China Securities Co.,Ltd.: A-shares may see a recovery rally in October; continue with a balanced allocation of both offense and defense.

China Securities Co.,Ltd. released a research report stating that the pre-holiday decline in A-shares was driven by a concentrated resonance of multiple short-term factors, and the market is expected to usher in a recovery rally after the holiday once these short-term factors are digested. In the short term, the market will focus on earnings: October marks the beginning of the earnings verification period for A-shares; in the medium term, attention will be on policy: a new round of policy stimulus may be on the horizon; in the long term, focus on liquidity: the probability of a rate hike in October has declined, but the 30-year U.S. Treasury yield remains elevated. The bank expects that after the post-holiday recovery rally, A-shares will overall continue to exhibit a range-bound pattern, and it continues to recommend a balanced allocation of both offense and defense. On the offensive side: AI computing power (PCB, CCL, electronic cloth, etc.) and innovative drugs as the core. On the defensive side: dividend sectors such as banks, non-bank financials, coal, and utilities as the base position. The main points of China Securities Co.,Ltd. are as follows: A-shares fluctuated and declined in September, may usher in a recovery rally in October The pre-holiday decline in A-shares was driven by a concentrated resonance of multiple short-term factors, and the market is expected to usher in a recovery rally after the holiday once these short-term factors are digested. The bank still maintains its judgment of a range-bound pattern with "a ceiling above and a floor below." After a short-term rapid decline in the market, one should not panic, but can actively look for opportunities to buy in at the bottom and add positions. As the broad market index approaches the level seen in late July, the bank believes that the possibility of medium- to long-term capital entering the market to provide liquidity is also continuously rising. From the perspective of A-share market sentiment, the sentiment index rose to around 52 on September 22 before falling back again, failing to break through 55, and even quickly dropped below 50, then fell below 38 again by the end of the month. In the short term, the obvious volume contraction and sentiment pullback before the National Day holiday are consistent with seasonal effects, and sentiment is expected to rebound after the holiday, launching a recovery rally. In the long term, compared with the sentiment index failing to break through 60 in August, in September the sentiment index even failed to break through 55 before beginning to fall back, causing the peak of the sentiment index to decline further. Going forward, it is necessary to be alert to a situation of stock-game competition for incremental funds, and one can observe whether the sentiment index can break through 55 after the holiday and rebound to the 60-65 range. A-share market outlook: short-term focus on earnings, medium-term expect policy, long-term focus on liquidity Short-term focus on earnings: October marks the beginning of the earnings verification period for A-shares. The bank expects that in October A-shares will enter the earnings verification period, and industry sectors with high certainty of earnings growth are expected to attract capital favor. The bank expects the technology sector to maintain high growth, midstream manufacturing to improve marginally, and upstream cyclical sectors to decline due to a high base effect. The prosperity of sub-sectors will further concentrate in technology hardware, upstream resources, and overseas-expansion manufacturing. Earnings estimate upgrades are concentrated in AI hardware, biological products, and some finance and pharmaceutical directions. Medium-term expect policy: a new round of policy stimulus may be on the horizon. In the third quarter of this year, the market had low expectations for policy measures to boost the economy, which to some extent suppressed market risk appetite. The bank believes that as economic data, especially indicators related to domestic demand consumption, continue to decline, and with the introduction of a series of policy packages at the end of September, a new round of policy stimulus may be on the horizon. Long-term focus on liquidity: the probability of a rate hike in October has declined, but the 30-year U.S. Treasury yield remains elevated. Although the probability of a Federal Reserve rate hike in October has decreased, the U.S. 30-year Treasury yield is still rising rapidly, which will continue to weigh on the A-share market. In the future, it is necessary to closely monitor the trend of the U.S. 30-year Treasury yield, which may be the core indicator for equity investment over the next year. Industry allocation approach: adhere to balanced allocation, short-term technology sector may usher in a recovery rally The bank expects that after the post-holiday recovery rally, A-shares will overall continue to exhibit a range-bound pattern, and it continues to recommend a balanced allocation of both offense and defense. On the offensive side: AI computing power (PCB, CCL, electronic cloth, etc.) and innovative drugs as the core. On the defensive side: dividend sectors such as banks, non-bank financials, coal, and utilities as the base position. Risk warnings (1) The effect of domestic demand support policies is lower than expected. If subsequent domestic real estate sales, investment, and other data remain difficult to recover, inflation remains sluggish, consumption does not show obvious improvement, corporate earnings growth continues to decline, and the economic recovery is ultimately falsified, then the overall market trend will come under pressure, and overly optimistic pricing expectations will face correction. (2) Risk of deterioration in the Middle East geopolitical situation. Be alert to further escalation of the U.S.-Iran conflict, an upward shift in the center of international oil prices, increased global inflationary pressure, and constraints on monetary easing space for domestic and foreign central banks. If inflation develops malignantly, it may drag down aggregate economic demand, exacerbate the risk of global economic recession, and at the same time impact the equity market. (3) U.S. stock market volatility exceeds expectations. If the U.S. economy deteriorates beyond expectations, or the Federal Reserve's easing intensity falls short of expectations, it may cause significant volatility in the U.S. stock market, which will also have spillover effects on domestic market sentiment and risk appetite.