China Securities Co., Ltd.: What is the market waiting for?

China Securities Co., Ltd. published a securities research report stating that the market has been persistently weak recently, characterized by a strong atmosphere of capital caution, related to a series of unresolved uncertainties both domestically and internationally. The main core factors include: whether the Federal Reserve will raise interest rates, whether technology chips will be cleared, whether incremental funds will enter the market, and whether favorable policies will be introduced. The current narrow fluctuations may continue, and investors are advised to be patient and position themselves at low levels after the market's pessimistic expectations have been fully priced in. A three-tier balanced allocation strategy is recommended: high-growth aggressive positions include AI computing power, AI applications, innovative drugs, and industrial metals; dividend bottom positions include shipping, non-bank financials, and banks; low-position rebalancing positions include oil and petrochemicals, basic chemicals, coal, and agriculture. What is the market waiting for? When will the turnaround come? Waiting for the September meeting of the Federal Reserve: Current data cannot give a clear direction regarding the Fed's interest rate decision in September; next week's inflation data may be particularly critical. Currently, there is significant disagreement in the market about whether the Fed will raise interest rates at the September meeting, and some funds may wish to wait for a resolution after the Fed's meeting before making decisions. If the Fed ultimately chooses to remain inactive and continues the rate reduction cycle, the A-shares may benefit from the rebound in the valuation of global growth stocks and the improvement in domestic liquidity and policy expectations, which would lift risk appetite. Waiting for the clearance of technology chips: Reflecting on the semiconductor trends of 2020-2021, in the short term, the technology sector may experience a decline of about one quarter and a continued weakness relative to overseas technology stocks for about three quarters. In the long term, if the industry's prosperity continues to rise and performance becomes the main driving factor, an adequately corrected technology sector is likely to see a return to fundamental pricing. Waiting for the return of incremental funds: Recently, the market has been characterized by a lack of incremental funds and clear signs of stock game characteristics. A potential time point for incremental funds to re-enter the market is in the next two weeks, specifically before September 24, when national leaders visit the U.S. Another possible timing is when the major indices or the overall A-shares approach the lows from late July; at that point, national teams and insurance funds may collect chips at this position and support the market. Waiting for fundamental validation or a major policy move: If the GDP growth rate for the third quarter is adjusted downward in late October, it may put pressure on the annual targets. The market anticipates increased policy measures, including the National People's Congress Standing Committee meeting in late October (a key fiscal variable) and the Politburo meeting at the end of October. Another potential time point is in December: the Politburo meeting in early December and the Central Economic Work Conference in mid-December will outline the economic work for next year and is a possible timing for policy stimulus. However, considering that next year will enter a new political cycle in China, market expectations for policy stimulus are currently low. In summary, China Securities Co., Ltd. maintains its overall judgment of the A-shares as a "volatile market." The recent persistent weakness in the market and the atmosphere of cautious capital are believed to be related to a series of unresolved uncertainties both domestically and internationally. The major core factors include: whether the Federal Reserve will raise interest rates, whether technology chips will be cleared, whether incremental funds will enter the market, and whether favorable policies will be introduced. Therefore, the current narrow fluctuations may continue. Potential turning points in September include the Fed ultimately remaining inactive and an increase in market risk appetite before national leaders visit the U.S. Potential turning points in October include initial digestion of technology chips and expectations for policy benefits to be introduced. Investors are advised to remain patient and position themselves at low levels after the market's pessimistic expectations have been fully priced in. Balanced allocation and flexible adjustments to cope with the current market In a volatile market, build a foundation with balance and actively capture rotations. In a balanced allocation strategy, the combination should shift from a single prosperity bet to a three-tier balanced allocation structure. The first layer retains aggressive positions that are still being verified for prosperity, focusing on directions with high visibility of profits and industrial logic that has not yet been disproven, avoiding fully