Chen Guo: Waiting for the gold pit, shifting from defense to offense at the end of the third quarter

According to the Wisdom Financial APP, on July 29th, Chen Guo, Chief Strategy Officer of CITIC Securities, analyzed and forecasted the market during a live broadcast. Chen Guo stated that from the perspective of major contradictions, domestic profit cycle, policies, and liquidity environment are all improving. Therefore, there may be some twists and adjustments in the short term, but this is also a relatively good positioning stage. In the next year or even longer, it should be a period of the US dollar index and US bond interest rates declining. So, we are roughly at a turning point in a cycle, and this stage is also relatively the most difficult, but it will soon be over. Domestic demand is still at the bottom, but some industries have global competitiveness, with increasing penetration in overseas markets or benefiting from renewal and innovation cycles, showing some structural highlights.

Chen Guo pointed out that although there hasn't been a significant inflow of funds into the market, the supply-demand balance is still good. This can support the gradual improvement of the stock market center. I don't think, at this point in time, it's as simple as going for dividend assets or chasing dividend assets. It's still necessary to carefully price (dividend assets) as there is already evident differentiation.

Waiting for the Golden Pit, Gathering at New Highs

Specifically, the host asked, "We are especially looking forward to your sharing today because our slogan this time continues the major theme from your research report, 'Waiting for the Golden Pit, Gathering at New Highs.' First, please explain this title 'Waiting for the Golden Pit, Gathering at New Highs.' From this title, it seems that you think the road ahead is still challenging, but then you mention gathering at new highs, indicating that you are still quite positive. Could you explain this title to us?"

Chen Guo explained that the key actually lies in the second half of the sentence, "Gathering at New Highs."

Overall, he is optimistic about the market in the second half of the year. Why can we expect innovative new highs?

Because the fourth-quarter corporate profit growth rate will turn from negative to positive. At the same time, the market outlook expects the ROE downturn cycle to end next year. In terms of liquidity, it is expected that the Federal Reserve will enter a rate-cutting cycle around September, which is a significant change. Regarding China's monetary policy, including fiscal policy, some space has been released. Of course, at the time of the report's release, including the present moment, there may still be some difficulties and challenges in the short term, including pressure on interim profits and the third-quarter profits may not turn positive quickly.

The stabilization and rebound of domestic demand still need to be observed. At the same time, some overseas data are also trending downwards, and external demand is entering a phase of downward revision.

This stage is defined as a golden pit because, from the perspective of major contradictions, domestic profit cycle, policies, and liquidity environment are all improving. Therefore, there may be some twists and adjustments in the short term, but this is also a relatively good positioning stage, which is the main meaning the title aims to convey.

The past three years have been a period of ROE decline, which may end next year

The host asked, "We have seen that in the past three years, the market has been mainly adjusting, with ups and downs this year as well. With the national team supporting the market, it hit a new high for the year in May. However, in the past two months, there has been another round of adjustments. What are the factors contributing to this? What are the trading logics in the current market, and what are the concerns of everyone?"

Chen Guo believes that the A-share market has faced many challenges in the past three years, summarized simply as a profit downturn cycle or an ROE downturn cycle on the numerator end. Historically, the A-share market has experienced ROE fluctuation cycles roughly every three to four years Part of the supply-demand adjustment in this situation is due to declining demand, while another part is due to previous oversupply, so the supply also needs to be adjusted.

From the current situation, the demand adjustment is nearing completion. The nominal GDP growth rate in the second quarter is 4%, which is roughly the lower bound of relative fluctuations in the coming year. However, the supply growth rate is still adjusting.

It is expected that by next year, the capital expenditure growth rate will be significantly lower than the GDP private sector growth rate or income growth rate. In other words, companies will shift from oversupply to supply-demand balance or undersupply, allowing corporate profits to turn positive. This is the cycle of Return on Equity (ROE).

Domestic demand is still bottoming out, but some industries remain globally competitive

The host asked, as we are now entering the earnings season, with companies starting to disclose their performance one after another. Since the performance has not been fully disclosed, we cannot summarize some of its characteristics. But based on your tracking of the first half of the year, what are the key directions to focus on in the financial reporting period, and what key changes can be observed and verified?

