CITIC SEC: Current fluctuations and structural opportunities rotation are the norm. Focus on resource revaluation and the direction of enterprise going global.

CITIC SEC released a research report stating that before the unexpected changes in domestic demand occur, the rotation of shocks and structural opportunities is the norm. The reassessment of global pricing power for resources/traditional manufacturing industries still has potential and is undervalued. Since the "9.24 market" last year, the overall rise in two rounds of market water levels has been accompanied by a systemic increase in financing scale, totaling a net increase of 1.11 trillion yuan, far exceeding the total new issuance scale of public and private subjective long products since October last year. In these two waves of market trends, major broad-based and cyclical industries have completed the majority of their gains. Excluding the significant increase in financing in the two rounds, the market has basically been in a sideways shock. Sectors that can achieve effective increases during the shock period are mainly quantitatively driven small caps, banks driven by insurance, non-ferrous metals driven by price increases, and innovative pharmaceuticals driven by pipeline outflow. The current market fluctuations may be the norm before the appearance of unexpected changes in fundamentals. The adjustment of the bond market has led to a certain challenge for balanced stock/bond strategies at present, which may require higher demands on controlling portfolio volatility and indirectly affect stock allocation strategies. The potential appreciation pressure of the renminbi in the future may bring about unexpected monetary easing, which may be the source of unexpected changes and break the shock pattern. Prior to this, the focus is on continuing the reassessment of pricing power in the resources/traditional manufacturing industries and the direction of companies going global. The main points of CITIC SEC are as follows: Since the "9.24 market" last year, the rise in two rounds of market water levels has been accompanied by a significant increase in financing balance. The first round of increase in margin trading occurred from September 24th to November 13th last year, with margin trading balance increasing by 483 billion yuan (up 35.2%), while the Shanghai Composite Index rose by 25% during the same period; the second round of margin trading increase was from June 20th to September 25th this year, with margin trading balance increasing by 623.5 billion yuan (up 34.2%), while the Shanghai Composite Index rose by 14.6% during the same period. These two increases occurred once after unexpected policy shifts and once after the China-US-London economic and trade negotiations, which basically established the framework for China-US economic and trade negotiations, reshaping market confidence in Chinese companies' overseas competitiveness and China's ability to balance the United States, which was an unexpected boost to external demand. Both market trends began with significant unexpected changes, driving up market risk appetite significantly, pushing subjective funds to leverage substantially, and then pushing the entire index up a notch. In fact, during these two market trends, the total leverage balance increased by 1.11 trillion yuan, far exceeding the cumulative new issuance scale of public and private subjective long products since October last year. During these two market trends, major broad-market and high-cyclical industries completed the majority of their gains. With the exception of the small-cap index, the majority of the gains in broad-based indices were completed during the two rounds of margin trading balance increase, while the Shanghai and Shenzhen 300, CSI 500, and Wind A shares indices declined during the two stable margin trading periods. This was also the case at the industry level. In the China Securities Industry Classification, except for certain industries (such as banks), the majority of industries and broad-based indices completed the majority of their gains during the two rounds of margin trading balance increase, and with the exception of innovative pharmaceuticals, which trended independently of the market, most varieties' gains were also achieved in the context of increased risk appetite, with increases of 140%, 99%, and 82% for communications, non-ferrous metals, and gaming since the "924 market", respectively, with gains during the margin trading balance increase period accounting for 116%, 79%, and 121% (contributions > 100% indicate a decline during the margin trading stable period). Furthermore, even during a unidirectional market rise, the performance of quantitative long positions remains significantly better than that of subjective long positions. During the first round of margin trading increase, the average return of quantitative stock strategy private funds reached 26%, while that of subjective long positions averaged 14%; during the second round of margin trading increase, the gap between the two returns narrowed significantly, with quantitative stock strategy at 20% and subjective long positions at 16%. During other times, the market mostly moved sideways and only sectors such as small caps, banks, non-ferrous metals, and pharmaceuticals that were driven by price increases achieved gains. 1) Excluding the stages of significant increase in financing in the two rounds, the market basically maintained a state of sideways rotation. Although the market has seen significant gains since the "9.24 market", in reality, excluding the two rounds of margin trading balance increase, the market has basically been in a state of low-volume sideways rotation. During the two rounds of stable margin trading balance increase, our investor sentiment index readings were as high as 96.0 and 75.9 (on a scale of 0-100), while during the remaining two rounds of margin trading, they were only 69.3 and 62.9. From our analysis of industry rotation, each industry showed a tendency for mean reversion in returns during the stable margin trading periods, with frequent high-to-low rotations, making it difficult for industries with positive cyclical trends to sustain a continuous uptrend. 