Huatai strategy: Market adjustment brewing layout opportunities.

Huatai's research report points out that market volatility has increased, and it is recommended to pay attention to opportunities in the over-adjusted sectors. The recent increase in volatility in the domestic stock market is due to the "lack of follow-up" in the technology and cyclical narratives, as well as marginal tightening of liquidity, which could further amplify volatility due to leverage positions and emotional trading. The main theme of asset revaluation in China and the demand for core assets by funds remain unchanged, and the current adjustments are aimed at creating a healthier environment for future performance. Due to the recent emotional trading, some high-quality assets may be "overlooked," creating opportunities for positioning. Huatai points out that the current adjustment in Hong Kong stocks is earlier and deeper than in A-shares, and some industries at current levels are starting to show cost-effectiveness. 1) Short-term risk aversion and high-low switches may continue, and it is recommended to focus on consumer services, construction, textiles and apparel, and home appliances that have ranked lower in performance so far this year. 2) In the third round of revaluation since August, some industries have seen limited gains but larger recent declines, increasing the probability of being "overlooked," with a focus on electronics, pharmaceuticals, automobiles, and light manufacturing. 3) With the improvement in liquidity environment starting in December, there is still room for revaluation in Hong Kong's technology sector, and a balanced allocation is recommended. Key points: Trigger: Narrative of "lack of follow-up," tight liquidity Narrative DRIVE of "lack of follow-up": The AI narrative-driven market volatility has caused a risk-off sentiment in global markets and a general retracement of AI-related assets. Since the end of October, top tech companies such as Tesla, Amazon, NVIDIA, and Meta have seen declines of 13.3%, 11.1%, 10.8%, and 9.1%, respectively, while the Hang Seng Technology Index, ChiNext Index, Nikkei 225, and Nasdaq have seen declines of 8.7%, 8.4%, 7.2%, and 6.9%. However, the expected follow-up economic data as the next DRIVE has not shown significant improvement. Sales area and volume of new homes in October saw year-on-year declines widened to 18.8% and 24.3%, respectively, and industrial added value, investment, and consumption in China have all slowed to varying degrees. The market is currently in a period where there are no catalysts or trading themes. Recent tightening of liquidity environment: 1) Decline in trading activity by year-end. Daily trading volume in A-shares has fallen to below 2 trillion yuan recently, significantly lower than the central point in Q3, and turnover has fallen from around 5% in Q3 to about 4% currently. Weekly turnover in Hong Kong stocks has fallen to 9% (average of 10.8% over the past quarter), and US stock turnover has also shrunk. 2) Momentum of southbound fund inflows has slowed down. Since October, the daily average net inflow of southbound funds has decreased from 84.1 billion in September to around 57.5 billion Hong Kong dollars. The high positions of domestic institutions in Hong Kong stocks (Q3 domestic active equity mutual funds' Hong Kong stock positions are near historical highs of 28.2%) and the presence of floating profits are the main reasons, along with seasonal factors. Historically, the average net inflow of southbound funds in December has narrowed by about 25% compared to September. 3) US dollar liquidity constraints affecting overseas asset performance have also had a transmission effect. In terms of quantity, the scale of US interbank reserves/commercial bank total assets has significantly declined, falling below the critical threshold value of modest reserve adequacy of 12% in November. Price-wise, the probability of a rate cut by the FOMC in December has dropped from near 100% in mid-October to only 30% currently. 4) Increasing supply pressure. The amount of potential unlocking in Hong Kong stocks has increased rapidly towards the end of the year, with a potential unlocking amount of about 120 billion Hong Kong dollars in December, compared to unlocking amounts of about 12.1 billion, 62.4 billion, and 70.1 billion in September, October, and November, respectively. Combined with the generally high leverage positions in the previous market, the disturbances mentioned above may trigger a technical pullback. 1) As of November 20, the balance of margin financing in A-shares reached 2.43 trillion yuan, remaining at a relatively high level during the year. 2) Hong Kong stock put-to-call ratios have increased by about 15% from the same period in October. 3) As of October, the balance of margin financing in US stocks/market capitalization reached 1.7%, rising faster from 1.4% at the beginning of the year. Future judgment: Adjustment brings positioning opportunities The recent market adjustment is mainly due to changes in funds, technology, emotions, and expectations, with little change in fundamental factors. Therefore, short-term trends and operational judgments still need to start from the above factors. Based on the support levels of A-shares and the sentiment indicators of Hong Kong stocks, it is judged that the current decline is "brewing" buying opportunities. 1) The profits of listed companies in Hong Kong and A-shares have either confirmed a turning point or are about to confirm it, providing fundamental support. 