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

September Market Review: A-Share Market Declined Then Rebounded

As of September 23, most major 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 1.72% and 0.57%, respectively. The average daily turnover of the entire 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 and rebounded in the second half.

First Half of September: Downward Pressure

During the first half of September, geopolitical tensions escalated, long-end U.S. Treasury yields rose, and the market priced in a Federal Reserve rate hike, leading to A-share declines.

• Overseas factors: On one hand, the U.S. and Iran launched new rounds of attacks against each other, and Houthi forces struck 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, and market risk appetite weakened. On the other hand, the market priced in the possibility of a Fed rate hike. August non-farm payroll data significantly exceeded expectations, intensifying rate hike expectations and pushing U.S. Treasury yields higher, which weighed on market valuations. Subsequently, the U.S. core CPI accelerated to 0.3% month-on-month, further strengthening rate hike expectations. However, as the market gradually priced in the rate hike fully, indices began to stabilize.
• Domestic factors: Various industries released their plans and implementation schemes 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

In the second half of September, the Fed's rate hike was delivered, and the market traded on the "bad news is out" narrative. Meanwhile, overseas geopolitical tensions showed signs of marginal easing, and the approaching China-U.S. talks further boosted risk appetite, leading to an index rebound.

• On September 17, the Fed announced a 25-basis-point rate hike, in line with expectations. After the decision, the market traded on the exhaustion of negative factors.
• The Iranian president visited the U.S. to attend the UN General Assembly, signaling a marginal easing of geopolitical risks, which supported the rebound.
• On September 20, China-U.S. economic and trade teams held consultations in New York. Subsequently, the Ministry of Foreign Affairs announced that the Chinese and U.S. heads of state would meet from September 23 to 25, further driving the recovery of market risk appetite.

Sector Rotation Accelerated, Internal Divergence Intensified

(1) Technology Sector: AI Hardware Chain Outperformed

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

• The U.S. FCC released final rules on component-level regulation, but several major Chinese optical communication manufacturers were not named entities on the FCC Covered List, leading to a temporary clearing of suppressed expectations.
• The CIOE (China International Optoelectronic Exposition) confirmed the volume ramp-up of 1.6T optical modules and the high景气 of CPO (Co-packaged optics). Combined with tight supply and price hike expectations in upstream segments such as storage and PCB, the AI computing chain's景气 was not disproven.
• After the Fed rate hike was delivered, previously concentrated rate hike expectations were realized, and the tech sector saw a rebound.

(2) Cyclical Sector: Resource Stocks Corrected Sharply

Pressure came from three fronts:

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

(3) Consumer and Dividend Sectors: Periodic Performance During Risk Aversion

Market risk appetite remained volatile overall in September. Consumer and dividend sectors were relatively resilient, with some segments benefiting significantly. The most notable performer was the pharmaceutical and biotech sector (+2.78%), driven by multiple factors: high景气 in innovative drug out-licensing deals, the release of the "15th Five-Year Plan" top-level design for the pharmaceutical industry, and 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 latest FOMC meeting delivered a 25bp rate hike as expected. The dot plot indicated one more rate hike in 2026 and unchanged rates in 2027, with a generally neutral tone that partially alleviated market concerns about a strong tightening cycle. This meeting confirmed the effectiveness of the Walsh policy framework, marginally consolidating the Fed's policy credibility. The U.S. Treasury market exhibited a pattern of "short-end rising, long-end yields not rising but falling," with term premiums gradually recovering and upward pressure on long-end yields easing. Looking ahead, U.S. financial conditions have tightened since July, which is expected to transmit negative feedback to the economy with a one-quarter lag. Even if inflation still supports nominal rates, the real interest rate center is expected to gradually decline.

(2) Solid Conditions for an A-Share Rebound

• Chip pressure has been fully released: The proportion of the top 5% of market turnover has fallen back to levels seen in April this year, and the chip pressure accumulated during the rapid market rise from April to June has largely cleared.
• Valuation contraction has been the main driver of this adjustment: Overall market valuation has fallen back to April 2025 levels, with downside space fully digested and market odds significantly improved.
• Policy bottom provides clear support for win rates: The central bank emphasized continuing to implement moderately accommodative monetary policy. Policy fund holdings have marginally increased, with sustained stability signals.
• Implied volatility of core indices such as CSI 300 and CSI 1000 has fallen to historical lows: This suggests that the market stress test is largely complete, and risk appetite is undergoing marginal recovery.

(3) Short-Term Trading Environment Uncertainty Is Manageable

During the upcoming holiday period, there are few major overseas data releases, and 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 together build a solid foundation for an A-share rebound.

Allocation Recommendations: Focus on Tech and Healthcare, Watch Cyclical Upstream and Midstream

1. Although 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 healthcare has independent景气 expectations.
2. Against the backdrop of a weak economic fundamentals, a new round of steady-growth policies in the fourth quarter is worth anticipating. Attention can be paid to cyclical upstream and midstream sectors such as construction, building materials, machinery equipment, and steel.

October Stock Picks

| Stock/Fund | Sector/Strategy | |---|---| | 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 | | Lianxun Instruments | Machinery | | FiberHome Telecommunication Technologies | Communication | | Quanyangquan | Food & Beverage | | Mobvista | Media | | Rongxin Culture | Media | | China Pacific Insurance | Non-Bank Finance | | Honglu Steel Structure | Construction | | WuXi AppTec | Healthcare |