liquidating key lines due to short-term pullbacks. The second layer uses dividends and stable cash flows as the bottom position to hedge against volatility and reduce sensitivity to drawdowns. The third layer reserves positions for low-area rebalancing, collecting clues for strategic recovery based on low allocations and marginal fundamental improvements. The three levels should operate simultaneously to ensure that one does not fall behind in a rotating market while also avoiding backlash from a single style. Flexible adjustments: Adjustments should revolve around dynamic rebalancing of "performance - chips - catalysts." The pace of adjustment should be light rather than heavy: when crowded, narratives become exhausted, reduce holdings and switch to better odds in niche directions; after performance is delivered and chips are digested, re-enter core lines; when external disturbances push up risk premiums, gradually lean towards defensive and resource-related sectors, and after sentiment falls back, reallocate in the opposite direction. In terms of specific industry selection, the current three-tier balanced allocation structure is: first layer high-growth aggressive positions: AI computing power, AI applications, innovative drugs, industrial metals, etc.; second layer dividend bottom positions: shipping, non-bank financials, banks, public utilities, etc.; third layer low-position rebalancing positions: oil and petrochemicals, basic chemicals, coal, agriculture, etc. High-growth aggressive positions AI computing power focuses on volume rather than price logic, as pricing power shifts gradually from upstream computing power to downstream applications, which may perform better. AI computing power: The price slope has peaked, while the volume slope continues to rise. In segments driven by price elasticity such as storage and passive components, the price increase slope is converging (first derivative has peaked), while the shipment volume, assured by capital expenditures and order visibility, is expanding: logic for optical modules (800G/1.6T), PCB/CCL, AI servers, advanced packaging, and domestic AI chips is accelerating upwards (second derivative points upwards). The clearance of AI computing hardware chips still requires waiting, with gradual positioning at low levels starting at the end of September. The pricing power of AI will gradually shift from upstream to downstream. China's AI applications have begun to experience explosive growth. According to data from the National Bureau of Statistics and CCTV, the daily average number of Token calls in China has surged from 100 billion at the beginning of 2024 to over 500 trillion by June 2026, a growth rate exceeding 1000 times. Performance on the application side is beginning to materialize: Z.AI's cloud deployment revenue for the first half of 2026 was 820 million RMB, a growth of 2735.7%; Beijing Kingsoft Office Software, Inc's revenue for the first half of 2026 was 3.313 billion RMB (WPS 365 revenue of 497 million RMB), a year-on-year increase of 24.69% (60.84%). However, valuations and chips are misaligned, with upstream hardware (electronics, communications) and downstream applications (media, computing) seeing a 40% return discrepancy in the first half of the year. As of the end of June, the allocation ratio of active equity funds in electronics + communications exceeded 60%, the highest on record, while the allocation in media + computing was below 1.5%, close to historical lows. Thus, the application side is in a state of "fundamentals have been realized, but stock prices and chips have not reflected this," leading to a more favorable combination of odds and success rate compared to upstream price-increase varieties that have already been fully priced. A certain position is also maintained in high-growth innovative drugs and industrial metals. The Chinese innovative drug sector is currently experiencing a triple resonance of accelerated internationalization, technological breakthroughs, and performance realization. In the first half of 2026, the License-out transaction value of Chinese innovative drugs was about 110 billion USD, reaching 80% of the total for 2025; in technology, small nucleic acids, IO multi-antibodies, ADCs, and GLP-1 weight loss are all blooming; in the second quarter of 2026, prosperity improvements in the innovative drug supply chain have started to reflect in performance. In the CXO sector, WuXi AppTec and Pharmaron Beijing have seen synchronized improvements in revenue, profits, and order indicators, indicating that the recovering overseas research and development demand is gradually being transmitted to the revenue side; in terms of independently innovative drugs, BeOne Medicines Ltd. continues to benefit from the global commercialization of core products. Overall, the innovative drug sector not only has financing and business development deal catalysts but also ongoing validation of fundamentals such as orders, product revenue, and profits. The supply-demand mismatch and emerging demand resonance in industrial metals keep prices for copper, aluminum, and tin resilient. Copper is the clearest variety in this round of supply-demand logic: the supply side is constrained