China Merchants Securities: The A-share market will bottom out in November and recommend balanced allocation of biased value

The Zhitong Finance App learned that China Merchants Securities released a research report saying that looking ahead to November, China Merchants Securities believes that the market will rebound after moderately bottoming out, and that it is necessary to defend first and attack later, and wait for the flowers to blossom. The primary principle of the current market is chip pressure. Before chip pressure is resolved, it is recommended to defend in the direction of dividends, domestic demand, etc. However, after a rapid market adjustment, the game rebound was a high-odds transaction, so after the chip pressure is resolved and an opportunity on the right side appears, there will be an obvious opportunity to attack. Furthermore, judging from important events, as major events such as the US election and the APEC meeting come to fruition, it will bring a window of rebound. From implementation to allocation ideas, it is not advisable to bet on a single style in November. We recommend a balanced configuration around the idea of excessive decline and rebound, steady cycle, and preferred dividends.

The main views of China Merchants Securities are as follows:

General research and core logic: defend first, then attack, wait for the flowers to blossom. The core contradiction of short-term A-shares is chip pressure. In July, TMT transactions are crowded. Currently, funds such as public offering and fixed income + are causing negative feedback. The solution method is to either rely on ETF funds to break the game, or wait for the sell-off to naturally digest the pressure. The odds of a game rebound after a sharp decline in the market are high. Priority is given to sectors with large declines and a stable medium- to long-term profit logic. On the overseas side, the performance of leading US stocks fell short of expectations due to misalignment between industry trends and valuation pricing. Upbeat expectations in the early stages were fully priced, and there was insufficient room for fault tolerance. The Federal Reserve's policy depends on inflation, and the evolution of the US-Iran conflict will determine the path of oil prices and interest rate hikes. The November external focus was on tracking the APEC meeting, the US midterm elections, and the US-Iran situation. A-share profits were divided in the third quarter, leading in information technology and resource products, and marginal improvements in pharmaceuticals, some consumption, and TMT segments. There is support for profit recovery in the fourth quarter, but overseas restrictions still exist. The layout is balanced, focusing on the three main lines of excessive decline and rebound, steady cycle, and dividend optimization, focusing on electronics, chemicals, pharmaceuticals, industrial metals, petroleum and petrochemicals, food and beverage, and banks.

Style and industry allocation ideas: At the style level, balanced allocation of partial value is recommended. Recommended index combinations include: Shanghai and Shenzhen 300, Science and Technology Innovation 50, China Securities Dividend, Value 100, and China Securities Healthcare. In terms of industry allocation, we should not bet on a single style. It is recommended to focus on the following directions: one is the direction of overfall and rebound, typical industries such as semiconductors, industrial metals, chemicals, pharmaceuticals, etc.; second, a steady cycle direction, where cyclical resources such as industrial metals, petroleum and petrochemicals are still expected to continue to benefit supply and demand; third, the preferred direction of dividends, focusing on banking, food and beverage industries with stable or improved profits and continuous dividends. The November proposal focuses on electronics (semiconductors, components), chemicals and pharmaceuticals, industrial metals, petroleum and petrochemicals, food and beverages, and banking.

Liquidity and capital supply and demand: There is a net inflow of incremental capital supply and demand in November, and ETFs are expected to continue to be the main incremental capital. In terms of external liquidity, there is still a possibility that the Federal Reserve will raise interest rates further in December. The subsequent policy path will be highly dependent on verification of inflation and employment data, and US bond yields may continue to fluctuate at a high level. In terms of capital supply and demand in the stock market, the stock market can track the conversion of capital to a net inflow in October, and the net inflow of ETFs hedge the net outflow of financing. On the capital supply side, the size of newly issued partial equity funds declined compared to September; risk appetite for financing declined, and net outflows accelerated; ETFs bucked the trend and net inflow into the underpinning market. On the capital demand side, important shareholders have increased their net holdings for the first time in nearly two years; the scale of IPO issuance has declined, the scale of refinancing has declined, and the scale of capital requirements has declined. In terms of October's main incremental capital, ETFs became the main incremental capital in the market.

China's outlook and industry recommendation: A-shares have entered a performance verification period after the valuation is cleared, and the market is shifting from “killing valuation” to “repricing.” In terms of corporate profits, the growth rate of third-quarter results slowed due to high base figures, capital market fluctuations, and rising prices. Information technology and resource products have maintained leading growth rates, and the low-base consumer sector and pharmaceutical performance have improved marginally; the performance of financial real estate and the midstream manufacturing industry continues to be under pressure. On the economic side, the booming sectors in October were mainly concentrated in upstream resource products and some information technology and consumer sectors. Prices of cement, crude oil and most chemicals have risen; prices of memory in the information technology sector have risen and fallen; prices in the new energy industry chain have mostly declined in the midstream manufacturing sector, and the year-on-year decline in automobile production and sales has increased; A-share trading activity in the financial real estate sector has declined, and real estate transactions are still weak; prices of liquor and fresh milk have risen in the consumer services sector; and gas prices for utilities have risen. Taken as a whole, the November proposal focuses on electronics (semiconductors, components), chemicals and pharmaceuticals, industrial metals, petroleum and petrochemicals, food and beverage, and banking, etc. around the layout of “excessive decline and rebound, steady cycle, and preferred dividends”.

Investment in racetracks and industry trends: An overview of the financial reports of overseas technology leaders. High valuations and high growth expectations have reduced the market's tolerance for performance fluctuations, and cash flow and financing capacity have become the key to evaluating the sustainability of AI investment. Although the market already has some expectations of negative free cash flow, when financial pressure is actually realized, higher valuations and crowded transactions may still amplify stock price adjustments caused by partial indicators falling short of expectations. At the same time, market testing standards have been extended from revenue and profit to capital expenditure, free cash flow, and future guidance, paying more attention to growing capital costs and the pace of implementing returns. The market not only expects enterprises to continue to increase investment in AI and achieve growth beyond expectations, but also requires commercial returns from AI businesses and the ability to generate cash from mature businesses to support new investment. However, compared to fluctuations in the performance of some individual stocks in a single quarter, it is worth paying more attention to whether financing restrictions substantially affect capital expenditure: if internal cash flow is insufficient and external financing is limited, leading to a slowdown in AI infrastructure investment, then it may only be a key point of influence on industry trends.