CITIC SEC: In terms of A-share market allocation, it is advised to continue the reassessment of pricing power in the resource/traditional manufacturing industries and the strategy of overseas expansion for companies.

CITIC SEC released a strategic research report stating that at the current moment, more attention should be paid to the opportunities in the resource/traditional manufacturing industries. The bank continues to favor leading companies in industries where China has a competitive advantage globally, telling the story of "supply inward, demand outward for profit," constantly enhancing pricing power globally, with a focus on industries such as chemicals, non-ferrous metals, and new energy. Going global for enterprises remains an important way to open up profit and market value space, transitioning from the positioning of A-shares in emerging markets to the positioning in mature markets globally is still a characteristic of the times. In the process, inevitable issues will arise with increased resonance frequency with overseas risk assets and economic environments, focusing on industries such as engineering machinery, innovative drugs, power equipment, and defense industry. From a perspective of high cutting and low viewing, rotating undisturbed varieties (cinemas, securities, aviation, liquor, hotels, games, etc.), and directly increasing holdings dividends (banks, thermal power, oil and petrochemicals) are also options. In addition, close attention should be paid to the policy changes of the year-end Central Political Bureau meeting and Economic Work Conference. The main points of CITIC SEC are as follows: The market is showing characteristics of a low volatility slow bull market, but the subjective improvement in the bullish sentiment is relatively limited. 1) The volatility of major broad-based indices has decreased, with maximum drawdown and Sharpe ratio better than in the past. Since 2010, the daily intraday volatility and daily intraday volatility of the Shanghai Composite Index and major broad-based indices are at their second-lowest levels since 2017. The maximum drawdown of the indices is also significantly lower than in the past, with the Shanghai Composite Index having a maximum annual drawdown of -9.7%, second only to 2014, 2017, and 2021. However, considering that this year the Shanghai Composite Index faced single-day declines of over -7% when facing retaliatory tariffs, while the other three years did not have unexpected black swan events, this year the Shanghai Composite is the least volatile year since the bull market started in 2010. In addition, the maximum drawdown for the CSI 500, CSI 1000 is -13.8%, -16.9%, significantly better than the historical average of -24.8%, -27.0% in the past 15 years, and the maximum drawdown of the STAR 50 this year is -18.0%, the lowest in history. From the perspective of Sharpe ratio, the Sharpe ratios of the Shanghai Composite Index, Shenzhen Composite Index, CSI 500, STAR 50, and Growth Enterprise Board Index are all above 1, and the Sharpe ratios of the SSE 300 and CSI 1000 are also around 0.9, historically high levels. 2) Subjective investment products have only slightly outperformed the WIND full A index since the beginning of the year, continuing to lag behind quantitative strategies. Looking at the performance of subjective investment products, according to CITIC SEC Research Department financial products team statistics, as of the end of October, the average return on subjective investment products was 23.3%, below the 26.4% of WIND full A, and far below the 35.2% of quantitative products. Since 2021, subjective strategies have been underperforming quantitative strategies for five consecutive years. Looking at the performance of active stock selection products in the public fund sector, the average return of the overall market stock selection product is 24.4%, only slightly better than the WIND full A, with performance lagging behind the average return of event-themed products at 32.4%, but generally lagging behind quantitative and index enhancement products. The product categories with the highest absolute returns are those heavily invested in cycles and technology, recording returns of 45.3% and 43.4%, respectively, but the average maximum drawdown of technology products is -20.7%, the largest among all strategies, while the average maximum drawdown of cyclical products is only -13.3%, similar to that of the overall market stock selection products, with significantly better experience than technology products. Industry-balanced overall market stock selection products still show mediocre performance this year. The bank surveyed 30 representative industry-balanced fund managers (with an average management tenure of over 10 years), as of the end of November, the average return of the 30 industry-balanced fund managers was 23.8%, basically in line with the +23.6% increase of the WIND full A, with only some excess returns before the Spring Festival and in September. This to some extent shows that the market's excess returns generated by stock selection are relatively limited, although the major broad-based indices have shown significant gains year-to-date, there are still more structural profit opportunities formed by the flow of liquidity between sectors. 3) Market timing is weakening, the performance gap between relative and absolute returns of subjective investment has reached a peak in recent years. From January to October this year, subjective investment products have underperformed public fund subjective products by 7.6 percentage points, the highest value since 2021. In fact, if we exclude the special years of explosive growth in public fund new products in 2019 and 2020, this is also the year since 2010 with the largest performance gap between private subjective investment and public subjective investment. Relative return products representing public subjective investments perform significantly better than absolute return products representing private subjective investments, which precisely illustrates two points: first, this year is an extreme structural market rotation, with limited effectiveness of balanced allocation, stock selection, and drawdown control; second, market timing is extremely difficult, and an excessive reaction to market factors can easily lead to ineffective position management. Configuration-type funds are increasing in wealth, but incremental funds with individual stock pricing capabilities are lacking 1) Configuration-type funds and quantitative pricing power continue to rise, while actively selecting type funds have limited growth. In this round of market trends, insurance funds, "fixed income +" products, and quantitative private equity funds have shown significant growth, becoming important sources of market increment. Instead of showing a decrease in deposits