CITIC SEC: Currently, we need to focus on the constraints that Trump is facing rather than speculating on his intentions. Pay attention to the key variables in both directions.

CITIC SEC released a research report stating that in the context of escalating US-China trade war, the focus should be on the constraints facing Trump rather than speculating on his intentions. The key variables for predicting the direction and pace of the trade war are the US economy and US bond interest rates. It is predicted that before the US midterm elections, the probability of the conflict in the Sino-US economic and trade field spreading widely to the financial sector is not high. It is expected that domestic policy responses in April will focus on prevention and pilot testing, while the policy scale will expand in the mid-year. With the firm determination of entities like Central Huijin to stabilize the market, the "chip bottom" of A-shares in the short term has been observed. The trading opportunities in April and May may be dominated by technology-themed rallies, while fundamental expectations may stabilize in the third quarter, leading to a significant shift in investment style in 2021. CITIC SEC's main points are: How to deal with the uncertainty brought by Trump's frequent changes and fluctuations? CITIC SEC believes that Trump does not have a coherent plan and the focus should be on the constraints he faces rather than trying to speculate or rationalize his goals and visions. The core constraint Trump faces is the midterm elections, and typically voter perceptions solidify three quarters in advance. At least by the third quarter of this year, he must start working to improve the US economy and capital markets. Until then, uncertainties in areas such as tariffs may still exist, but after that, boosting the economy and market through tax cuts and rate cuts will become his core demands. How to track and evaluate the risk of a US recession? Currently, the "hard data" of the US macro and micro data is strong, which may be the basis for Trump's push for a trade war, but the probability of a US recession is rapidly increasing. As of April 9th, the Atlanta Fed's GDPNow model predicts that the actual GDP growth rate for the first quarter of the year in the US will be -2.4%, with net exports dragging down by 4.73 percentage points and consumer spending contributing only 0.47 percentage points. Through selecting core leading companies in the US technology and cyclical sectors as samples, and calculating their core operating indicators, results show that the proportion of companies showing improvement in these indicators in the fourth quarter of 2024 is 55%. According to S&P's consensus forecast, this proportion will drop to 33% by the first quarter of 2025. Starting in mid-April and continuing into May, these leading companies will enter a period of financial reporting, during which their guidance may be significantly downsized. As the impact of the trade war gradually unfolds, the deterioration of the US "hard data" is only a matter of time. Will conflicts in the economic and trade field spread to the financial sector, and will other countries also target China? CITIC SEC believes that while the US may exert pressure on China in non-economic and trade areas, the actual probability of implementation is not high. Currently, other countries and regions do not have a strong motivation to target China. Trump's key goal is to reduce the deficit and promote his tax cut plan, easing the pressure of paying interest on US debt is crucial. If the economic and trade conflict spreads to the financial sector, the selling pressure on US bonds will increase, and the pressure of paying interest on US debt will accumulate. It is not ruled out that the Democrats may use the debt ceiling issue to restrict the implementation of Trump's tax cut plan within the year. For other countries, the optimal solution to reduce medium- to long-term uncertainty is for Trump to lose the midterm elections and for his power to be somewhat constrained. The only country capable of winning the trade war is China, and it is not believed that other major countries and regions have the motivation to join the US in targeting China; instead, it is currently a strategic opportunity for China to enhance its economic and trade relationship with non-US countries. What policies will be implemented domestically, and what will be the pace? It is expected that the first round of policies in April this year will focus on prevention and experimentation, while the second round of policies in mid-year will expand in scale. CITIC SEC believes that compared to the past, China's policy response this time will focus more on boosting confidence, social security, and promoting domestic demand. These policies may include interest rate cuts, reserve requirement ratio cuts, stimulating capital market vitality, expanding the scope of "two new" policies, increasing childbirth subsidies, raising social security standards, expanding storage and urban village transformation, and including export replacement with new subsidies. The complexity in the design and implementation of these policies far exceeds simple investment-focused policies in the past, and a shift in thinking also takes time. Therefore, China's first round of policies in April may have a certain preventive and experimental characteristic. If the "hard data" of the US and global economy does indeed begin to weaken in the mid-year, the scale of the second round of policies will significantly increase. Has the A-share market hit bottom? The firm buying by institutions like Central Huijin has boosted market confidence, eased liquidity risks, and absorbed a large amount of forced selling, with A-shares already seeing the "chip bottom." Popular ETFs in sectors like tourism, semiconductors, defense industry, real estate, and building materials experienced a significant downward gap on April 7th, allowing emotions to be fully vented. However, by the end of the week, the gap had been filled, indicating that these sectors had likely completed the process of clearing out chips. What changes have occurred in the ETF market recently, and how does the logic of stabilization by entities like Huijin differ from last year? This week, major broad-based ETFs saw significant net purchases. According to Wind data, the net purchase amount of the Shanghai 50, Shanghai-Shenzhen 300, and CSI 800 was 109.95 billion RMB, an increase of 107.32 