs. Risk warning: Accelerated confirmation of a "hard landing" of the US economy beyond market expectations; a slowdown in domestic exports beyond expectations.