Guotai Haitong: Chinese stock market is expected to hit a major bottom and turning point.

Guotai Haitong released a research report stating that the recent market adjustment has two reasons: first, inflation risks and expectations of financial tightening; second, loosening of the micro-trading structure in the stock market. The impact of micro-trading will not last long, and blindly selling off at the current position is not advisable. The Chinese stock market is expected to see a significant bottom and rebound zone. Although inflation risks are still looming, it should be noted that Chinese assets have both improved technological productivity and a relatively stable security situation, economic society, and capital markets. China's diverse energy reserves and diversified growth, even from a global perspective, are scarce. China's supportive loose stance and diversified reserves/diversified growth will help break the risk narrative faster. Guotai Haitong's main points are as follows: The Chinese stock market is expected to see a significant bottom and rebound zone, stability is the backdrop, and confidence is key. While the Shanghai Composite Index has broken key levels, the Shanghai and Shenzhen 300 and the ChiNext Index have not retreated much, but in reality, there is a significant differentiation, with the average adjustment of the entire A approaching 9%, and the Zhongzheng 1000 falling by 10%. The recent market adjustment has two reasons: first, inflation risks and expectations of financial tightening. The unclear direction of the US and Iran, the energy inflation it causes, and the resulting concerns about financial tightening. Second, loosening of the micro-trading structure in the stock market. Although external conflicts do not directly impact China logically, the uncertainty in the outlook has reduced the willingness to take market risks. With the recent simultaneous adjustment of stocks and bonds, the scenario of fixed-income + products' floating gains narrowing and increasing floating losses has constrained the investment of institutions relatively rigid in liabilities and with high positions since the beginning of the year. The impact of the micro-trading shock is expected by the bank to not last long, and blindly selling off at the current position is not advisable. The Chinese stock market is expected to see a significant bottom and rebound zone. Although inflation risks are still pending, it should be noted that Chinese assets have both improved technological productivity and a relatively stable security situation, economic society, and capital markets. China's diverse energy reserves and diversified growth, even from a global perspective, are scarce. How will energy shocks and expectations of financial tightening be priced? Expected impact - actual impact - return to growth logic three-stage evolution. In the bank's recent roadshows, some investors expressed deep concerns about energy price shocks and expectations of financial tightening. An important historical reference is the 2022 US stock market's setbacks in the Russia-Ukraine conflict and successive substantial rate hikes by the Fed, but it also demonstrated strong resilience and rebound and did not collapse. Overall, risk pricing is divided into three stages: the first stage, expected impact. From March to June 2022, the Russia-Ukraine conflict broke out, oil prices soared, the Fed launched substantial rate hikes that month, and the US stock market fell; the second stage, actual impact. After June 2022, although the Russia-Ukraine conflict continued, the intensity did not increase, oil prices began to decline from their highs, and risk pricing basically ended. However, due to sticky inflation and Fed rate hikes, the US stock market is generally in rebound and volatility. The third stage, return to growth logic. Starting in January 2023, the US AI industry made positive progress, capital expenditures and performance improvement drove the stock market higher. In this process, two insights about market pricing can be drawn: 1) Risk pricing is not about seeing the end of risks, but when the intensity no longer increases, risk pricing ends. 2) After risk pricing ends, the key is whether the market itself has growth capability. Currently, the US has a higher tolerance for inflation, China's central bank has also emphasized a supportive monetary stance, which is more certain and conducive to China's increased investment in technology and stable domestic demand, helping to break the risk narrative faster. Industry comparison: Financials and stability remain the top choices, and Chinese technology manufacturing and stable domestic demand are the key to breaking the narrative of stagnation risks. 1) Financial and stable sectors: important stabilizers of the market, high dividend yields have allocation value, recommended: banks/electricity/highways/coal. 2) Technology manufacturing and energy transition: Chinese capital goods and equipment companies with global competitiveness and cost advantages benefit from energy shocks and transition, recommended: power equipment/new energy vehicles/engineering machinery. The AI space is vast, with China increasing technology investment by 2026, likely driving domestic production line growth. Recommended: semiconductors/communication equipment/mechanical equipment. 3) Domestic demand value: stable investment policies combined with inflation rebound are expected to drive demand for supplementary inventory, recommended: construction materials/construction/hotels/fashion. Theme recommendations: 1) Energy transition: geopolitical disruptions affect key energy supplies, policies focus on building a new energy system and future energy, optimistic about power grids/new storage systems/nuclear fusion energy. 2) Computing-electricity synergy: Connecting computing power, electricity, and grid-load storage integration pathways, optimistic about computing facilities, digitalization of the power grid and green electricity computing operators. 3) Token goes global: domestic large models have the highest global invocation volume, optimistic about large models/AIDC/domestic computing power. 4) Commercial aerospace: Building an emerging pillar industry of aviation and aerospace, optimistic about medium and large rocket manufacturing and launch service industry chains. Risk warning: Overseas economic recession exceeds expectations, global geopolitical uncertainties.