Soochow: How do you view the recent market adjustments?

Soochow released a research report stating that since the adjustment of A-shares started on November 14th, the Shanghai Composite Index has fallen by 4.8%. The intensity of structural adjustment is greater than that of the index, and the sectors that had the highest gains in the previous period experienced more significant corrections. The bank believes that this round of adjustment is the result of the combined influence of external factors and internal pressures. Looking ahead, considering that the index's retracement in this round is at a moderately high level compared to previous bull markets during the same period, the space for further downward movement after the recent continuous adjustments is relatively limited. The bank tends to judge that the market correction after November will end and anticipates an early window for positioning for the spring market. In terms of specific sector allocation, if the market opens the spring market in December, the main focus of funds is expected to shift towards AI applications. Key points: Since the adjustment of A-shares started on November 14th, the Shanghai Composite Index has fallen by 4.8%, with the intensity of structural adjustment being greater than that of the index. Sectors such as the Science and Technology Innovation Index, the Growth Enterprise Market Index, as well as the non-ferrous metals and electronics industry indices, which had gains of over 50% in Q1-3, all experienced declines of over 8%. We believe that this round of adjustment is the result of the combined influence of external factors and internal pressures: Firstly, under global liquidity tightening, A-shares find it difficult to "stand alone" Recent multiple factors have been at play, leading to a tightening of global liquidity. Previously, the tightening pattern was mainly affected by the US federal government shutdown, with the TGA account absorbing a large amount of market liquidity, which had a more direct impact on the US mainland and led to the stock market peaking and then falling first. With the reopening of the US government, this liquidity pressure has significantly eased. The current core driver of liquidity tightening is the high likelihood of the US Federal Reserve not cutting interest rates in December: 1. Hawkish statements from the Fed: Several officials have recently made hawkish remarks, indicating that although overall employment is weak, it has not deteriorated significantly, and there is no urgent need to cut interest rates in December, which suppresses expectations of easing; 2. Japanese policy disturbances: Hiroshi Kato plans to introduce a large-scale fiscal stimulus plan, leading to an increase in Japanese yields and unwinding carry trades, further tightening global US dollar liquidity; 3. Mixed September non-farm payrolls data: While the number of new jobs exceeded expectations, the revision of previous values and the rise in the unemployment rate did not signal a clear need for rate cuts. Since non-farm payrolls and CPI data for October will not be released, and the release window for November data is later than the interest rate meeting in December, the September non-farm payrolls become the "only important indicator available for reference before the December interest rate meeting". In the context of the somewhat neutral performance of this data, market expectations for a rate cut in December have slightly increased, but the probability of not cutting rates still remains at about 2/3, maintaining a dominant position. For various reasons, the pressure of tightening liquidity has led to a general pullback in global assets in recent times, and the A-share market finds it difficult to "stand alone." Secondly, anxiety about the overseas "AI bubble," the decline of the technology sector leading to the A-share As major North American companies accelerate their AI capital expenditures more aggressively and the economic and profitability effects of AI have not been fully demonstrated, the market has become more cautious in assessing the transmission of capital spending to EPS, starting to focus on the risk of the "AI bubble." On this basis, the mode of "technology giants engaging in a competition in AI calculation power and concentrating capital expenditures to drive the calculation power market" in the past two years, which could smoothly boost the calculation power market, may change. In the future, the continuous development of the AI narrative may not only demand vigorous calculation power but also require clearer signals of AI value creation. The adjustment in overseas technology sectors has had an impact on the A-share market. Although NVIDIA's performance and guidance confirmed the resilience of orders, it also reflected the competitive landscape of technology giants increasing their investment in calculation power to seize the technological high ground, which failed to effectively alleviate market concerns. Recently, several institutions have reduced their holdings of NVIDIA, with SoftBank liquidating, Bridgewater reducing holdings by nearly 70%, and Barclays, UBS, and other major banks also joining the ranks of reductions, leading to a 18.5% pullback from the high levels. On the A-share side, some core heavyweight stocks in the innovation and entrepreneurship board are in the midstream of the global technology industry chain, or belong to the supporting links of the N-chain, influenced by the U.S. stock market; and some individual stocks have seen their valuation rise previously based on the global AI narrative, but as the valuation range in the global calculation power sector begins to decline, it becomes difficult to sustain this type of "story premium." Thirdly, in history, the Q4 "settlement season" game in A-shares is normal From the current extent of index adjustment, it basically conforms to the historical pattern of retracement before the "spring market frenzy" in bull markets. Influenced by year-end seasonal factors, the market