2) The renminbi exchange rate entering an appreciation channel and the relative stability in Sino-US relations may lead to an increase in risk appetite or centripetal force. 3) The performance of the domestic real estate market and US stocks can be seen as either bad news or good news; if they continue to weaken, they could trigger more policy expectations. 1) The decline in A-shares is starting to feel spacious, and the pressure on the supply side of funds is expected to improve. From a quantitative perspective, considering the guidance of key macroeconomic variables for the "reasonable" valuation level of A-shares, based on our predictive model of A-share valuation in the "Rebalancing Style" on November 3, assuming a year-on-year decline of 8.1% in the sales area of domestic commercial housing by the end of 2025 ("Reassessing China: Towards Depth" on November 3) and the mid-range of the USD index at the end of the year is about 98.4 ("Imbalanced Economy 'Reaccelerating'" on November 3), the model calculates that the "reasonable" forward PE TTM median of the Shanghai Composite Index is about 13.6x under the current combination of macro variables. The funding environment has already cooled down somewhat before (the "Resurgence of Private Equity Funds in Securities" on November 18), but there are a significant number of market unlocks this week, which could disrupt the funding environment. After the high point of unlocks passes and signals such as the resurgence of private equity in securities funds appear, the funding environment may see improvement. 2) As of the close of yesterday, the sentiment index of Hong Kong stocks was at 36.4, still in the pessimistic range. Data for today are not yet available, but considering today's market pullback and southward outflows, the index may continue to decline. From the operational signals indicated by this index, entering the pessimistic range means that the upside and downside risks are more balanced; falling below 30 would formally trigger a buy signal. Therefore, Hong Kong stocks are entering the positioning zone, and contrarian investors can gradually take positions. For those with higher win rate requirements or right-leaning funds, it may be advisable to wait for next week when core Hong Kong companies such as Alibaba and Meituan release financial reports and the dense unlocking period ends. Looking back, the last time this index triggered a signal was on October 2, entering the greed range after breaking through 70, triggering a sell signal, and successfully warning investors of overheated sentiment, indicating that volatility may rise after the holiday ends. Which industries have placement opportunities? In the long run, the main themes of asset revaluation in China have not changed, and the demand for core assets by funds remains unchanged; it's just that with the increased volatility in global assets, the allocation strategy needs to shift from the previous emphasis on speculative thinking during the general rise to focusing on distinguishing between the real and fake. For A-shares, in a high-volatility environment, considerations should be given to enhancing safety margins, which may primarily come from three points: 1) safety margins from crowding, screening for varieties with low gains since the National Day holiday, low valuation percentiles and low chip crowding, and recent marginal improvements in prosperity, focusing on condiment fermentation, leisure food, poultry farming, communications services, and securities sectors; 2) safety margins from fundamentals, screening for varieties that are improving in supply and demand until the third quarter report and negatively filtering out sectors with excessively rapid recent gains, focusing on textiles and manufacturing, commercial vehicles, general equipment, and rare metals; and 3) safety margins from asset properties, with a decline in market risk appetite suggesting that high dividend-earning assets are worth considering; signals based on high dividend-earning sectors' own trends, interbank market turnover, and term spreads are still sending bullish signals, suggesting continued attention to cyclical dividends (coal, chemicals, steel, etc.), and some potential dividend sectors (railways, highways, food processing, environmental protection, building materials, etc.). In addition, for those interested in making high-low cuts within the technology growth sector, it is recommended to focus on sectors such as semiconductors and innovative pharmaceuticals. Hong Kong stocks started their adjustment earlier than A-shares and saw deeper declines, with some industries at current positions beginning to show cost-effectiveness. 1) Short-term risk aversion and high-low switches may continue, and it is recommended to focus on consumer services, construction, textiles and apparel, and home appliances that have ranked lower in performance so far this year. 2) In the third round of revaluation since August, some industries have seen limited gains but larger recent declines, increasing the probability of being "overlooked," with a focus on electronics, pharmaceuticals, automobiles, and light manufacturing. 3) With the improvement in liquidity environment starting in December, there is still room for revaluation in Hong Kong's technology sector, and a balanced allocation is recommended. Risk warning: Geopolitical risks, AI development falling short of expectations. This article is compiled from a research report published by Huatai Research; GMTEight Editor: Wenwen.