Source: Caixin Media.

Benefiting from a series of major bullish policies, the recent influx of funds into the Hong Kong, A-share and Chinese concept stocks has directly triggered an epic bullish trend.$Hang Seng TECH Index (800700.HK)$,$Chinext Price Index (399006.SZ)$,$NASDAQ Golden Dragon China (.HXC.US)$and ushered in a rapid surge in trading volume within the market.$TENCENT (00700.HK)$,$Kweichow Moutai (600519.SH)$,$Contemporary Amperex Technology (300750.SZ)$,$PDD Holdings (PDD.US)$Representative large cap stocks have also experienced explosive surges.

However, after the short-term frenzy, market adjustments are inevitable.

On October 8, the Hong Kong stock market first saw a significant decline, with the Hang Seng Tech Index plunging 12.82%, trading massive volumes, leading to a general market decline; on October 8 (local time), the Nasdaq Golden Dragon Index in China plummeted 6.85%, with component stocks generally falling; on October 9, the A-share market also entered a correction phase, with significant drops in the Shanghai Composite Index, Chinext Price Index, and other key indices.

After the skyrocketing rise, the market's first major correction has also caused concern among many investors. It is worth noting that, shortly after entering the fourth quarter of 2024, multiple institutions have recently published their views on the market and investment strategies for the fourth quarter.

High expectations for improvement in fourth-quarter performance are favored in these directions.

Some investors point out that the recent surge in the A-share market is mainly driven by liquidity, with no substantial improvement in fundamentals, which could be a hidden danger for future sustained strength.

According to Galaxy Securities data, in the first half of 2024, the cumulative year-on-year decline in net income attributable to mother for all A-shares was 3.23%, a narrowing of 1.62 percentage points compared to the first quarter of 2024. However, the net income attributable to mother in the non-financial sector, non-financial oil and petrochemical sector continues to widen. The growth on the supply side outpaces that on the demand side in the production structure, with weak consumer growth dragging down A-share earnings growth. At the industry level, due to weak demand in the first half of the year driving prices down, most industries are under pressure in terms of performance. Overall, downstream consumer sector leads in profit growth, followed by the TMT sector, with infrastructure and finance in the middle, and significant profit declines in the upstream resources, midstream manufacturing, and real estate.

Looking ahead, due to the slowdown in macroeconomic data growth in the third quarter, A-share earnings growth may continue to be under pressure. With increased efforts in growth stabilization policies, expectations for macroeconomic improvement in the fourth quarter are strong, likely to drive fourth-quarter A-share performance improvement. Particularly in finance, real estate, and consumer sectors, there are high expectations for performance improvement in the fourth quarter.

Regarding the fourth quarter performance, Galaxy Securities points out that in the overall trend assessment, the current A-share market valuation is at historically low levels, highlighting significant long-term investment value. In the short term, boosted by bullish policies, investor sentiment has improved, leading to a rapid rebound in the A-share market. Economic stimulus policies supporting growth are expected to land in the fourth quarter; in addition, the fourth quarter coincides with the US presidential election period, with overall expectations for investor risk appetite remaining low. In the long term, the extent of the A-share rebound depends on whether the economic fundamentals can trend positively and whether investor risk appetite increases.

In terms of thematic styles, large cap styles are expected to continue to dominate, as medium to long-term funds enter the market, large cap stocks are more suitable to meet their allocation needs. Supported by favorable policies, financial styles are expected to continue to dominate; with the implementation of consumption-promoting policies, consumer stocks are expected to rebound significantly.

In terms of industry rotation, first, bullish on consumer and growth sectors that were oversold and have low valuations. Second, bullish on the financial and real estate sectors benefiting from positive policies. Third, continue to be bullish on the dividend sectors with strong hedging attributes.

Dongguan Securities believes that under the large context of "effectively implementing existing policies, intensifying the launch of new policies", "making efforts to accomplish the annual economic and social development goals", and "striving to boost the capital markets", there is still room for valuation expansion in the current market. With policy support, there is a strong expectation for corporate profit recovery. As the space for new policies expands and domestic economic endogenous growth momentum is expected to rapidly recover, coupled with strong willingness for incremental funds to enter the market, there is continuous momentum for the overall market to warm up and continue the strong, volatile upward trend. Focus areas include the sustainability of policy releases, macroeconomic performance, changes in trading volume, and the sustainability of incremental funds.

Sector-wise, it is recommended to focus on sectors such as finance, electrical equipment, CSI SWS Food & Beverage, TMT, basic chemicals, CSI SWS Health Care, and machinery equipment.

