GF Securities Chief Economist: Three DDM Factors Support A-Share Gains This Year

Authors:

• Xun Yugen, Chief Economist, Guosen Securities (Qualification No.: S0980525090001)
• Wu Xinkun, Chief Strategy Analyst, Guosen Securities (Qualification No.: S0980525120001)
• Yu Peiyi, Strategy Analyst, Guosen Securities (Qualification No.: S0980526010001)

Report Date: September 18, 2026

Key Conclusions

Based on the three variables of the DDM (Dividend Discount Model), the A-share market shows upside potential:

1. Earnings: Net profit of A-share companies has grown by double digits year-on-year.
2. Risk-Free Rate: The 10-year government bond yield has declined this year, favoring long-term capital inflows.
3. Risk Appetite: Global risk appetite has risen in 2026, while A-share risk appetite remains below its historical average.

DDM Framework: Why A-Shares Should Rise

Recent market sentiment in A-shares has been subdued. The CSI 300 and Shanghai Composite Index have declined year-to-date, while previously strong indices such as the STAR 50 and ChiNext have seen their gains narrow significantly. Meanwhile, overseas equity markets and risk assets such as crude oil and copper have posted notable gains.

To understand the divergence between A-shares and overseas equities and commodities, it is useful to return to the fundamentals of asset pricing—specifically, the DDM model.

According to financial theory, the fair price of a stock is the present value of its future cash flows. Under the DDM:

• With a constant dividend payout ratio, the numerator reflects earnings.
• The denominator (discount rate) primarily reflects the risk-free rate and risk premium.

Below, we analyze the three key drivers of stock prices.

1. Earnings: Double-Digit Net Profit Growth

A-share net profit has grown by double digits this year, marking the most significant positive change in fundamentals. The breadth of earnings improvement has also expanded.

• Aggregate data: In the first half of 2026, net profit growth for all A-shares improved markedly. Real GDP grew 4.7% year-on-year in H1 2026. Corporate earnings showed even greater recovery elasticity:
• Full-year 2025: Net profit growth for all A-shares was 2.0%; excluding financials, it was -2.8%.
• H1 2026: Growth rebounded to 15.9% for all A-shares and 15.1% excluding financials.
• In Q2 2026, ROE (TTM) for all A-shares rose for the first time since 2022.

• Sector breakdown: The technology sector, led by electronics, posted the highest earnings growth, with cumulative net profit growth of 101% in H1 2026. The breadth of improvement also widened: the share of Shenwan secondary industries with net profit growth exceeding 10% rose from 38% in Q4 2025 to 46% in Q2 2026.

2. Risk-Free Rate: 10-Year Government Bond Yield Declines

The decline in government bond yields this year supports long-term capital inflows into equities.

• The 10-year government bond yield, commonly used as a proxy for the risk-free rate in China, has fallen 16 basis points from 1.9% at the start of the year to 1.7%.
• Government bond issuance in 2026 has also declined compared to the same period in 2025, contributing to an "asset scarcity" environment that has pushed long-term yields lower.
• Although overseas interest rates have risen recently, the impact on domestic risk-free rates is expected to be limited. The central tendency of the 10-year yield is expected to shift downward for the full year.

Against this backdrop, insurance funds are expected to continue increasing their allocation to equities. With lower bond yields, the attractiveness of equities rises. In H1 2026, retail investors, insurance funds, and private equity all contributed significant inflows, with insurance funds being a major force, adding a net 479.5 billion yuan.

Looking ahead, supported by premium income growth and new regulations requiring state-owned listed insurers to allocate 30% of annual new premiums to equities, insurance funds are likely to further increase equity allocations, providing liquidity support to the stock market.

3. Risk Premium: Global Risk Appetite Rises

Global risk appetite has increased this year, and A-share sentiment is expected to recover.

• Overseas equities and commodities have posted significant gains year-to-date (as of September 16):
• Japanese and South Korean markets led gains.
• U.S. stocks rose by double digits.
• UK and German markets also advanced.
• Only A-shares and Hong Kong stocks saw broad-based index declines.
• Commodity markets: Crude oil rose 79%, copper rose 12%.
• Risk premium indicators for U.S., Japanese, and South Korean markets show that risk appetite has been rising and remains at high levels relative to the past 15 years.

In contrast, A-share sentiment has been weak. The five-day smoothed total turnover of all A-shares fell from 3.55 trillion yuan in late June to below 1.75 trillion yuan—a decline of over 50% from the peak.

• The current risk premium for all A-shares stands at 3.0%, placing it at the 31st percentile from the top since 2005.
• During the bull markets of 2019–2021 and December 2012–June 2015, the risk premium at market peaks reached near the mean plus one standard deviation. Currently, it has not even reached the mean.
• Compared to historical levels and other global risk assets, A-share risk appetite is low and has room to rise.

Conclusion

According to the DDM pricing model:

• A-share net profit has grown significantly in 2026.
• The decline in the risk-free rate supports capital inflows.
• Market risk appetite is expected to recover.

These three factors support a year-end rally for A-shares.

We continue to draw an analogy between the market rally that began on September 24, 2024, and the "519 rally" of 1999. Both occurred during periods of economic transition from old to new growth drivers. In terms of market rhythm, the current phase is similar to late February 2001. From a wave theory perspective, the market is now in the late stage of a fourth-wave correction and the early stage of a fifth-wave uptrend.