and an increase in equities, deposit migration has shown a transformation from traditional deposits and financial management to "fixed income +" and insurance product forms, where underlying demand is savings, seeking stable returns, but indirectly participating in the equity market with lower positions. These funds generally have characteristics such as strict drawdown control, early left-side layout, balanced sector allocation, and preference for niche sectors but have limited sensitivity to changes in fundamentals and individual stock differences. The issuance of new products by private quantitative funds has also maintained rapid growth, but they are also typically sensitive to quantity and price movements and market information while being insensitive to individual stock fundamentals and value evaluations. In contrast, the growth of actively selecting funds is very limited. As an example, in the public offering sector, the highest monthly issuance volume of actively managed equity products is only 31 billion yuan (in September), but after deducting existing redemptions, the actual net outflow is still about 48 billion yuan. The main sources of active funds leading to rapid one-way increase in high-brightness sectors in July and August are mainly due to the growth in financing (net increase of about 700 billion yuan in two months), with the net increase in funds provided by financing far exceeding the funds brought in by the issuance of active subjective products or net subscriptions. In fact, since September of last year, the two "steps up" in market index have been accompanied by an increase in the balance of financing, and once the growth of financing balance stalls, the market will revert to a pattern of shrinking volume, low volatility, and oscillating rotation. 2) Subjective investors tend to be cautious about individual stocks and sectors, adopting a strategy of "lying in wait, striking, and retreating." The continuous inflow of configuration funds has effectively smoothed the overall market and broad-based index volatility, presenting a relatively healthy low-volatility market; however, as quantitative strategy sizes continue to expand and public active and passive products become more instrumentalized, sector and industry-level volatility increases. When the main incremental funds in the market are large, have strict drawdown controls, and generally lack individual stock pricing capabilities, such as configuration and instrumental funds, the "right side" or high points become core factors restricting buying, while fundamental and value assessments take a back seat. This structural change in funds leads to a typical phenomenon in the market: even stocks that are not significantly overvalued can experience sharp drawdowns during pullbacks due to the lack of active support from funds with individual stock pricing capabilities when their stock prices are relatively high. For subjective investment strategies, in an environment of overall low volatility in the index, sharp drawdowns in holdings imply that portfolio performance may lag behind the index and quantitative strategies, affecting client holding experiences and the stability of the liability side. To avoid such drawdowns, strict valuation and safety margin requirements must be adhered to at every entry point or bottoming process. In addition, with the participation of instrumental products and quantitative strategies, the life cycle of structural market trends is significantly compressed, often quickly consuming market expectations in the short term. This means that to fully capture a market trend, it is necessary to build positions early at the bottom, endure the quiet stages on the left side, wait for consensus formation on the right side, and swiftly realize profits at the peak of the trend. This "lying in wait, striking, and retreating" strategy is gradually becoming the mainstream strategy to adapt to the new market environment. However, this has led to an counterintuitive effect where, in a low-volatility slow bull market, the risk appetite of subjective investors has not systematically increased, but may become more conservative. Breaking the stalemate can only come from drastic fundamental changes, this year is about foreign demand and going global, in the future it may still require changes in domestic demand to open up the market to new heights Given the liquidity situation mentioned above, expecting a rapid increase in investor risk appetite in the short term is unrealistic. Perhaps at the end of the year and the beginning of next year, some funds that realized profits earlier may return, but without significant changes in fundamentals, even to mobilize this active capital inflow, stocks need to demonstrate stronger safety margins. So far this year, the significant progress in domestic technology, the revenue and profits contributed by Chinese companies going global has been beyond expectations, as well as the evolution of the China-US landscape. These unexpected changes have driven the market to a higher level in July and August, just as last year's "9.24" market started with unexpected policy changes and swiftly boosted the index through financing. However, looking forward to 2026, the logic of autonomous technology, Chinese companies going global, and globalization, and stable China-US relations can only be seen as a continuation and extension of the current situation. Growth elasticity can only be found at the operational level within companies, not through macro-narrative changes. From this perspective, the bank anticipates more returns from the growth in corporate performance and perhaps also expects the grand narrative and valuation reshaping that the market brings about the consensus on global pricing power in Chinese manufacturing; however, a valuation expansion driven by narratives without major landmark events or sustained subjective capital support does not have high credibility. Currently, producing clues indicating drastic changes exceeding market expectations in fundamentals depends on significant changes in domestic demand-related policies, although the market has very little expectation for this. Foreign demand can only continue the existing structure, while domestic demand can open up new horizons. Without unexpected changes, the spring frenzy that the market may expect is only a continuation of the current logic and structure, with limited potential. Risk Factors Escalation of friction between China and the US in the technology, trade, and financial sectors; inadequacy in the implementation of domestic policies or economic recovery compared to expectations; unexpectedly tight macro liquidity domestically and internationally; further escalation of conflicts in regions such as Russia, Ukraine, and the Middle East; inadequate digestion of real estate inventory in China.