Huaxi Securities: Temporary pullback, the trend of this round of "slow bull market" remains unchanged

According to the Zhitong Finance APP, Huaxi Securities released a research report stating that after the July Politburo meeting and the new round of China-US economic and trade talks, the market's speculation on incremental policies has cooled down, and the index has a demand for phase adjustment after rising for five consecutive weeks. Looking ahead, expectations for a Federal Reserve interest rate cut have reignited, and domestic macro and micro liquidity remains relatively ample, which is conducive to the continuation of the slow bull trend in A-shares. Since the "623" market, the characteristics of "rotating upward and low-level replenishment" among various A-share sectors have been evident, with better sustainability of the profit-making effect. At the same time, the sources of incremental funds in the market are relatively broad; in addition to financing funds, the participation of public and private equity institutions has also increased. In the context of asset allocation scarcity, the subsequent positive feedback effect of "residents allocating funds to enter the market and the slow rise of the stock market" is also expected to strengthen.

In terms of industry allocation, it is recommended to focus on: 1) new technologies and new growth directions: such as AI computing power, robotics, solid-state batteries, etc.; 2) dividend sectors that provide reallocation opportunities after corrections, such as some undervalued state-owned enterprises.

In terms of themes, pay attention to self-controllable, military industry, low-altitude economy, marine technology, etc.

The main views of Huaxi Securities are as follows:

Market Review: This week, global equity markets generally adjusted, with Hong Kong, France, Germany, and the US stock markets experiencing significant declines. After five consecutive weeks of gains, A-shares welcomed a correction, with major broad-based indices generally declining. In terms of sectors, A-share CPO and innovative pharmaceuticals led the gains; cyclical products such as coal and non-ferrous metals corrected. In the domestic commodity market, with the intensive risk warnings from the three major futures exchanges and the implementation of position limits on certain varieties, market sentiment in the commodity market has cooled down, with previously strong varieties such as coking coal, glass, and polysilicon experiencing significant declines. In the international commodity market, on July 30, Trump announced that copper tariffs would not restrict copper raw materials, leading to a sharp decline in COMEX copper. In the foreign exchange market, after the US non-farm data was released on Friday, the US dollar index plummeted, and market expectations for a rate cut in September significantly increased.

The following aspects are the recent market focus:

1) Overseas: US non-farm data was significantly revised down, and the probability of a rate cut in September increased. According to data from the US Department of Labor, in July, the US non-farm payrolls added 73,000 jobs, and the unemployment rate rose to 4.2%. At the same time, the number of new jobs added in May and June was significantly revised down by a total of 258,000, marking the largest downward revision since the pandemic in 2020, raising concerns about a slowdown in the US economy and employment. The dovish sentiment in the capital market was ignited, with US stocks and the dollar weakening on Friday, gold rising, and the 10-year US Treasury yield falling from 4.4% to around 4.2%. CME FedWatch showed that market expectations for a rate cut in September rose from 38% to 80%. After the employment data was released, Trump called for the dismissal of the head of the US Bureau of Labor Statistics, and subsequently, Fed Governor Quarles resigned early, raising further questions about the Fed's independence. If subsequent inflation data does not significantly exceed expectations, the likelihood of a rate cut in September will significantly increase.

2) The July Politburo meeting and the new round of China-US economic and trade talks have both landed, and the market's speculation on incremental policies has cooled down. Regarding tariffs, in the China-US-Sweden economic and trade talks, both sides stated that they would continue to promote the previously suspended 24% equivalent tariffs from the US side and the Chinese countermeasures for a 90-day extension, reducing uncertainty regarding China-US tariffs. In terms of domestic policy, the July Politburo meeting expressed a relatively optimistic view of the economy in the first half of the year, maintaining the "four stability" tone, focusing on implementing existing policies, and reducing the necessity for intensive introduction of incremental policies In terms of the capital market, the meeting mentioned the need to "enhance the attractiveness and inclusiveness of the domestic capital market, and consolidate the momentum of stabilization and improvement in the capital market," continuing the supportive attitude towards the capital market. In addition, the meeting decided to hold the Fourth Plenary Session of the 20th Central Committee in October to study and formulate the "14th Five-Year Plan," with the expectation that cultivating and strengthening new productive forces will remain a policy focus for a considerable period, and the narrative of technological growth is expected to be reinforced.

3) After a rotation and rise in low-position sectors, the market has experienced a brief pullback. Since June 23, the A-shares have continued to rise driven by the large financial and technology sectors, with the market once expecting to challenge the previous high of 3674. Starting in mid-July, the market's large/small-cap style and value/growth style converged, first with a rebound in low-position cyclical sectors under the expectation of reversing the involution, followed by a renewed strength in high-prosperity sectors such as computing power and innovative pharmaceuticals. As of now, the price-to-earnings ratio percentile of two-thirds of A-share industries has returned to above the median of the past decade, and the average stock price index of the entire A-share market has also surpassed the year's high. After the Politburo meeting at the end of July, market policy expectations have cooled, and the index has shown a need for phase adjustment after rising for five consecutive weeks.

4) Stock market liquidity remains abundant, which is conducive to the deepening of the slow bull market in A-shares. Unlike last year's "924" market, the current "623" A-share market features more obvious characteristics of "rotating rises and low-position rebounds," with better sustainability of the profit-making effect, which is beneficial for attracting external funds into the market. As of the latest data, the financing balance of A-shares has risen to around 2 trillion yuan, with the financing balance accounting for 2.3% of the circulating market value, which is at the median level for this year. This also reflects that the sources of incremental funds in this round of market are relatively broad; in addition to financing funds, the participation of public and private equity institutions has also increased. Overall, the current micro liquidity in the stock market is relatively abundant, and under the pattern of asset allocation scarcity, the positive feedback effect of "residents allocating funds to enter the market and the slow rise of the stock market" is also expected to strengthen.

Risk warning: Policy effects may be less than expected, overseas liquidity risks, geopolitical risks, etc