CMSC: A-shares' profits are expected to stop falling and rebound, focusing on three key signals for allocation.

CMSC released a research report stating that looking ahead to 2025, the overall A-shares market will stabilize after hitting bottom, with continued structural differentiation. With the advancement of a new round of loose monetary and fiscal policies, under the influence of low base numbers and the profit cycle, it is expected that the A-shares earnings will gradually recover, and the earnings of A-shares are expected to marginally improve by the end of 2024 and in 2025. CMSC pointed out that in 2025, industry allocation will focus on three main clues. First: focusing on areas where the turning point of supply-side reform and capacity clearance is approaching, such as precious metals, cement, and chemical products in the resources sector, general/railway/automation equipment in the middle of the manufacturing sector, lithium batteries, as well as farming and food processing in the agriculture and food and beverage sector. Second: focusing on areas with low external demand risk exposure and strong internal demand, such as retail, auto, home appliances, and food and beverage. Third: sectors benefiting from the technological innovation cycle and the domestic policy of self-reliance and controllability, such as computer equipment, communication equipment, automation equipment, and consumer electronics. The five key industries highlighted are electronics, media, defense military industry, household appliances, and mechanical equipment. Key points from CMSC: Outlook for earnings in 2025: stabilization after hitting bottom with continued structural differentiation. With the advancement of a new round of loose monetary and fiscal policies, under the influence of low base numbers and the profit cycle, it is expected that the A-shares earnings will gradually recover, and the earnings of A-shares are expected to marginally improve by the end of 2024 and in 2025. The driving factors include strengthening internal demand, replenishing inventory, and a slight increase in profit margins. It is predicted that the cumulative earnings growth rate of A-shares/non-financial and oil companies listed on the A-shares market will still be negative in 2024, but it is expected to achieve moderate growth in 2025. From a sector perspective, the sectors with relatively higher earnings growth in 2025 are expected to mainly focus on consumer services, information technology, and middle-of-the-road manufacturing. Forecasts for major industry trends. The upstream resource industry has seen limited recovery in demand this year, resulting in a limited downside for resource prices. Policies related to energy conservation and carbon reduction are expected to accelerate, raising the prosperity levels of basic chemicals, construction materials, and precious metals. The middle-of-the-road manufacturing industry is expected to see differentiation in prosperity, and high-tech manufacturing related to new quality productivity is expected to have high demand in 2025. Consumer services sector will maintain relatively high profits, and the expansion of domestic demand policies in 2025 is expected to boost demand for home appliances, automobiles, and retail trade. The pharmaceutical sector may see a recovery as macroeconomic demand improves. The information technology sector, with a relatively high level of prosperity, is expected to see a greater certainty of performance improvement in computer equipment, communication equipment, and consumer electronics under the background of a new technology cycle. Focus on three main clues for industry allocation in 2025. 1. Industries with supply-side reform: focus on sectors nearing capacity clearance turning points, such as precious metals, cement, chemical products in the resources sector, general/railway/automated equipment in the middle of manufacturing, lithium batteries, and farming and food processing in the agriculture and food and beverage sector. 2. Industries with low external demand risk exposure and strong internal demand: such as retail, auto, home appliances, and food and beverage. 3. Industries benefiting from the technological innovation cycle and domestic self-controllable policies: such as computer equipment, communication equipment, automation equipment, and consumer electronics. The five key industries highlighted are electronics, media, defense military industry, household appliances, and mechanical equipment. Short-term industry allocation recommendations for January focus on the spring effect and the disclosure of annual performance. Based on industry policies and mid-term prosperity levels, sectors with relatively high or trending rising prosperity levels are mainly in information technology, consumer services, high-end manufacturing, and the pharmaceutical sector. Risks: Economic data falling below expectations; Fed policy easing progressing slower than expected; industry support falling short of expectations.