Shenwan Hongyuan Group Strategy: Medium- to Long-Term Swing Positioning for A-Shares; Seeking Structural Opportunities Amid Divergence in the AI Chain

Shenwan Hongyuan Group Securities released a research report stating that during the National Day holiday, global assets displayed a pattern of "the high US Treasury yield stalemate remains unbroken, and equity market divergence continues": US PCE and nonfarm payrolls came in below expectations, lowering the probability of an October rate hike, but crude oil remained locked in a high-level tug-of-war after rebounding, and US Treasury yields stayed elevated after hitting new highs. The market's perception of "short-term economic strength + repeated inflation" was reinforced, while concerns that high rates exacerbate medium-term economic fragility lack any means of resolution. US stocks continued to rebound but structural divergence intensified, Japanese stocks rebounded strongly on lowered rate hike expectations, and Hong Kong stocks adjusted slightly due to the absence of southbound capital. Corresponding to A-shares, the market remains in a long-term consolidation and rest period between two major upward waves (analogous to the first half of 2014 or the 2018 scenario), the medium-term consolidation and rest continues with a weak bias, and after short-term overselling, a small-scale "Red October" rebound can be expected. On allocation, continue to favor directions within the AI chain where earnings have digested valuations (storage, high-end CCL, PCB, capacitors) as well as non-tech sectors such as CXO, innovative drugs, coal, shipping, precious metals, industrial metals, chemicals, and real estate, while high-dividend assets (banks, non-bank financials, food and beverage, utilities) still have allocation value as a defensive base position. The main views of Shenwan Hongyuan Group are as follows: I. National Day asset price performance: October Fed rate hike expectations were revised down, but crude oil prices engaged in a high-level tug-of-war after rebounding, and US Treasury yields remained elevated after hitting new highs. High US Treasury yields and the corresponding medium-term concerns about the US economy have still not found a breakthrough point. During the holiday, equity markets across countries leaned more toward continuation of medium-term trends, with event-driven catalysts having a small-scale impact: US stocks continued to rebound with intensifying structural divergence, Japanese stocks rebounded strongly (the Bank of Japan's October rate hike probability was also revised down), and comparable Chinese assets adjusted slightly. Characteristics of National Day asset price performance: September US PCE and new nonfarm payrolls came in below expectations, Fed officials made dovish remarks, and October Fed rate hike expectations were revised down. However, US Treasury yields did not decline significantly with the lowered rate hike probability. Crude oil prices engaged in a high-level tug-of-war after rebounding, and US Treasury yields remained elevated after hitting new highs. The short-term perception of the US economic combination was reinforced: economic fundamentals are relatively strong, and inflation expectations are oscillating. Fed rate hikes are matched with the short-to-medium-term economic + inflation combination. But the market reasonably deduces that sustained high rates will exacerbate economic fragility, medium-term credit risks may ferment, and localized risks triggered by the AI transformation may also be amplified. We summarize the problem behind elevated US Treasury yields as follows: medium-term problems objectively exist, but policy arrangements have not provided a solution for the medium cycle. Rate hikes are not the solution to medium-term problems; on the contrary, they may exacerbate medium-term risks. During the National Day holiday, oil prices, US Treasury yields, and Fed rate hike expectations remained the main lines of market trading. And the breakthrough point for high US Treasury yields has still not appeared. On the equity market side, US stocks continued to rebound, but structural divergence further intensified, with the wealth effect increasingly concentrated; Japanese stocks rebounded strongly, while comparable Chinese assets represented by Hong Kong stocks adjusted slightly. In the short term, major capital markets' responses to changes in the global asset allocation environment were asymmetric. The main differences may come from: 1. Exposure weight to short-term AI catalysts: for example, the exposure weight of the AI storage chain. 