Did the A-shares' pullback last week break the bull market logic?

Last week, the SSE Index fell by 0.94%, the CSI 300 dropped by 1.75%, the CSI 500 decreased by 1.37%, the ChiNext Index declined by 0.74%, and the Hang Seng Index fell by 3.47%. The value style underperformed the growth style. Last week, the average daily trading volume of the entire A-share market was 1.8096 trillion yuan, a decrease compared to the previous week. Although the market experienced some pullback last week, we still believe that "the current fundamental conditions for entering a bull market based on liquidity are in place; while the upward space cannot be clearly defined for now, the focus remains on structure."

From a structural perspective, we reiterate the views from our previous weekly reports "The Best Choice: 'Innovation'" and "Challenging the Barbell Strategy for the First Time!": Currently, the extreme barbell strategy represented by banks and micro-trading still has some absolute return space, but the effectiveness of excess returns is declining, corresponding to the "anti-barbell excess" judgment; at the same time, the "intermediate assets" represented by undervalued large-cap growth are welcoming a rebound in absolute and excess returns. We remain firm that the key to Q3 is the ChiNext Index + technology and innovation.

Last week, the major indices experienced a slight pullback, which we believe was mainly due to the relatively mild economic stimulus from the domestic Politburo meeting and the significantly lower-than-expected U.S. non-farm employment data, leading to a sharp decline in U.S. stocks and causing some funds to take profits temporarily. However, this did not hinder the overarching logic driven by liquidity due to proactive credit expansion. In fact, since the 407 golden pit was realized, we have maintained the judgment that "the market will be stronger than expected." This optimistic forecast stems from the continuous return of non-U.S. assets due to a weak external dollar and the rebalancing of domestic stock and bond asset allocations, both of which jointly promote liquidity easing in the stock market, corresponding to a continuous influx of incremental funds. Currently, we tend to believe that the major indices will remain strong under the "banks setting the stage, multiple parties performing" scenario in August.

1. Whether the U.S. economy has fallen into "stagflation" still needs to be tracked and observed: This month, U.S. non-farm employment data fell short of expectations, with significant downward revisions to the employment data for May and June, and the unemployment rate rising to 4.2%. Coupled with high inflation, this has again triggered panic in U.S. stocks regarding economic stagflation, believing that under the impact of Trump's global tariff war and the expulsion of illegal immigrants, the U.S. economy is beginning to suffer backlash. As a result, market expectations for the Federal Reserve to cut interest rates have been significantly brought forward, with current CME bets predicting three rate cuts this year, and a reduction to 3.00%-3.25% by 2026, approaching neutral interest rates. The increased probability of rate cuts aligns with Trump's demands, but his public criticism of the Labor Department highlights the political complexities behind this week's non-farm employment data, warranting continued attention to subsequent employment data updates

2. The Politburo meeting in July corrected the "anti-involution": This Central Politburo meeting made positive statements in the areas of finance, monetary policy, and consumption, alleviating concerns about adjustments in policy focus. Regarding the market's high concern for "anti-involution," the meeting proposed to "govern disorderly competition among enterprises in accordance with laws and regulations, promote capacity governance in key industries, and standardize local investment attraction behaviors," which differs from some perceptions of "production limits and price increases reversing industrial deflation," leading to a rational return in the pricing of bulk commodities and anti-involution products.

In fact, constraints on the supply side of anti-involution may push PPI to rebound, but the core still depends on demand. We believe that the overarching logic of cyclical demand needs to wait for the easing of the turbulent political cycles in China, the U.S., and Europe (tariffs being lowered) and the upward resonance of economic cycles (global fiscal expansion driving PMI upward), with the best cyclical varieties corresponding to globally priced resource products.

From a structural perspective, our current structural ranking judgment is: 1. Undervalued large-cap technology growth (such as the ChiNext Index) 2. Technology and innovation based on industrial logic, globally priced resource categories 3. Domestically priced cyclical products 4. Traditional consumer large-cap growth (post-cycle).

In fact, before the current low inflation situation is completely resolved, the current "barbell strategy" of banks - micro-accounts accurately indicates that absolute return space still exists, but excess performance will be challenged by undervalued large-cap growth represented by the ChiNext Index + technology and innovation. The specific logic is as follows: 1. The yield differentiation between banks - micro-accounts and intermediate assets (ChiNext Index, CSI 300) has reached historical extremes; 2. The dividend yield of the four major banks minus the yield of ten-year government bonds is below 2.5%, suggesting that banks will be in a high-level fluctuation; 3. Based on the theory of active credit creation, liquidity will gradually spread from absolute undervaluation to relative undervaluation, showing a historical pattern where banks rise first, non-banks follow, and then technology and undervalued large-cap growth rise.

At the same time, the most accurate expression for the excess rebound of barbell intermediate assets is: Excess of anti-bank - micro-account barbell = excess rebound of leading companies in various sub-industries represented by the A500 Index, while the ChiNext Index benefits from valuations below the historical 30th percentile and performance growth and trends dominating broad-based indices, potentially becoming the most beneficial direction.

1. Regarding the banking sector's high-level fluctuations, falling but not collapsing situation: Since mid-July, the current banking index has retraced more than 6%, which has reached a relatively high level in the past three years. Secondly, with the "banking platform, multiple parties performing," the high-risk funds that flowed into the banking sector in late June have gradually moved to other sectors, improving the market's profitability effect, resulting in a significant decrease in the volatility of the banking sector, returning to historically low levels. This suggests that the chip structure of the banking sector is beginning to clear, overall remaining in a high-level fluctuation, falling but not collapsing pattern. Objectively speaking, the current valuation of the banking sector has roughly approached the mid-2020 level of the Miao Index, without forming extreme bubble conditions. Combined with the active credit creation theory under social financing expansion, and the ongoing rebalancing of stock and bond asset allocation, while banks are not generating excess returns, it is also inaccurate to be overly bearish on the banking sector.

2. Regarding the ChiNext Index + Technology and Innovation: Currently, the effectiveness index of A-share prosperity investment is rebounding, and the active bullish pricing power based on cost-effectiveness and industrial trends is beginning to emerge. From a macro strategy perspective, the current slowdown in long-term interest rate declines and the shift of domestic and foreign disturbance factors to a positive direction, combined with policies such as "anti-involution," are long-term beneficial for capacity clearing, improving competitive landscape, and warming inflation; at the industrial level, new drivers such as AI (computing power), Hong Kong stock internet, innovative drugs, new consumption, semiconductors, and new energy (vehicles) are successively welcoming their respective cyclical turning points, which undoubtedly provides conditions for the return of undervalued large-cap growth and so-called "intermediate assets" to excess effectiveness.

Note: This article has been abridged.

Authors of this article: Lin Rongxiong, Zou Zhuoqing, Huang Weizong, Source: Lin Rongxiong Strategy Salon, Original title: "[Guotou Lin Rongxiong Strategy] Don't Worry About the Road Ahead"

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