CITIC Securities believes that in the future, assessing whether fundamentals and liquidity are aligned should be done from a global exposure perspective rather than solely through the lens of the domestic economic cycle.
According to the CITIC Securities research report, as more listed companies shift their focus from domestic exposure to global exposure in the future—especially as Chinese enterprises in the manufacturing sector continue to convert market share into pricing power—the traditional economic analysis based on domestic inventory cycles can no longer fully capture the state of market fundamentals. Reviewing this round of market performance, whether growth or value stocks, those that have risen significantly are mostly related to overseas expansion or deeply integrated into global supply chains. Moving forward, when evaluating whether fundamentals and liquidity are aligned, we need to adopt a perspective centered on global exposure rather than the domestic economic cycle for comprehensive assessment.
The report highlights that, aside from the noticeable sentiment premium over the past four weeks, most of this market rally has followed the pattern of 'smart money driving structural gains,' which dictates a strategic approach focused on minimizing volatility and avoiding broad-based dispersion. While there may be some excess turnover driven by short-term sentiment premiums, the bank estimates that average daily trading volume returning to RMB 1.6-1.8 trillion would suggest the sentiment premium has been absorbed. In terms of allocation, the fundamental framework for sector selection should remain anchored in resources, new productivity drivers, and overseas expansion, with continued focus on resources, consumer electronics, innovative pharmaceuticals, chemicals, gaming, and defense.
The key points of the research report are as follows:
Whether considering growth or value stocks, the majority of significant gainers in this market rally are still closely tied to overseas expansion.
We reviewed 695 leading companies across 315 sub-industries within China's asset landscape, identifying the top 15 performers since June. Among these, 12 were driven by overseas expansion logic, primarily linked to overseas AI supply chains (e.g., optical modules, PCBs, servers, liquid cooling, gallium nitride, fiberglass), innovative pharmaceutical business development, globally priced resource stocks (e.g., rare earths, copper), and competitive industries leveraging overseas markets to capture market share (e.g., gaming, robotic vacuum cleaners), as well as endpoint AI contract manufacturing chains. Within the highly active TMT sector, earnings divergence is particularly pronounced, with companies oriented toward overseas demand in communications, computing, and media sectors showing notably stronger performance for H1 2025 compared to those driven by domestic demand. For the most part, this market rally has remained rational, consistent with our earlier assertion that this is not a retail-driven market. Whether through direct investments by seasoned institutional investors or via structured financial products, the inflows are fundamentally driven by industry momentum and performance trends. The incremental capital in this rally mainly comes from high-net-worth clients entering through quant or discretionary long-only hedge funds, alongside corporate clients willing to pay for research resources. Liquidity determines market intensity and valuation but does not deviate from the underlying fundamentals or structural trends.
When assessing whether fundamentals and liquidity are aligned, it will be imperative to evaluate from the perspective of global exposure rather than the domestic economic cycle moving forward.
Over the past 12 years, the proportion of overseas revenue for A-share listed companies calculated using the aggregate method has increased from 12.6% to 19.4% in 2024, with the pace of increase notably accelerating after 2021. Going forward, A-share fundamentals must be evaluated through the lens of global operations; reliance on domestic price signals and inventory cycle frameworks will increasingly diverge from actual market dynamics. The A-share market is in the early stages of transitioning from characteristics typical of an emerging market driven by domestic demand to those of a developed market led by multinational corporations and global demand. Future fundamentals will reflect the gradual monetization of China’s manufacturing sector's global market share and competitiveness, such as in compute power supply chains, machinery (robots, two-wheelers, etc.), gaming exports, and innovative pharmaceutical exports. Even within cyclical stocks, the standout performers in metals and chemicals are often those tied to global pricing or profit growth from overseas markets, such as copper, rare earths, and fluorine chemicals. The existence of domestic-foreign price differentials, combined with strategies that control domestic capacity expansion while managing overseas output to enhance pricing power, means that revenue and margin growth stemming from rising overseas income proportions will rely less on assumptions of robust global economic growth and instead only require stability. From the ROE and gross margin figures in the past year's financial reports of listed companies, firms accelerating overseas expansion (with overseas business revenue increasing by over 10% in the past year) are seeing continuous recovery in profitability and ROE levels, converging towards firms with consistently high overseas revenue (above 60%). Traditional analytical frameworks based on China’s domestic inventory cycles may misjudge the validity of market moves. Of course, stronger policy support and domestic demand recovery would broaden market participation. Until then, analysis frameworks based on domestic price signals and inventory cycles will show higher alignment with market dynamics.
The essence of this structural rally dictates the response strategy: minimize volatility, avoid broadening exposure, and maintain focus on resources, new productivity drivers, and overseas expansion.
The driving force behind this round of market activity mainly comes from relatively rational capital, with high-net-worth individuals and corporate clients showing significantly higher participation enthusiasm. In the process of directly investing in stocks, they typically make full use of market research resources or enter the market through products such as quantitative and subjective long-only private equity funds. This has led to a highly pronounced institutionalization characteristic of incremental capital. From a broader perspective of 'deposit migration,' residents are still indirectly increasing their allocation to equity assets by purchasing wealth management products and insurance products from banks. This capital structure dictates that market activity will focus on high-growth industrial trends or assets with sustainable cash returns for the majority of the time, primarily distributed across resources, new productivity (AI, innovative drugs, etc.), overseas expansion, or various combinations of the three (resources + overseas expansion, AI + overseas supply chain, innovative drug BD, etc.). Once short-term market sentiment generates a high premium, leading to widespread market gains, it usually cools down quickly, with weaker fundamental stocks falling back into stagnation, ultimately reverting to a structured market pattern. If our judgment regarding the nature of the market trend (a structural bull) reflects the current consensus among mainstream capital, then for capital seeking high return elasticity, the likely behavior patterns are twofold: either maintaining stable positions and enduring fluctuations in high-growth sectors, or shifting within thriving sectors from high to low valuations rather than blindly expanding into other sectors; for capital pursuing stable returns, any indiscriminate broad-based rally will prompt a shift from sectors with high sentiment premiums to those with relatively lower sentiment premiums, as evidenced by the recent 'reduce A-share ETF holdings and increase Hong Kong ETF holdings' phenomenon in the ETF market, which essentially reflects underlying skepticism about an indiscriminately rallying market.