2. Continued pricing of medium-term AI industry divergence: AI large models and application end focus more on security, the sustainability of high compute inflation profits faces additional challenges; there is objectively room for compute inflation and CSP leader profit redistribution; supply constraints on compute inflation are loosening. This corresponds to US stocks outperforming Asia-Pacific stocks in the medium-term wave. 3. Independent liquidity logic of each capital market: the Bank of Japan's October rate hike expectations were also revised down. Meanwhile, Hong Kong stocks continued their offshore market characteristics, and the absence of Stock Connect southbound capital during the National Day holiday exacerbated the liquidity shortage problem in Hong Kong stocks. Overall, during the National Day holiday, global stock market performance was more a continuation of respective medium-term trends; short-term event-driven catalysts had a small-scale impact. II. Discussing the long-term, medium-term, and short-term wave positioning of A-shares: Long-term, A-shares are in a consolidation and rest period between two major upward waves. Medium-term, the consolidation and rest wave continues and still leans toward a weak consolidation phase. Short-term, after the market's overselling, a small-scale "Red October" can be expected. During the National Day holiday, neither the global asset allocation landscape nor the technology industry trends achieved major breakthroughs. The long-term, medium-term, and short-term wave positioning of A-shares remains generally unchanged, and we discuss it more explicitly: Long-term: A-shares are in a consolidation and rest period between two major upward waves. A complete major wave has two major upward waves, which is a classic characteristic of A-shares. This round of major wave dominated by the AI industry trend will most likely have another major upward wave, with the core logic being that the technology industry trend has not ended + the space for residents' asset allocation migration toward equities has not been fully utilized. As for the consolidation and rest period in between, the upper-bound scenario can reference the first half of 2014, when the technology main line consolidated and rested, the market was generally a range-bound market, but technology and non-technology themes were active, and the micro-level wealth effect was not weak. The process of theme rotation is also the process of building consensus around new industry trends. The lower-bound scenario can reference 2018, when under macro shocks, the combination of economy and policy was unfavorable, and the core industry trend was affected. Only after macro problems are resolved and industry trend consensus is rebuilt can the major wave be re-established. Medium-term: The consolidation and rest wave continues and still leans toward a weak consolidation phase. We continue to highlight two important subsequent nodes: 1. After the October Q3 earnings reports, AI leaders' earnings will have initially digested valuations, and they may strengthen divergently based on clues of continued improvement in 2027 earnings growth. At the same time, on this basis, technology theme activity may pick up again. 2. An important opportunity for improvement in the overseas asset allocation environment is still, in the AI era, clarity on the direction of the Fed's monetary policy framework adjustment. When the Fed's policy focus shifts to preventing medium-term potential risks and actively addressing structural risks that may be triggered by the AI transformation, the global asset allocation environment may usher in a reversal. Short-term, after the market's overselling, a small-scale "Red October" can be expected. In the short term, the proportion of strong stocks in electronics and communications has already entered the low-to-mid range, and market downside momentum has spread significantly. The market's small-scale oversold characteristics are becoming increasingly clear. Red October is one of the monthly calendar effects with the highest historical win rate. After the market's accelerated adjustment at the end of September, the realization of Red October is already a high-probability event. However, before major breakthroughs are achieved in the global asset allocation environment and technology industry trends, the Red October may only be small-scale. III. The currently effective AI chain aesthetic remains unchanged: 1. The few directions where fundamental expectations can exceed end-June levels (the few new compute inflation directions catalyzed by CPO and GPT-6, price pass-through in the PCB industry chain, etc.). 2. Directions where 2027 prosperity continues to improve relative to 2026, which will be verified by end-October Q3 earnings reports, and may strengthen divergently after earnings digest valuations. Focus on storage, high-end CCL, PCB, and capacitors. 3. Value thematic investments in both technology and non-technology. The time period for non-technology directions to outperform is lengthening, and the time period for high-dividend assets to generate absolute returns is lengthening. In non-technology sectors, short-term volatility is also increasing, but the medium-term key directions remain unchanged: CXO, innovative drugs, coal, shipping, precious metals, industrial metals, and basic chemicals. After new sales regulations standardized the industry, real estate has entered a period of resolving historical legacy issues and laying out incremental policies; combined with short-term highlights in property sales, real estate remains an important source of excess returns. High-dividend and technology sectors exhibit a "seesaw effect," with key focus on banks, non-bank financials, food and beverage, and utilities. Before clues of the market returning to strength emerge, one can still hold high-dividend assets based on defense. Risk warnings: Overseas economic recession exceeding expectations, domestic economic recovery falling short of expectations.