CITIC SEC: Asian stock market liquidity improving, geopolitical disruptions and AI not a concern, A-share market breakthrough relies on fundamentals exceeding expectations.

CITIC SEC released a research report stating that under the triple factors of improving liquidity, geopolitical disturbances, and the short-term absence of an AI bubble, Asian stock markets need to focus more on the structural allocation opportunities brought about by changes in fundamental clues. Expectations of a rate cut by the Fed in December have eased macro pressures in the Asian markets, while confrontations between China and Japan, conflicts between Russia and Ukraine, etc., under the high running of the global GPR index, constitute temporary disturbances. The cash flow support and supply chain bottleneck in the AI field make it difficult for extreme bubbles to burst. The specific core views of the market are as follows. 1) A-shares: Super breakthroughs in fundamentals are needed, and it is recommended to focus on the pricing power estimation and the main theme of companies going abroad in the resources/traditional manufacturing industries, and pay attention to low-crowded varieties and dividend targets. 2) Hong Kong stocks: Benefiting from internal and external catalysts, it is expected to achieve a "Davis Double Play", and it is recommended to focus on five major directions including technology, healthcare, and natural resources. Key points from CITIC SEC: Asian liquidity risks have eased, geopolitical risks remain high, and the AI bubble is difficult to burst in the short term. Dovish statements from the President of the New York Fed, Williams, and the FOMC's dovish committee members forming a key support as of December 1st, CME Fed Watch data shows that the probability of a rate cut in December has risen to 87%. In addition, key inflation data disclosures postponed and strengthened policy thresholds are asymmetrical, it is expected that a 25bps rate cut in December would reduce the cost of financing, decrease annual interest expenses by 100-200 billion US dollars, and with supply chain bottlenecks still existing, the rebound in spending on semiconductor factory equipment is far lower than historical cycles. Companies like TSMC and SK Hynix have clear medium-term growth expectations, and talk of extreme bubbles bursting lacks actual support in the short term. Asian markets: Focus on changes in fundamental clues. A-shares: Market breakthroughs depend on exceeding expectations in fundamentals, and focus on pricing power estimation and companies going abroad. External improvements in demand and Chinese companies going abroad are the core support, while long-term market opening still requires policy catalysts to exceed expectations. Under the current liquidity situation, it is difficult for investors' risk appetite to improve rapidly, and fund inflows require stronger safety margins or breakthroughs in fundamentals; looking ahead to 2026, the logic of self-reliant technology, Chinese companies going abroad and globalization, and stable China-US relations are extensions of the current situation, and growth resilience will depend on internal business operations and the formation of a global pricing power consensus for Chinese manufacturing. The macro narrative-driven valuation expansion lacks high confidence support, and unexpected clues still rely on the implementation of domestic demand-related policies. It is recommended to continue focusing on resources/traditional manufacturing industries (chemicals, metals, new energy, etc.) with a global pricing power estimation and companies going abroad (engineering machinery, innovative medicine, etc.) as the two main themes, while also paying attention to rotation in low-crowded varieties such as cinemas, securities, and dividend targets like banks and thermal power plants, and closely monitoring the policy direction of year-end political meetings and economic work conferences. Hong Kong stocks: Under internal and external catalysts, Hong Kong stocks will achieve a "Davis Double Play". In 2026, Hong Kong stocks are expected to benefit from internal catalyzing effects of the "15th Five-Year Plan" and external "fiscal + monetary" easing measures from major economies. From a fundamental perspective, consensus expectations show that the growth rate of Hong Kong stocks' earnings will bottom out in 2025, with the Hang Seng Index expected to have revenue and profit growth rates of 3.6% and 3.5% in 2025, and projections of 5.5% and 9.2% in 2026. It is also expected to stabilize at a high level in 2027; as the macro economy improves, subsequent earnings of Hong Kong stocks will shift from "earnings recovery" to "revenue expansion", forming a sustainable trend of revenue and profit resonance. In terms of liquidity, the "profit effect" in the Chinese stock market has become more significant this year, and the phenomenon of residents "moving deposits" may continue. Considering the current underweight allocation of mainland investors to Hong Kong stocks, it is predicted that southbound capital will continue to increase allocations to Hong Kong stocks, especially as trends of retail investors flowing into Hong Kong stocks through ETF channels are expected to continue. Hong Kong stocks not only have a complete domestic AI industry chain company (including infrastructure, software and hardware, applications), but also benefit from more and more high-quality leading A-share companies listing in Hong Kong. It is expected that Hong Kong stocks will benefit from the overflow of liquidity from domestic and foreign markets and the continued narrative of AI. With the rebound in Hong Kong stocks' fundamentals and significant valuation discounts, it is predicted that the Hong Kong stock market will see a second round of valuation repair in 2026 and further recovery in earnings. It is recommended for investors to focus on five major long-term directions: 1) Technology industry, including AI-related subdivisions, consumer electronics, etc.; 2) Large healthcare sector, especially biotechnology; 3) Commodities benefiting from overseas inflation expectations and de-dollarization, including metals and rare earths; 4) The relatively lagging and undervalued essential consumer sectors are expected to see valuation repairs as the domestic economy continues to recover; 5) The paper and aviation sectors benefiting from RMB appreciation. Korean stock market: Fundamental support, policy support, and liquidity are expected to drive further evaluation of the Korean stock market. Since 2025, the Korean Composite Index (Kospi) has risen by 60%, marking one of the best annual performances in the Korean stock market since 1980. This strong momentum is expected to continue in 2026, mainly based on three key reasons: first, the strong fundamentals of major export