Guotai Haitong: Market risks have been greatly released and we are optimistic about the prospects of the Chinese market.

Guotai Haitong released a research report stating that as the year-end approaches, some investors have high motivations to protect their returns and reduce their positions. The cooling of the Fed interest rate cut expectations, increased volatility in the US stock market, and the absence of internal policies have intertwined to drive trading volatility and weaken confidence. Additionally, the slowdown in the filing of equity products has led to insufficient market supply, objectively impacting the microstructure of the stock market negatively. Unlike the current cautious consensus, Guotai Haitong is optimistic about the prospects of the Chinese market and believes that the stock index has entered the hitting zone. The period from December to February is a window of resonance for Chinese policies, liquidity, and fundamentals moving upward, and after market adjustments, the strategy will gradually increase its offensive positions. Taking the lead and increasing holdings in the Chinese market, the report is bullish on technology, securities, and consumption sectors. Key points from Guotai Haitong: Overall situation assessment: Market risks have been significantly released, and the Chinese stock market has entered the hitting zone. Recent developments show rapid weakening of the Chinese stock market and panic selling on some days, with a prevailing pessimistic sentiment in the market. The reasons for this include the high motivations of some investors to protect their returns and reduce their positions as the year-end approaches, the cooling expectations of the Fed interest rate cut, increased volatility in the US stock market, and the absence of internal policies have contributed to trading volatility and weak confidence. Additionally, the slowdown in the approval of equity products has led to insufficient incremental supply in the market, negatively impacting the microstructure of the stock market. Unlike the current cautious consensus, Guotai Haitong's strategy is bullish on the Chinese market, believing that the stock index has entered the hitting zone. Despite the 5% retracement of the Shanghai Composite Index, the ChiNext Index has fallen by 12%, the Sci-Tech 50 Index by nearly 20%, and the Hang Seng Technology Index by 22%. The adjustment time and space are similar to the mainline retracements in past bull markets, showing that the panic selling has released trading risks. There is not much discussion in the market regarding the end-of-year Economic Work Conference, but considering the current weakening growth reality and the importance of the growth speed at the beginning of the 15th Five-Year Plan, there is a possibility of creating new expectations as the policy window approaches. The merger of CICC signifies the acceleration of capital market reforms, and the rapid approval of 16 hard tech ETFs on the 21st implies the regulatory commitment to stabilize the market. Opportunities often arise in panic, and the report believes that the Chinese stock market will gradually stabilize and enter into a year-end offensive, leaving ample room for upside. The Chinese capital market is in a period of great development, and there is still ample room for the stock index to rise. Most investors still hold bearish thinking rather than bullish thinking and hold on to cyclic frameworks rather than transformation frameworks. It should be noted that the factors that have caused the undervaluation of the stock market in the past have dissipated (concerns about US-China conflict, declining economic visibility, asset-liability contraction), and the increasing confidence towards 2025, internal stability, declining tail risks, and stabilizing RMB assets imply that the Chinese capital market is in a period of rising valuation and great development, leaving significant room for market gains. Based on this, the weakening of expectations in traditional sectors and the dissipation of high-yield/low-risk financial assets have led to a historic break in the "pegging" mindset in China, resulting in a surge in asset management demands and an expected increase in the scale of incremental market entry by 2026 beyond consensus. Furthermore, driving capital market reforms is essential, as the reform of basic institutions and the construction of stable market mechanisms help enhance society's understanding of the investability and risk of the capital market. In terms of investment, the reduction of tail risks in traditional sectors (improved operational cash flow, reduced maturity debt, stabilization of revenue and inventory) and the expansion of emerging sectors (expansion of high-tech industries, global expansion of manufacturing) provide clues for improvement. The report expects non-financial stocks on the A-share market to achieve double-digit profit growth for the first time in 2026, reaching 10.6%. Taking the initiative and preparing for the year-end market: Bullish on technology, securities, and consumption. The fluctuations in the US stock market driven by AI and Google reaching new highs appear to be structural shifts rather than the end of trends. China will also experience a resonant period of policy, liquidity, and fundamentals from December to February, gradually increasing the offensive positions in the portfolio after market adjustments. The report is bullish on: 1) Technological growth. The advancement of AI models and accelerated applications have resulted in a shortage of domestic computing infrastructure. Recommendations include Hong Kong-listed internet/media/computer/computing power stocks, as well as expansion in manufacturing: power equipment/mechanical equipment. 2) Big finance: Deepening capital market reforms are expected to rejuvenate the market sentiment, with mid-term dividend increases in banks, which may lead to a style shift in December. Recommendations include securities/insurance. 3) Consumption: After three years of adjustment, valuations and positions are low, with reduced macro tail risks and potential incremental policies, structural opportunities will emerge. Recommended are consumer stocks with low prices, low inventory, and improved sales: food/beverage/agriculture, forestry, animal husbandry, fishery/hotels/duty-free, etc. Theme recommendations: 1) AI applications: Google/Alibaba breaking the application silence, bullish on Hong Kong-listed internet/global smart computing infrastructure; 2) Siasun Robot&Automation: Upspeed in releases by Yushu/Neusoft, bullish on key components and new materials; 3) Domestic consumption: Bullish on sports events/ice and snow tourism; 4) Xinjiang infrastructure: Bullish on clean energy/power grid/wind energy storage investments in Xinjiang. Risk warning: Overseas economic downturn exceeds expectations, global geopolitical uncertainties.