CMSC: Market Main Themes and Allocation Directions After the U.S. Midterm Elections

CMSC released a research report stating that after the U.S. midterm elections, the Democratic Party regained both chambers of Congress, but constrained by presidential veto power, policy will manifest more as increased constraints rather than a reversal of direction. Regulation of AI and data centers is tightening, and the market has begun to worry about returns on capital expenditure and downward revisions to upstream hardware EPS, though the probability of comprehensive restrictions on AI expansion is low. A-share allocation recommendations should center on "critical mineral resources, high cash flow, and self-reliance and controllability." Market Main Themes and Allocation Directions After the Midterm Elections. After the U.S. midterm elections, the Democratic Party regained both chambers of Congress, but constrained by presidential veto power, policy changes will manifest more as "increased constraints" rather than "direction reversal," achieved mainly through appropriations, congressional oversight, and state-level administrative discretion. At the industry level, medical services marginally benefit from expanded coverage, while pharmaceutical companies face cost-control pressure; data centers bearing the cost of new grid additions has become a bipartisan consensus, and the certainty of grid investment is higher than that of clean energy subsidies; technology restrictions on China and restructuring of critical mineral supply chains remain continuous. In addition, tightening AI regulation has triggered concerns about returns on capital expenditure, with overseas trading focus shifting from cloud vendors' cash flow to downward revisions of upstream hardware EPS. Strong nonfarm payrolls constrain short-term easing expectations, while cooling AI investment suppresses long-term interest rates. A-share allocation recommendations should center on "critical mineral resources, high cash flow, and self-reliance and controllability," with attention to semiconductor equipment and materials, domestic computing power and IT localization, rare earths, copper and minor metals, transformers and grid equipment, as well as innovative drugs and high-dividend banks. Last week, the A-share market fluctuated and rebounded, with main reasons including: (1) The People's Bank of China, the National Financial Regulatory Administration, and the CSRC held a symposium on the two tools supporting the capital market, explicitly committing to further optimize the securities, fund, and insurance companies' swap facility and the stock repurchase and increased shareholding relending policy; the swap facility operation amounted to RMB100 billion, and the repurchase and increased shareholding relending was converted into a long-term institutional arrangement with the interest rate lowered to 1%, strengthening market-stabilization expectations; (2) Democrats gained an advantage in the U.S. midterm elections, and the market revised upward expectations for the continuation of new energy support policies, driving a recovery in the new energy chain; bets on an easing of the Iran conflict pushed oil prices lower, alleviating downstream cost pressure; (3) Affected by the midterm election results, concerns over tighter overseas AI regulation intensified, compounded by constraints on data center capital expenditure returns, U.S. tech stocks plunged, affecting the A-share hardware chain and risk appetite on Friday. In September, the year-on-year growth rate of global semiconductor sales expanded, and the cement price index rose. Last week, areas with improving fundamentals mainly included: 1) Among resource products, gold, silver, and cement prices rose, and inventories of most industrial metals declined; 2) TMT continued to prosper, with the year-on-year growth rate of global semiconductor sales expanding in September; 3) Real estate fundamentals improved, with the transaction area of commercial housing in 30 major cities rising month-on-month and the year-on-year decline narrowing. Recommendations focus on precious metals, building materials, food and beverage, home appliances, chemical pharmaceuticals, media, banks, and others with relatively high or improving fundamentals. ETFs saw large net subscriptions, while fund issuance scale declined. Margin financing funds recorded a cumulative net outflow of RMB36.76 billion over the first four trading days; newly established equity-oriented public funds amounted to 11.50 billion shares, down 4.02 billion shares from the previous period; ETFs saw net subscriptions, corresponding to a net inflow of RMB195.5 billion. Last week, margin financing funds recorded net purchases in media, coal, banks, and others; brokerage ETFs saw relatively large redemptions, while new energy & smart vehicle ETFs saw relatively large subscriptions. Major shareholders shifted from net increases to net decreases in holdings, and the planned reduction scale declined. AI media blossomed in multiple areas. AI technology is accelerating its penetration into various segments of the media field, with application scope covering AI comic dramas, AI games, AI publishing, advertising and marketing, and content platforms. Among them, AI comic dramas directly participate in content production through video generation technology, reducing production costs and shortening production cycles; AI games are mainly applied in code development and art production, driving R&D efficiency improvements and gameplay innovation; AI publishing covers text creation, editing and processing, intelligent typesetting, and digital content generation, transforming traditional publishing processes. Overall, AI comic dramas, AI games, and AI publishing have taken the lead in forming relatively clear AI industrial application scenarios, becoming three directions worthy of key attention in the current AI media field. Last week, the overall A-share valuation level rose compared with the previous week, with the Wind All A Index PE (TTM) up 0.6 from the previous week, at the 51.9% percentile of historical valuation levels. Last week, index valuations mostly rose, among which non-bank financials, media, and computers posted the largest gains, while electronics, coal, and petroleum and petrochemicals posted the largest declines.