companies will further raise market expectations; second, the Korean government is continuously introducing relevant policies to support the stock market; third, various funds, including foreign investors, domestic institutions, and retail investors, are expected to increase their buying of the Korean stock market in 2026. Currently, the P/B ratio of the Korean Composite Index is around 1.3 times, with a net asset return rate of about 12%, while the average P/B ratio for emerging markets (EM) is 1.9 times and a net asset return rate of 14%, indicating that the valuation of the Korean stock market is still attractive. A positive attitude towards the Korean market should be maintained. Risks faced by the Korean stock market include policy implementation falling short of expectations, a reversal in the export cycle, but at least in the first half of 2026, these risks are unlikely to have a major impact on the market. It is recommended to focus on industries such as semiconductors/artificial intelligence, finance, shipbuilding, and nuclear energy. Indian stock market: With potential for catch-up growth, the focus should be on consumption and IT sectors under a differentiated structure of fundamentals. Currently, the forward P/E ratio of the Nifty index for the next 12 months is 20.8 times, still at a historically high level, but relatively close to a three-year low in valuation premium compared to China and other emerging markets, indicating that the current global bull market backdrop and neutral investor sentiment provide a solid foundation for stock market catch-up growth. Since 2025, foreign capital inflow has amounted to $8.7 billion, although the divergence in capital flows between the bond market and the stock market, and the depreciation of the Rupee, have dampened short-term allocation enthusiasm, under the Fed rate cut cycle, foreign capital inflow is expected to accelerate, with no signs of systematic de-allocation. Fundamentals show a clear structural feature, with large and medium-sized companies showing impressive performance in the second quarter of the 2026 financial year, contributing mainly to profit growth in the energy and materials sectors. Forecasts for EPS in the 2026/27 financial year have been revised upwards, while profit forecasts for small-cap stocks have been revised downwards, with some industries underperforming expectations; expectations for the signing of trade agreements between India and the US/EU are rising, GDP exceeding expectations continuously, policy support, etc., easing macro risks and further strengthening fundamental stability. In terms of investment recommendations, with monetary policy expected to remain accommodative, it is advisable to prioritize the allocation of interest-sensitive companies and consumer sectors, and based on improved India-US relations, take a contrarian bullish view on the IT services sector. Japanese stock market: Governance dividends attract increased foreign allocations, profit recovery coupled with private equity positioning windows expected to open. Earnings from the component stocks of the TOPIX index in the third quarter of 2025 exceeded expectations, with non-financial companies operating profit growing by 2.3% year-on-year, driving a 3.2% increase in net profit guidance for the 2025-2026 financial year, depending mainly on growth in the automotive and banking sectors for the 2026-2027 financial year. The global PMI rebound and improving domestic economy provide macro support; improvement in corporate governance is the core logic for increased foreign inflows, with overseas net purchases amounting to $91 billion since April this year, reaching a record high for a single month in April 2025, current foreign holdings are still below peak levels, along with the safe-haven properties and governance dividends, there is still room for allocation. However, industry diversification and cash hoarding that restrict ROE improvement, a widening gap with European and American companies, and M&A at record levels as well as share buybacks are key to improvement. Japan has become a focus for global private equity, with giants like Bain Capital heavily invested, highlighting market opportunities. Investment recommendations focus on four main directions: industries with market share dispersion that still have integration space, asset revaluation targets with low valuation and abundant cash, value stocks with low volatility and high ROE, and governance optimization opportunities under the mother-son company listing structure. Southeast Asian stock markets: Economy showing signs of recovery, focus on structural industry opportunities. 1) Malaysian stock market: Bullish on investment opportunities in AI-related technology, banks, and electric companies related to the data center industry chain. The IMF has raised its 2025 GDP growth forecast for Malaysia to 4.8%, with third-quarter GDP growing by 5.2% year-on-year, creating a good macro environment for corporate profits, especially in the banking sector. Overall, bullish on investment opportunities in AI-related technology, banks, new energy vehicles, and data center industry chain-related companies. 2) Indonesian stock market: Has long-term investment value, focus on economic fundamentals and currency policy linkage. Indonesia's GDP in the third quarter grew by 5.04% year-on-year, slightly exceeding expectations. Investment in the Indonesian stock market needs to focus on the impact of the Rupiah exchange rate fluctuations, the pace of GDP growth recovery, and the transmission effects of policies on the market. It is advisable to focus on industries such as consumer goods, metals and mining, and new energy vehicles. 3) Thai stock market: Economy showing signs of recovery, focus on structural industry opportunities. The Thai economy significantly weakened in the third quarter of 2025, with GDP growing by 1.2% year-on-year, and a seasonally adjusted decline of 0.6% over the previous quarter. Priority should be given to investments in consumer and tourism-related sectors; although consumption is currently weak and tourism sector growth is slowing, both are expected to see quarterly recovery, and may benefit from the overflow effect of Chinese tourism warnings against Japan. Risk factors: - Escalation of tensions between China and the US in technology, trade, and finance. - Unforeseen tightening of liquidity at home and abroad. - Further escalation of conflicts in China-Japan, Russia-Ukraine, and the Middle East. - Economic fluctuations in the US and the Asia-Pacific region. - Risks related to the burst of the AI bubble narrative. - Domestic policy measures, their implementation effects, or economic recovery falling short of expectations. - Policies and their implementation effects falling short of expectations in various Asian economies.