billion RMB from the previous week; the net purchase amount of the CSI 500, CSI 1000, and CSI 2000 was 44.33 billion RMB, an increase of 45.24 billion RMB from the previous week. According to the annual reports disclosed by public ETFs, by the end of 2024, Huijin Holding's stock ETFs totaled 1043.9 billion RMB, an increase of 46 billion RMB from the mid-year report of 58.39 billion RMB in 2024 (with 36.96 billion RMB from increased holdings and 9.04 billion RMB from asset appreciation). This is not characterized by selling after market increases, but rather by long-term holdings, which to some extent dispels investors' doubts. The measures taken by entities like Huijin to stabilize the market have clear guidance. Firstly, the Central Bank has pledged to provide re-lending support when necessary, and secondly, Huijin has committed to buying in a more balanced manner. ETFs related to CSI 500 and CSI 1000 have seen significant net inflows, ensuring the normal operation of IC and IM index futures.Sex provides a hedge tool for the mini cap stocks, quickly stimulating bottom fishing in the market.At present, how are the positions of various types of investors and the financial situation of A shares? The positions of active private equity investors have temporarily stabilized after experiencing four consecutive weeks of decline. According to research data from CITIC SEC channels, as of the week ending April 4, 2025, the positions of active private equity investors in the sample were recorded at 80.7%, unchanged from the previous value, falling by 4.6 percentage points from the year-to-date high (week ending March 7) of 85.3%. As for sample public funds, the net redemption rate was -0.51% as of the week ending April 9, with a marginal decrease in redemption intensity (week-on-week +0.13pcts). On the foreign capital front, sample funds tracking China overseas have recently turned into a net outflow trend. According to Refinitiv data, as of the week ending April 9, sample funds tracking China from overseas experienced a total net outflow of 1.56 billion USD, with active funds seeing an outflow of 360 million USD, and passive funds seeing an outflow of 1.2 billion USD. In addition, the proportion of A-share margin purchases to total turnover has dropped from a peak of 10.8% on February 21 to 7.2% on April 8, reaching the lowest level of the year. How do we see the future market outlook? While the chip bottom has been seen, the bottom of fundamental expectations still needs to wait, possibly until the third quarter. On the macro level, there is uncertainty in the evolution trajectory of the trade war at least before the third quarter. The indirect impact of tariffs on the U.S. and global economy also involves uncertainty. This further leads to a policy response domestically that is more likely to be responsive to the actual situation, rather than a one-time "behind-the-curve" response. In this situation, uncertainty remains in both external and internal demand varieties. However, institutions such as SAFE have firmly increased their holdings to boost market confidence, alleviate liquidity risks, and absorb a large amount of forced sell-off. Intense buybacks and holdings by listed companies, along with the clearances of selling announcements, indicate that the market has achieved a phase of clearing up the chip structure. CITIC SEC predicts: 1) April-May may present a trading opportunity, with the clearance of chips as the basis. The active withdrawal of speculative capital like Kai believes in March is a favorable condition, and self-controllable and technological themes with weaker EPS correlation may become more advantageous in the current window. 2) After the third quarter of this year, if Trump is expected to shift his focus from tariffs to domestic tax cuts and economic stimulus, the global macro situation and investors' expectations on fundamentals might become clearer. China may introduce more aggressive policies to support the economy. When the economic and policy cycles of China and the U.S. sync up, up to the mid-term elections in the U.S. in 2026 may be the best time window for configuration based on fundamental logic. At that time, it is more optimistic about consumer goods, advanced manufacturing, and core assets in the cycle. What are the potential catalysts for trading opportunities in the oversold thematic in the second quarter? The focus on the AI model end is multimodal, while the focus on the application/agent end is the diffusion of underlying protocols such as MCP/A2A. The biggest focus on the hardware end is AI and AR glasses, and Siasun Robot & Automation is focused on Tesla's third generation Optimus. In addition, there may be new product or capital expenditure catalysts in smart driving and computing power. What is the industry allocation strategy in the next? From an industry allocation perspective, in the short term, it is recommended to focus on: 1) self-controllable companies with pricing power and without fear of geopolitical disturbances; 2) the innovation drug sector that heralds an innovative cycle and domestic policy catalysts; 3) the military sector with emotional and order catalysts; 4) parts of the consumption sector with clear domestic demand attributes and improving fundamentals. From a long-term perspective, the escalation of the tariff war has intensified global political and economic uncertainty. Various countries, especially major powers, may engage in redundant investments in energy, defense, technology, and infrastructure. China's manufacturing capacity is expected to benefit from a global "security first" strategy, and globalization and technological going global are the trend. In addition, on April 11, the U.S. Customs and Border Protection (CBP) issued updated tariffs, exempting import duties on products such as automatic data processors, computers, communication equipment, displays and modules, and semiconductor-related items. The Apple chain and NVIDIA chain may see a recovery. Risk factors Intensification of friction in the areas of technology, trade, and finance between China and the U.S.; Policy intensity and implementation effects domestically fall short of expectations for economic recovery; Domestic and international macro liquidity tightening beyond expectations; Further escalation of conflicts in Russia, Ukraine, and the Middle East; Unsatisfactory digestion of inventory in the housing market in China; Unexpected policy focus by the Trump administration.