The reasonable turnover rate for the market after digesting sentiment premiums is between 1.7% and 1.9%.
1) Since the beginning of this year, the lowest daily turnover rate of the entire A-share market has been the highest since 2012, while the highest turnover rate ranks second highest. Since 2012, the annual average daily turnover rate of the entire A-share market has ranged between 0.75% and 2.51%, with the lowest being 0.75% in 2012 and the highest being 2.51% in 2015. This year’s 1.91% ranks as the second highest. Interestingly, the highest single-day turnover rate this year was 3.44%, ranking fourth since 2012, but the lowest daily turnover rate reached 1.2%, surpassing that of 2015. Since August, the average daily turnover rate of the entire A-share market has reached 2.56%, which is historically on the higher side.
2) It is estimated that the reasonable daily trading volume for the market after digesting sentiment premiums would be between RMB 1.6 trillion and RMB 1.8 trillion. Historically speaking, the average daily turnover rate of China's A-share market has been approximately 1.4% since 2012. In years when market sentiment was subdued, the annual average daily turnover rate could drop below 1%. In more active years, the annual average daily turnover rate reached above 1.5%. From the perspective of implied volatility (IV), the average daily turnover rate of trading days where the CSI 300 IV fell within the historical median range (historical percentile between 40% and 60%) since 2024 has been 1.7%. From the perspective of market trends, we observed a significant correlation between the highest intra-year gains of Wind All A Index and changes in market turnover rates since 2012. Even after excluding the extreme year of 2015, if the highest intra-year gain of Wind All A Index reached over 20% since 2012, the market turnover rate increased by an average of 0.32 percentage points, representing an average year-on-year increase of 27%, implying that this year’s turnover rate should rise to 1.9% relative to last year according to statistical patterns. Overall, we estimate that if market sentiment enters a relatively calm period, the reasonable turnover rate after digesting sentiment premiums will be between 1.7% and 1.9%, corresponding to a trading volume of RMB 1.6 trillion to RMB 1.8 trillion based on the current (as of September 12) free float market capitalization.
3) At the sector and industry levels, there has been a notable increase in trading volume for the ChiNext and STAR Market, electronics, non-ferrous metals, and defense industries. From the perspective of broad-based indices, the most significant increase in turnover rates since August has been observed in the ChiNext and STAR Market sectors. The average daily turnover rates for ChiNext 50, ChiNext Index, STAR 200, and STAR Composite Index since August have been 4.12%, 3.64%, 3.98%, and 2.86%, respectively, marking increases of 1.71 percentage points, 1.35 percentage points, 1.41 percentage points, and 1.04 percentage points compared to the average daily levels from January to July. From the perspective of industries/themes, among the 30 CITIC first-tier industries, electronics, non-ferrous metals, defense, steel, and non-banking finance have shown heightened trading activity since August, with average daily turnover rates of 3.93%, 3.32%, 3.72%, 1.95%, and 1.72%, respectively, representing noticeable increases compared to the average daily levels from January to July.
Downplay market fluctuations and continue focusing on resources, consumer electronics, innovative drugs, chemicals, gaming, and defense.
We still recommend focusing on industries with genuine profit realization or strong industrial trends, namely resources, consumer electronics, innovative drugs, chemicals, gaming, and defense. For consumer electronics, we are closely monitoring changes brought by the introduction of AI Agents in smartphones starting at the end of this year and extending into next year. The transition of AI-driven trends from cloud-side to end-side represents an important development, potentially creating broader opportunities including end-side devices, computing chips, and communication modules. If expressed through ETFs, we note that the VR ETF sample stock structure contains a higher proportion of Apple supply chain components (while the consumer electronics ETF still has a relatively high concentration in computing power). For other recommended sectors, resources, innovative drugs, and gaming can be represented by non-ferrous metals ETFs and rare metals ETFs (focused on rare earths and energy metals), Hang Seng Innovative Drug ETF (focused on large pharmaceutical companies rather than small-cap speculative stocks), and gaming ETFs, respectively. Additionally, we emphasize paying attention to industries where supply is domestic but demand growth is external, and where China already has or is expected to develop sustained pricing power, such as rare earths, cobalt, tungsten, phosphorus chemicals, pesticides, fluorine chemicals, and photovoltaic inverters. If represented through ETFs, the position and liquidity improvement of chemical ETFs stand out most prominently. Regarding the recently adjusted defense sector, we believe that increased arms exports will be the key driver of profitability and growth. The period covering the 15th Five-Year Plan may witness continuous breakthroughs, and the military parade on September 3rd is not the culmination of catalytic events but rather the start of the long-term logic for the defense sector, requiring patience in observation.
Risk Factors
Intensified friction in science, trade, and financial sectors between China and the U.S.; domestic policy measures and implementation effects or economic recovery failing to meet expectations; unexpected tightening of macro liquidity domestically and internationally; escalation of conflicts in Russia-Ukraine and the Middle East; slower-than-expected inventory reduction in China’s real estate sector.
