Guosen's Xun Yugen: Three DDM factors support A-share gains this year

Xun Yugen is Chief Economist of Guosen Securities, Director of the Economic Research Institute, and Director of the China Chief Economist Forum.

Core Conclusions

1. Profitability: A-share net profits increased by double digits year-on-year.
2. Risk-free rate: The ten-year government bond interest rate has fallen since the start of the year, which is conducive to the entry of long-term funds into the market.
3. Risk preference: Global risk preference has increased this year, while A-share risk preference remains below the historical average.

Market Context

Investor sentiment in the A-share market has been sluggish recently. The CSI 300 and Shanghai Composite Index have continued to decline this year, and returns on strong indexes such as the Science and Technology Innovation 50 and the GEM Index have also shrunk significantly. Meanwhile, peripheral equity markets and risk assets such as crude oil and copper have experienced considerable gains.

To understand the divergence between A-shares, overseas equity markets, and commodity markets, we return to the origins of asset pricing and begin the analysis with the DDM model.

According to financial theory, the reasonable price of stock assets should be the discounted value of future cash flows. When applied to stock pricing, this is the DDM model:

When the dividend ratio is constant, the numerator reflects the profit side, while the denominator discount rate mainly reflects the risk-free interest rate and risk premium.

Below, we analyze the three major factors determining stock prices in detail.

1. Profit Side: Net Profit Increased by Double Digits Year-on-Year

A-share net profit has grown by double digits this year. The profit side represents the most important positive change in the A-share market this year, and the breadth of performance improvement has increased.

Overall Data

• The growth rate of all-A net profit improved significantly in the first half of this year.
• China's real GDP growth in the first half of the year was 4.7% year-on-year.
• The profit recovery of micro-enterprises has been more flexible.
• In 2025, the year-on-year growth rate of all-A net profit attributable to the parent company was only 2.0% ; excluding finance, it was negative at -2.8%.
• In the first half of 2026, it rebounded to 15.9% and 15.1%, respectively.
• In 26Q2, all-A share ROE (TTM) rebounded for the first time since 2022.

Structural Breakdown

• The technology sector, represented by electronics, recorded the highest profit growth rate.
• The cumulative year-on-year growth rate of net profit attributable to parent companies in the first half of the year reached 101%.
• The breadth of fundamental improvement is also expanding.
• Using the proportion of Shenwan secondary industries with net profit growth exceeding 10% year-on-year as an indicator of breadth:
• Breadth of all-A profit improvement increased from 38% in 25Q4 to 46% in 26Q2.

2. Risk-Free Interest Rate: 10-Year Treasury Bond Interest Rate Moves Downward

Treasury bond interest rates have fallen since the start of the year, which is conducive to the entry of long-term funds into the market. Domestic investors typically regard the 10-year government bond yield as a representative of the risk-free rate of return, which affects price trends by acting on the discount rate on the denominator side of the DDM model.

Key Developments

• The 10Y Treasury bond interest rate has fallen 16 BP from 1.9% at the beginning of the year to 1.7% currently.
• The supply of government bonds this year has also declined compared with the same period in 2025.
• The background of asset shortage may further push long-term interest rates lower.
• Although overseas interest rates have risen recently, the impact on domestic risk-free interest rates may be limited.
• The 10-year government bond interest rate center is expected to move downward overall throughout the year.

Impact on Fund Allocation

Against the backdrop of falling interest rates, the allocation of insurance funds to equities is expected to continue to expand this year. As bond investment yields are diluted, the attractiveness of equity assets increases.

• Since the start of the year, retail investors, insurance funds, private equity, and other funds have entered the market at a considerable scale.
• Insurance funds are one of the main players.
• The net inflow of insurance funds in the first half of the year reached 479.5 billion yuan.

Looking ahead, benefiting from:

• Growth in premium income of insurance companies this year
• New regulations requiring listed state-owned insurance companies to allocate 30% of annual new premiums to equity assets

Insurance funds are expected to further allocate to equities during the year, providing support for the micro-liquidity of the stock market.

3. Risk Premium: Rising Global Risk Bias

Global risk appetite has increased this year, and A-share sentiment is expected to eventually pick up. According to the pricing model, risk appetite also affects the discount rate on the denominator side.

Global Market Performance

Risk assets such as overseas equities and commodities have all achieved significant positive returns this year, indicating that global market investment sentiment is heating up.

As of September 16:

| Market/Asset | Performance | |---|---| | Japanese and Korean stock markets | Led gains significantly | | US stocks | Rose by more than double digits | | UK and German stock markets | Also rose | | A-share and Hong Kong broad-based indexes | Fell | | Crude oil | Rose 79% | | Copper | Rose 12% |

Observing the risk premium indicators of the US, Japanese, and Korean stock markets, risk appetite has continued to rise this year and is at the highest level in the past 15 years.

A-Share Sentiment

A-share sentiment is currently weak but is expected to pick up during the year:

• All-A trading volume (five-day smoothing) fell from 3.55 trillion in late June to less than 1.75 trillion currently.
• Volume has shrunk by more than 50% from its high point.
• The current risk premium rate of all A-shares is 3.0%, in the historical range of 31% from high to low since 2005.

Historical comparison:

• In the 19–21 bull market and the 12/12–15/06 bull market, at the high point, the risk premium rate was close to the mean + 1 times the standard deviation.
• This time, it did not even reach the mean.

Compared with history and other global risk assets, the current risk appetite for A-shares is low and has the potential for improvement.

Summary

According to the DDM pricing model:

1. Net profit of A-shares has increased significantly this year.
2. The decline in risk-free interest rates is conducive to the entry of funds into the market.
3. Market risk appetite is expected to recover.

These three major factors support a potential closing of A-shares higher this year.

We have consistently compared the market trend that started in 2024 to the market trend in 1999. The general background is that the economy is in a transition period of switching between old and new driving forces. Comparing the pace of market operation, it is now similar to the end of February 2001. From wave theory analysis, it is currently at the low point of the 4-wave adjustment and the early stage of the 5-wave rise.

Risk Warning

• Fundamentals are improving weakly.
• Geopolitics may affect market sentiment.

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