often experiences a phased adjustment in the fourth quarter and starts the spring market either at the end of the year or in the early part of the next year. This adjustment process essentially involves closing out profits for the year and preparing for the next year's market. We have analyzed the maximum drawdown of the Wind A-share index before the start of the spring market frenzy in historical rounds, and found that even in the middle of a bull market (such as the end of 2014, 2016, 2019, and 2020), the maximum drawdown during the period usually reached or exceeded 5%. This year, from October to the present, the maximum drawdown of the Wind A-share index has already reached 6.5%, which places it at a moderately high level compared to the drawdown levels in previous bull markets during the same period. Especially this year, the structural characteristics of the market are prominent, and the demand for short-term position rebalancing is more pronounced. The concentration of institutions on core mainstream varieties this year shows some similarity to the behavior in 2021: in terms of actively held equities, the position in the electronics sector increased from 18% in Q4 2024 to 26% in Q3 2025, an 8 percentage point increase over three quarters. Looking back at 2021, there was also a trend of accelerating concentrations in the electric power equipment sector, with positions increasing from 9% in Q4 2020 to 18% in Q3 2021, also rising by over 8% over three quarters. After entering Q4 2021, the market showed a clear shift between highs and lows. On one hand, weak economic data suppressed market sentiment; on the other hand, high traffic in hot sectors such as electric power equipment led to a significant pullback for industries such as coal, steel, and other sectors with significant gains in the current quarter, resulting in a 0.6 percentage point drop in electric power equipment positions. Funds then shifted towards consumer, real estate chain, and low position directions such as green electricity in new energy, which is similar to this year's structural adjustments. What to expect next? Considering that the retracement of the index in this round is at a moderately high level compared to previous bull markets during the same period, the space for further downward movement after the recent continuous corrections is relatively limited. We maintain the view from the previous weekly report "Rhythm and Layout of the Spring Market," tending to judge that the market correction after November will end, and we will see an early window for positioning for the spring market. On one hand, the logic of liquidity at the end of the year and beginning of the year remains solid. Overseas, if the market is fully pricing in the expectation of "no rate cut" in December and the US dollar rebounds sharply, it may not be a bad thing for the subsequent market dynamics. Looking at the domestic situation, with the shift in economic growth engines, the traditional logic of the beginning of the year being characterized by "broad credit-eager expectations" has somewhat weakened, but the macro liquidity towards the end of the year is likely to remain reasonably provided, creating a favorable environment for fund inflows to the market. In the context of liquidity dominance, market fund dynamics may lead to an early development of the spring market. On the other hand, 2026 marks the beginning year of the "15th Five-Year Plan," with the first half of the year expected to further strengthen the policy theme centered on technological innovation and modern industrial system. The plan lists "greatly improving the level of technological self-reliance and self-strengthening" as a major goal, and places "building a modern industrial system" at the forefront of key tasks, indicating that the country's strategy is shifting from technological breakthroughs to the cultivation of industrial ecosystems. Against this backdrop, sectors closely related to new productive forces such as technological manufacturing, advanced production capacity, etc., are expected to become core areas of focus for market allocation in the first half of next year under the catalyst of policy expectations. In terms of specific sector allocation, if the market opens the spring market in December, we believe that the main focus of funds will shift towards AI applications. Referring to the market performance after rebalancing in the fourth quarter of 2021, the overall trend in the first half of 2022 continued the previous main logic centered on the energy revolution. Despite being suppressed by factors such as the Russia-Ukraine conflict, the Federal Reserve's policy tightening, and flat financial data expectations, the spring market frenzy in 2022 was relatively weak, but in the first half of the year, electric power equipment, automobiles, and coal remained the leading sectors. Institutional concentration on electric power equipment increased significantly, reaching a peak of 20.4% in Q2 2022. We predict that in this round of spring market frenzy driven by liquidity, the core trading logic will continue to revolve around the diffusion of the AI industry trend, with low potential for continuous market activity in cyclical sectors such as the real estate chain. Specific recommendations focus on two main directions: first, the global technology industry trend represented by AI applications, including downstream applications such as AI + medicine, AI on the terminal side, humanoid robots, automation, intelligent driving, AI applications, and agents; second, technology innovation and advanced manufacturing sectors closely related to the "15th Five-Year Plan" and benefiting from domestic policy support, such as hydrogen energy, nuclear energy, quantum computing, commercial aerospace, etc. Risk warning: Economic recovery pace falls short of expectations; policy advancement falls short of expectations; geopolitical risks; overseas interest rate reduction pace and uncertainty in the Trump administration's tariff policies, etc.