by long-term declines in global copper ore grades, insufficient capital expenditure, the Congo's ban on copper ore exports, and disruptions in Chilean mines, transmitting tightness from the mines to the smelting side, with import copper ore processing fees consistently remaining in deep negative territory; the demand side is continuously driven by three major engines: AI data centers, grid upgrades, and new energy vehicles, with copper's pricing logic transitioning from a cyclical commodity to a strategic resource, and the price center is expected to continue to rise. It is important to note that AI, innovative drugs, and industrial metals are all interest rate-sensitive industries. If the Federal Reserve begins its rate hike cycle, related fundamental and valuation impacts may be significant. Therefore, compared to the previous single bet on high-growth sectors, China Securities Co., Ltd. has shifted towards a balanced allocation strategy, reducing the allocation ratio for these high-growth sectors while still retaining certain positions. Dividend bottom positions In addition to aggressive positions, in recent weeks, China Securities Co., Ltd. has repeatedly emphasized increasing allocations to dividend assets. Utilizing dividends and stable cash flows as bottom positions helps to mitigate the risks of a Federal Reserve rate hike, hedge against volatility, and reduce sensitivity to drawdowns. Key focus areas are shipping, non-bank financials, banks, and public utilities. Recently, container shipping prices and crude oil shipping prices have seen significant increases, and the profitability and dividend capacity of the shipping industry are expected to continue to rise. The overall valuation of the financial sector is relatively low, with institutions significantly underweight, highlighting the cost-performance ratio of fundamentals. Currently, the overall price-to-book value of A-share banks is only 0.52 times, at a ten-year low, with dividend yields exceeding 4%. In the context of asset scarcity, this poses a strong attraction to long-term funds. The net interest margin stabilized after mid-year reports, coupled with high dividend defensive attributes, clearly indicates potential for valuation recovery. In the non-bank sector, insurance mid-year report performances validate the industry's high prosperity, and brokerages benefit from active market trading, showing significant earnings resilience, with high growth and low valuation forming a significant mismatch, allowing for ample recovery space. It should be noted that the financial sector has started to strengthen significantly in the past two weeks. If future increases in bank and non-bank sectors cause the dividend yield appeal to diminish, profits can be timely realized, and alternatives for dividend bottom positions can be identified. Low-position rebalancing positions The recent market has evidently seen an increase in diversified funds and rebalancing characteristics, with institutional funds no longer concentrated in a single sector but leaning toward a balanced allocation across multiple sectors. The low-position low allocation direction seeks to "increase weights and find turning points," looking for signals that resonate among "institutional low allocation + cheap valuations + marginal fundamental improvements." Key sectors to watch include oil and petrochemicals, basic chemicals, coal, and agriculture. Oil and petrochemicals: Under the support of geopolitical risk premiums and global replenishment demand, oil prices have been running high, with sector profits in the first half of 2026 growing by 33.5%. The upstream maintains strong profitability and high dividends, with valuations at historically low to medium levels, possessing both defensive and profit improvement attributes. Basic chemicals: Industry capital expenditures peaked in 2024 and significantly dropped in 2025, and most sub-sectors have no new capacity. The supply-demand dynamics are entering a phase of upwards adjustment after self-correction. Currently, most chemical products' price spreads and valuations in most sub-industries are at historical bottoms, providing a substantial safety margin, combined with the "golden September and silver October" peak season and anticipated policies for domestic demand, confirming stronger marginal profit improvements. Coal: Supply side constraints from safety regulations and strict controls on new production capacity, along with demand from summer peak seasons, AI computing power electricity use, and chemical demand keep coal price centers resistant to declines. The profit of the coal sector grew by 19.5% year-on-year in the first half of 2026, transitioning from "cyclical volatility" to a reevaluation of "strategic safety resources," highlighting high dividend attributes and providing room for valuations to rise. Animal husbandry: The industry is in a phase of continuous capacity deconstruction and profit bottoming, with the turning point for pig price cycles gradually approaching. Institutional allocation ratios are relatively low, making it a typical "low-position recovery + cycle turning point" variety, with clear fundamental marginal improvement logic driven by reduced supply.