Shenwan Hongyuan Group: The market outlook for the past 26 years has been constantly evolving.

Shenwan Hongyuan Group released a research report stating that there are two stages in which Hong Kong stocks have excess returns compared to A-shares: 1. During the period of industrial trend fermentation, Hong Kong stocks, especially the leading ones, show stronger representation; 2. During the phase when Chinese assets have an overall advantage and clear structural themes, Hong Kong stocks are more likely to outperform A-shares. The report continues to be optimistic and expects a rebound in the fourth quarter, with Hang Seng Technology having a high elasticity advantage. The main points of Shenwan Hongyuan Group are as follows: Short-term market structural characteristics The long-term cost-effectiveness of technology growth is insufficient, and it is currently trading at a high level awaiting the accumulation of industrial trend catalysts; in the medium term, the year-on-year positive turn in Producer Price Index (PPI) trade is expected, leading to short-term price hikes, but the cost-effectiveness of the price hike cycle in the short term is limited. Recently, the Shanghai Composite Index has been trading in a narrow range, while technology growth has continued to fluctuate widely. In the short term, the Shanghai Composite Index has been trading in a narrow range, while technology growth has been fluctuating widely. Behind this, there is a lack of advantageous structures leading the market breakthrough: firstly, the long-term cost-effectiveness of technology growth is insufficient, similar to the situation in late 2013 with the ChiNext board, early 2018 with food and beverage stocks, and early 2021 with new energy stocks. Previous experiences with the trend when technology growth has insufficient long-term cost-effectiveness: 1. It becomes significantly difficult to earn valuation money in areas with low long-term cost-effectiveness. Continuous validation of industry catalysts and high performance growth is needed to sustain effective upwards movement. 2. In areas with low long-term cost-effectiveness, it does not mean that there will be a major correction immediately; high-end regions may continue for quarters. 3. A correction to digest the long-term cost-effectiveness issue, caused by clear performance disturbance, usually triggers a drop in valuation. 4. Sensitivity to liquidity shocks increases during this phase of the market. 5. Money earned with declining risk-free rates often requires waiting for a full bull phase, as A-shares are priced based on the marginal cost of trading funds. Overall, technology growth is currently trading at a high level, waiting for the accumulation of catalysts for industrial trends. Since early September, there has been a trend of cutting high and buying low, with the middle-term PPI year-on-year positive turn showing relative resilience. Short-term price hikes are expected, and with the anticipation of PPI turning positive in 2026, the short-term direction is towards a stronger offensive. However, there are still logical breakpoints in the medium-term outlook. Price stability is expected, but the sustainability of price rebounds remains uncertain. After PPI turns positive, the subsequent upward potential remains unclear. Therefore, the impact of cyclical and value sectors on the overall index is limited. The market composition leans more towards the fourth quarter and spring rotation trend. After accumulating certain price increases, the short-term cost-effectiveness decreases, and the high-end zone is not far away. The long-term cost-effectiveness of technology growth is insufficient while short-term fundamental concerns increase; the short-term price hike cycle and declining prices are short-term cost- ineffective, with medium-term outlook still having logical breakpoints. The structure that can lead the market breakthrough has not yet been established, and the A-share market may continue to experience a period of fluctuations. Medium-term market assessment maintains the "two-stage bull market" perspective The 25-year technology structural bull market was the first phase of the bull market 1.0, and 26 years may see a temporary high point in the spring, at which time the A-share market may face three challenges: 1. In the spring of 26, the critical validation period for demand will arrive. If supply growth returns to a low level, stable demand will lead to a supply-demand improvement, but if demand is weak, the turning point in supply and demand may still be postponed. 2. In the long-term low-cost-effective zone of technology, sensitivity to performance disturbances and liquidity shocks will increase. After a complex high-end phase, there may be an effective consolidation phase. 3. New structural highlights in the spring of 26 may still need time to develop. The decisive catalysis of the domestic technology industry and the verification period for the anti-hierarchical effect will take time, making it difficult to smoothly transition to new main themes. The spring of 2026 may be a temporary high point, but it is highly likely not the high point for the entire year of 26, nor the high point of the current full bull market. The bull market still has depth, and as time goes on, the conditions for the full bull market to develop will become increasingly sufficient. There are still at least three mid-term gains waiting to be realized in the A-share market: 1. Gains from cyclical improvements in fundamentals. 2. Valuation re-evaluation gains from portfolio shifts towards equity by residents. 3. Gains from the improvement in China's global influence and the confirmation of increased influence, leading to economic and valuation revaluation resonant gains. We continue to emphasize that as supply clears, the effectiveness of the framework with "policy bottom, market bottom, economic bottom" sequentially appearing in 2026 will be confirmed. The moment when China initiates a loose policy stance in 26 may be the start of the bull market 2.0. The direction of economic prosperity for the next year is evolving through the rotation trend in the fourth quarter The trade cycle expects a positive turnaround in the PPI; the energy storage and photovoltaic trade cycle expects the early emergence of a prosperity inflection point in 2026, providing medium-term fundamental support. Sector rotation will continue, with sectors that have taken a break recently such as the overseas and domestic AI industry chains, humanoid Siasun Robot & Automation, innovative drugs, and defense and military industry likely having opportunities for upward rotation. While an overall trend of "cutting high and buying low" is emerging, the direction with resilience is expected in the medium term with the anticipation of the PPI turning positive by 2026 and short-term price hikes. Similarly, within the technology sector, there is resilience with the expectation of supply clearance in 2026, and an early verification of the photovoltaic and energy storage sectors. In fact, since early September, there has been a trend of anticipating an improvement in 2026 economic prosperity. Currently, the long-term cost-effectiveness of power equipment is also approaching a low level, and the short-term cost-effectiveness of the price hike cycle is insufficient. Sector rotation trends may continue, and we continue to monitor: overseas AI computational power is still on the rise, domestic AI is making continuous progress, humanoid Siasun Robot & Automation is close to a breakthrough in the industry, the innovative drug sector has highlights for 2026, and the defense and military industry may see an order release period in the next two years. These directions may have opportunities for upward rotation at the end of the year and the beginning of the next year. Risk warning: Overseas economic recession surpassing expectations, domestic economic recovery falling short of expectations.