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Source: Guotai Junan

Chinese stock market strategy: spring is still there after winter. The apparent reason for the correction in the stock market this week is the growing concern about geo-risk. We believe that although the external geography is still grim, the market has not given too much expectation in the past two to three years. More importantly, we should see that the uncertainty within the economy and society is declining, which is the core factor driving the current round of market conditions. Unlike most prudent consensus, we believe that expectations are no longer revised down and uncertainty is reduced, which is the key driving force for the Chinese stock market to rise. Different from the situation in which the stock market has high expectations and high positions but optimistic expectations continue to fail in the past 23 years, after years of adjustment and stock market fluctuations in early 24 years, the stock market shows the characteristics of low expectations, low expectations and low positions. A consensus of low consensus implies potentially unexpected room for return and a more positive response to marginal good. The central finance turns to expansion, the real estate policy points to the crux of the problem, the domestic demand policy is more active, and a new round of system reform and innovation path is about to emerge. Although there is still behavior and thinking inertia under the great uncertainty in the past, it is manifested by weak data and repeated stock market. However, the marginal combination of RMB currency stability, domestic demand policy strength and rising reform expectations makes China's asset logic smooth. Investment opportunities in the middle of the year, dare to reverse the layout, the stock market volatility rose.

The driving force of the market is not the upward revision of growth expectations, but the reduction of uncertainty. The three-year adjustment and clearing of the stock market reflects the accumulation of medium-and long-term uncertainty, and the market needs to evaluate the positive effect of reduced uncertainty on stock valuation: 1) the uncertainty of stock market volatility is reduced. The two sessions emphasized "enhancing the inherent stability of the capital market", and decision-makers pointed out that "promoting the stable and healthy development of the capital market is an important embodiment of economic development and governance ability", implying that the bottom line of stock market volatility is clear; 2) the policy uncertainty is reduced. The policy attitude towards boosting domestic demand has become more proactive and the policy thinking is logical. The central finance has turned to expanding "issuing ultra-long-term special treasury bonds for several consecutive years" and exploring the central bank buying and selling treasury bonds in the secondary market. The policy goal of "digesting stock" of real estate points directly to the crux of the problem. Equipment renewal / trade-in has become a new starting point for counter-cyclical and stable growth; 3) economic uncertainty has been reduced. The pace of the issuance of special treasury bonds and fiscal expenditure has accelerated, the formation of physical workload has accelerated, and price inflation is expected to recover moderately. Expectations are no longer revised down, and falling uncertainty is the cornerstone of the stock market rally.

Looking back at 2014: how will reduced uncertainty boost the stock market? First blue chip stocks, then growth stocks. As the "4 trillion" stimulus effect gradually faded, the blurring of economic momentum and contractionary aggregate policies in 2011-2013 led to a persistent downturn in blue-chip stocks (CSI 300 fell), and small-cap stocks fell in early 2014 (gem adjusted by 25%) as optimistic expectations continued to fail. Pessimistic expectations and trading structure were cleared, and the Chinese stock market bottomed out. Although a number of economic data continued to decline in 2014, they also faced the constraints of traditional overcapacity. However, since the middle of 2014, the policy tendency of real estate and financial tightening began to relax, the uncertainty faced by the economy and society decreased, the stock market came out of the shock and rising market, and the rhythm also showed the characteristics of blue chips before growth stocks. In the face of the blue chip adjustment of 2021-2023 and the volatility of small-cap stocks in early 2024, history will not repeat but rhyme: 1) the stock market trend reflects the expected change, not the trend of data; 2) the market acceptance of the decline in uncertainty is gradual, from conservative to open, so the market rhythm starts from low blue chip, and then gradually moves towards technological growth.

Industry comparison: first blue chip stocks and then growth stocks, increase the allocation of some domestic demand blue chips and growth stocks. In late April, we proposed that the stock market was driven by reduced uncertainty and that most stocks could rebound. The focus is on the sectors with full pessimistic expectations and declining uncertainty, with risk appetite rising step by step, blue chip first and then growth. 1) domestic demand policy expansion and logical policy thinking, the uncertainty of some domestic demand sectors decreased, recommended: financial real estate / food and beverage / automobile / agriculture; and consumer building materials / transportation / resources, etc.; 2) growth stock rhythm first science and technology manufacturing, then science and technology application. Recommendation: semiconductor / national defense / computer innovation / innovative drugs; 3) continue to be optimistic about Hong Kong stock dividends and technology leaders.

Risk hint: higher-than-expected overseas interest rates and global geopolitical uncertainty.