2) Sectors that achieved gains during the sideline rotation are mainly small-cap stocks driven by quant models, banks driven by insurance funds, non-ferrous metals driven by price increases, and pharmaceuticals driven by pipeline outflows. We divided the relatively stable periods of market margin financing into two stages: the first stage corresponds to November 14, 2024, to June 19, 2025, with the second stage corresponding to September 26, 2025, to the present. Looking at the major broad-based indices, only small-cap stocks achieved gains in both of these stages (up 23.8% and 11.1%, respectively), while the Shanghai and Shenzhen 300 index declined by -6.5% and -0.2% during these two periods. At the industry level, during the first stage, banks achieved gains of 22.6%, while other industries with some consumer attributes and small gains included media (+3.6%), retail trade (+1.9%), and textiles and apparel (+1.7%); during the second stage, gains were seen in non-ferrous metals (+15.1%), petroleum and petrochemicals (+11.0%), steel (+7.4%), coal (+6.2%), and light industry (+5.5%), mainly in upstream resource and manufacturing sectors. It can be seen that during the relatively calm periods of the two rounds of margin financing, the structure was closely related to the most significant marginal changes at the time: the first stage corresponded to the emphasis on domestic demand in policies and market caution towards external demand after Trump took office, and the second stage corresponded to progress in anti-domestic industry trends. However, when combining these two stages, only small-cap stocks driven by quant models, banks driven by insurance funds, non-ferrous metals driven by price increases, and pharmaceuticals driven by pipeline outflows cumulatively achieved gains. Small caps and banks have specific types of incremental capital driving them, with the only truly independent industries being pharmaceuticals and non-ferrous metals. During the current market fluctuation phase, the adjustment of the bond market has posed a challenge for bond-heavy strategies at present, indirectly affecting stock allocation. As can be seen from the analysis above, since the "9.24 market" last year, except for the stages of significant changes (once in policy and once in China-US relations and external demand) that led to a significant increase in margin financing, the market has generally been in a state of fluctuation. The inflow of funds from insurance, fixed income +, and quantitative strategies to push up the index did not necessarily have a direct correlation. For the index to achieve systematic gains, there still needs to be a major change in fundamentals driving an increase in subjective funds' risk appetite. In addition, when the market is mainly driven by insurance, fixed income +, these fixed-income strategies as the main inflow body, the volatility of the bond market may instead affect stock allocation, which can be more pronounced during periods when the stock market is fluctuating. The current market fluctuation is different from previous ones in that the "seesaw effect of stocks and bonds" is not functioning, making it difficult for bond-heavy strategies to provide stable returns (for example, a strategy of 40% government bonds + 40% corporate bonds + 20% stock indices has been negative since the end of September), and if the bond market continues to adjust, in order to control drawdowns, some stable return funds may also need to control the pace of increasing equity allocation in the short term and seek lower volatility securities, aiming to reduce portfolio volatility without rotating or making significant adjustments. However, there is no need to worry about the potential instability caused by the redemption of "fixed income +" products by some market investors, as the incremental funds from these products are far smaller than those from insurance. With the implementation of insurance funds' investment plans in 2026 and the start of a new round of increased allocation, the overall market liquidity environment will begin to improve. The appreciation pressure on the renminbi may lead to unexpected monetary easing, which could be the source of unexpected changes. With the continuous increase in global pricing power and economic profit share for Chinese manufacturing, the intrinsic value of assets continues to rise, ultimately leading to sustained appreciation of the renminbi. The macro team of CITIC SEC's research department predicts that the renminbi is expected to appreciate to 6.8 against the dollar in 2026. In order to avoid premature and too rapid unilateral appreciation of the renminbi causing damage to export-oriented manufacturing, unexpected monetary easing is necessary. Unexpected monetary easing may drive down real interest rates and, to some extent, boost domestic demand (this requires coordination with fiscal policies), and the systemic boost to domestic demand is a necessary condition for breaking the market's current shock stalemate and taking it to the next level in 2026. Before that, the rotation of shocks and structural opportunities is likely to be the norm in the A-share market, and we still recommend seeking directions with a global exposure and logic for profit margin enhancement in allocation. 1) In the resources and traditional manufacturing sectors, we still favor leading companies in industries where China has a competitive advantage globally, telling the story of "supply internally against anti-domestic trends, demand externally for profit", continuously enhancing global pricing power, with key industries to focus on including non-ferrous metals, chemicals, and new energy, among others. 2) Going global for companies is still an important way to open up profit and market value space. The transition of A-shares from a positioning in the emerging market with exposure mainly to the domestic market to a mature market with exposure to the global market is still a characteristic of the times. During this process, issues such as increased resonance with overseas risk assets and economic environments will inevitably arise, and key industries to focus on include engineering machinery, innovative pharmaceuticals, power equipment, gaming, and military industries, among others. 3) From the perspective of high-to-low rotation, varieties that are not overcrowded (cinemas, securities, aviation, liquor, hotels, etc.), as well as those that offer direct incremental positions (banks, thermal power, petroleum and petrochemicals), are also choices. In addition, we recommend closely monitoring policy changes from the end-of-year political meetings and economic work conferences. Risk factors Escalation of friction in Sino-US technology, trade, and financial sectors; inadequate strength and implementation effects of domestic policies or economic recovery falling short of expectations; unexpected tightening of domestic and foreign macro liquidity; further escalation of conflicts in Russia-Ukraine, Middle East regions; real estate inventory digestion in China falling short of expectations.