Short-term fluctuations in Hong Kong stocks may increase, which sectors are worth paying attention to?

In terms of the Hong Kong stock market, China Thai International pointed out in its research report on October 8 that the market driven by positive sentiment is expected to continue for a period of time. However, the current steepness of the rise in Hong Kong stocks is higher than the most recent three rounds of major rises in March 2015, January 2019, and November 2022. It is important to note that the current extremely high slope of violent rise may be difficult to sustain.$Hang Seng Index (800000.HK)$The forecast PE has recovered to the seven-year average level, with the risk premium also below the extreme level of two standard deviations from the rolling two-year average.$HSI Volatility Index (800125.HK)$Reaching an extremely high level of 40, under the condition of full valuation repair, the intraday volatility of the short-term large cap in the Hong Kong stock market will significantly increase. Pay attention to the trading pace. If the index rises, seize the opportunity to gradually profit. From the perspectives of PE, risk premium, dividend yield, and relative valuation, the reasonable upward target price for the optimistic scenario of Hang Seng Index by the end of the year ranges from 23,500 points to 25,000 points. It is expected that funds will flow from heavyweight stocks to leading companies in segmented industries. Underperforming high dividend stocks are expected to benefit from fund inflow.

Currently, the Chinese economy is facing multiple pressures of declining commodity prices, real estate, and consumer confidence. Unless the central government can quickly implement a "rocket-style" fiscal policy, it will be difficult for the forecasted PE ratio of the Hang Seng Index to exceed 11 times (the level from 2018 to 2019), equivalent to 24,200 points of the Hang Seng Index. Secondly, referring to the risk premium of the Hang Seng Index during the margin-style bull market of A shares in 2015, the Hang Seng Index could reach as high as 23,500 points. Thirdly, if the dividend yield of the Hang Seng Index returns to the level in January 2023 (3.3%), the Hang Seng Index could reach 23,700 points. Finally, if the Hang Seng Index's relative PE ratio can return to the average level since 2018 (0.55 times), the Hang Seng Index could reach 25,000 points.$S&P 500 Index (.SPX.US)$PE ratio, the Hang Seng Index could reach 25,000 points.

Focus on the following strategies:

1) Benefiting from the expected improvement in consumption sector due to policy efforts, valuations of household appliances, dining, gambling, beverages, cultural tourism, etc., are reappraised.

2) Benefiting from partial return of foreign capital, technology, and biomedical sectors are expected to improve in liquidity and risk preference.

Benefiting from the rising stock market heat and the support of capital market liquidity policies, non-banking financial institutions such as insurance and brokerage firms.

Benefiting from the strong efforts of the central finance, there are positive prospects for construction machinery and electrical equipment.

Energy, telecommunications, utilities and other high-yield stocks are both offensive and defensive.

Galaxy Securities also mentioned that: (1) Vertically speaking, the Hang Seng Index PE valuation has rebounded to the 52.88th percentile level since 2010. Horizontally comparing with major global stock indices, the Hang Seng Index PE valuation is relatively low, making it more attractive to global funds. (2) With the combination of the Fed rate cuts and domestic policy stimulus, market sentiment has improved. The Hang Seng Index ERP indicator has significantly fallen recently, below the 3-year rolling average -1 standard deviation. In the fourth quarter, attention should be paid to the disturbances in market sentiment caused by the U.S. presidential election and geopolitical factors affecting the Hong Kong stock market.

Research analysts at Galaxy Securities pointed out that currently, the fundamental resilience of the Hong Kong stock market is strong, and profits are showing signs of recovery. The probability of a future soft landing in the U.S. economy remains significant, as current recessionary conditions are not yet present. A new round of Fed rate cuts have officially begun, continuing the tone of precautionary rate cuts throughout the year, with global liquidity improving, relatively benefiting the performance of Hong Kong stocks. However, attention should be paid to the disruptions in market sentiment caused by the U.S. presidential election. The combined effects of Policy 924 and market expectations from the September Central Political Bureau meeting are set to boost market performance. It is expected that there is a high probability of upward volatility in the fourth quarter, and further observation is needed on the recovery trajectory of the domestic economy and the intensity of subsequent fiscal policy adjustments.

In terms of allocation clues, the focus is on two aspects: technology sector, with particular attention on internet leaders and consumer electronics; high-dividend strategies, focusing on state-owned enterprises listed on HKEX.

Editor / jayden