Zhongtai Securities: A-share rebound likely to continue, recommends tech and healthcare

September Review: A-Share Market Declines Then Recovers

As of September 23, most major A-share indices recorded losses. The Shanghai Composite Index fell 1.25%, the CSI 300 dropped 2.33%, while the CSI 2000 gained 2.50%. The Sci-Tech Innovation Composite Index and the ChiNext Index declined by 1.72% and 0.57%, respectively. Average daily turnover across the A-share market stood at RMB 1,894.3 billion, down RMB 360.3 billion month-on-month from August.

In terms of rhythm, the A-share market trended downward in the first half of September before rebounding in the second half.

First Half of September: Downward Pressure

During the first half of the month, escalating geopolitical conflicts, rising long-end U.S. Treasury yields, and market pricing of a Federal Reserve rate hike weighed on A-share valuations.

• Overseas factors: The U.S. and Iran launched new rounds of strikes against each other, and Houthi forces attacked Saudi Arabia's East-West oil pipeline. WTI crude oil futures rose to a high of USD 102.4 per barrel, a new high since the U.S.-Iran conflict. Rising energy prices fueled concerns over inflation stickiness, weakening risk appetite. Meanwhile, the market priced in a potential Fed rate hike after August non-farm payroll data significantly exceeded expectations, pushing U.S. bond yields higher and suppressing valuations. Subsequently, the U.S. core CPI accelerated to 0.3% month-on-month, further strengthening rate hike expectations, though the market gradually priced in the move, allowing indices to stabilize.
• Domestic factors: Various industries released plans and implementation guidelines for the "15th Five-Year Plan" period. The Ministry of Finance launched a new round of large-scale capital replenishment for financial institutions. Policy support remained steady, providing a floor for the market.

Second Half of September: Rebound

The Fed's rate hike decision and easing geopolitical tensions triggered a market rebound.

• Overseas factors: On September 17, the Fed raised interest rates by 25 basis points as expected. The market interpreted this as "bad news priced in." Additionally, the Iranian president traveled to the U.S. to attend the UN General Assembly, signaling a potential easing of geopolitical risks, which supported the rebound.
• Domestic factors: On September 20, China-U.S. economic and trade teams held consultations in New York. Subsequently, the Chinese Foreign Ministry announced a meeting between the heads of state of China and the U.S. from September 23 to 25, further boosting risk appetite.

Sector Rotation Accelerates, Internal Divergence Intensifies

Technology Sector: AI Hardware Chain Outperforms

The communication (+5.40%) and electronics (+1.00%) sectors led gains, driven by three catalysts:

1. The U.S. FCC released final rules on component-level regulation, but several major Chinese optical communication manufacturers were not named on the FCC Covered List, clearing near-term overhang.
2. The Optoelectronics Expo confirmed volume growth for 1.6T optical modules and high景气 for CPO. Combined with tight supply and price hike expectations for upstream components like storage and PCB, the AI computing chain's景气 remained unrefuted.
3. After the Fed rate hike, previously concentrated rate hike expectations were realized, triggering a rebound in the tech sector.

Cyclical Sector: Resource Stocks Decline Sharply

Resource stocks faced significant pressure due to:

• The Fed's dot plot indicated one more rate hike within the year, tightening overseas liquidity and suppressing resource valuations.
• Expectations of diplomatic coordination in the Strait of Hormuz led to a pullback in energy prices, reducing price elasticity for resources.
• Domestic demand remained weak, with cumulative year-on-year growth in fixed asset investment at -7.2% and infrastructure investment at -5.37%, both in deep negative territory.

Consumer and Dividend Sectors: Defensive Performance

With overall risk appetite trending sideways, consumer and dividend sectors showed relative resilience. The most notable performer was pharmaceuticals and biotechnology (+2.78%), driven by:

• High景气 in innovative drug out-licensing deals.
• The release of the "15th Five-Year Plan" top-level framework for the pharmaceutical industry.
• Valuation recovery from low levels.

In contrast, traditional consumer sectors such as food & beverage and home appliances remained weak due to subdued domestic demand.

A-Share Outlook: Rebound Expected to Continue

1. External Pressure from U.S. Treasuries May Further Ease

The Fed's 25bp rate hike was in line with expectations. The dot plot indicated one more hike in 2026 and unchanged rates in 2027, a neutral tone that partially alleviated concerns over an aggressive tightening cycle. The meeting validated the effectiveness of the Walsh policy framework, marginally consolidating Fed policy credibility. The U.S. Treasury market exhibited a pattern of "short-end rising, long-end falling," with term premiums gradually recovering and long-end yield pressure easing. Looking ahead, tighter U.S. financial conditions since July are expected to transmit negative feedback to the economy with a one-quarter lag. Even if inflation supports nominal rates, the real interest rate center is expected to gradually decline.

2. Solid Conditions for A-Share Rebound

• Chip pressure fully released: The top 5% turnover ratio has fallen back to levels seen in April this year, with chip pressure accumulated during the rapid rally from April to June largely cleared.
• Valuation contraction fully absorbed: Market-wide valuations have retreated to April 2025 levels, with downside fully priced in and赔率 significantly improved.
• Policy bottom provides clear胜率 support: The central bank emphasized continued implementation of moderately accommodative monetary policy. Policy fund holdings have marginally increased, signaling ongoing market stabilization.
• Implied volatility at historical lows: The implied volatility of core indices such as the CSI 300 and CSI 1000 has fallen to historical lows, indicating that market stress tests are largely complete and risk appetite is poised for marginal recovery.

3. Short-Term Trading Environment Uncertainty Manageable

With few major overseas data releases during the holiday period, the probability of significant disruption to Fed policy expectations is low. Combined with expectations of marginal improvement in the external trade environment, short-term uncertainty is further reduced. These multiple conditions collectively build a solid foundation for the A-share rebound.

Allocation Recommendations

1. Allocate to Technology and Pharmaceuticals

While the risk of rising long-end U.S. Treasury yields has diminished, conditions for a trend decline are not yet in place. Therefore, tech stocks represented by AI still have relative景气 logic in a high-interest-rate environment, while pharmaceuticals have independent景气 expectations.

2. Focus on Pro-Cyclical Upstream and Midstream Sectors

Against the backdrop of a weak economic fundamentals, a new round of steady-growth policies in Q4 is worth anticipating. Attention can be paid to pro-cyclical upstream and midstream sectors such as construction, building materials, machinery equipment, and steel.

October Stock Picks

| Stock | Sector | |-------|--------| | Invesco Great Wall CSI Dividend Low Volatility 100 ETF | Strategy | | Invesco Great Wall CSI Hong Kong Stock Connect Innovative Drug ETF | Strategy | | Huarui Precision | Advanced Manufacturing | | Lianyi Instruments | Machinery | | FiberHome Telecommunication | Communication | | Quanyangquan | Food & Beverage | |汇量科技 | Media | |荣信文化 | Media | | China Pacific Insurance | Non-Bank Financial | | Honglu Steel Structure | Construction | | WuXi AppTec | Pharmaceuticals |