Chen Guo mentioned that the profit growth rate of all A-share companies in the second quarter is still in the process of bottoming out. The negative growth is relatively converging compared to the first quarter, but it is still likely to be negative, estimated at around -3%. From an industry perspective, several phenomena need to be observed.

The first is that stable industries have relatively outstanding performance, such as the electricity industry.

The second is in some manufacturing sectors, both domestically and internationally, showing very strong competitiveness. This includes many important manufacturing industries in the concept of going global, such as ships, construction machinery, tires, leading vehicle manufacturers, and power grid equipment.

There are also some technology industries maintaining high prosperity or marginal improvement, including optical modules, semiconductor equipment, consumer electronics, and IC design.

Another category includes slightly cyclical consumer industries such as breeding, industrial metals, shipping, and some chemical varieties, where a considerable factor comes from relatively tight supply, leading to prosperous prices.

In summary, domestic demand is still bottoming out, but some industries have global competitiveness, with increasing market penetration in overseas markets or benefiting from renewal and innovation cycles, showing some structural highlights.

The host asked, can we continue to focus on these industries you mentioned next?

Chen Guo continued to say that most industries are still worth continuing to focus on. However, some industries may experience marginal changes.

For example, in the manufacturing industry, we need to observe if overseas demand slows down rapidly in the future, or if there is a rapid rise in trade protectionism, which may pose challenges to companies that rely on external demand.

Of course, this is not considered inevitable because industries like ships have attributes that are difficult to replace by Chinese companies. So this may bring some uncertainty, but quite a few companies will ultimately prove themselves in this process.

Dividend assets are starting to differentiate

The host asked, do you think dividend investments should continue now? For example, in the electricity industry, some stocks have risen significantly.

Chen Guo stated that the electricity industry also faces this issue. In terms of industry indices, it is still acceptable. In terms of mid-year reports, the performance is good, and the electricity industry's performance in the second half of the year is also good. However, there is internal differentiation in the electricity industry. For example, some hydropower leading companies may have already exhausted this year's or next year's profit growth. And the dividend yield relative to the ten-year government bond yield has narrowed excessively, making it difficult to have significant upside potential Its expectation is for a significant decrease in government bond yields, but it may be relatively difficult in the short term, so it needs some time for consolidation and fluctuations.

Dividend assets are currently in a similar situation. Some dividend assets, such as coal or some resource-based dividends, may not even have fundamentals as strong as electricity, and their future stability may not be as good as electricity.

I don't think at this point in time, it's as simple as just grouping together dividend assets or chasing after them. It's important to carefully evaluate the pricing, as there is already a clear differentiation emerging.

End of the Third Quarter: Transition from Defense to Offense

The host asked, your mid-term strategy mentions a "transition from defense to offense," what is the judgment behind this? What are the reasons, and where is the turning point?

Chen Guo stated that, firstly, in the second half of this year, the market first suppressed and then rebounded. The transition from defense to offense mainly comes from the change in the profit cycle, roughly between the third and fourth quarters. The profit cycle changes, with corporate profits turning positive in the fourth quarter, and the market bottoming out and rebounding in terms of next year's ROE expectations. This is an important change.

Secondly, around the end of the third quarter, the Federal Reserve entered a rate-cutting cycle, which is also a significant change. Thirdly, some domestic policies, such as stabilizing growth or expanding domestic demand, have been continuously strengthened from the end of the third quarter to the fourth quarter. This year, it is challenging to meet the growth target because the actual growth rate in the second quarter was 4.7%. At the same time, in response to next year's external demand challenges, there needs to be deployment and policy reinforcement by the fourth quarter.

With the Federal Reserve entering a rate-cutting cycle, the monetary policy space has also opened up. Some recent policy statements, including the Third Plenum, have placed considerable emphasis on economic growth this year and subsequent efforts to expand domestic demand.

Therefore, the profit cycle itself, combined with the turning point in overseas liquidity, and the intensified domestic policy efforts, will lead to a transition from defense to offense. The timing is roughly around the end of the third quarter.

Key Point for the Second Half of the Year: Positive Profit Growth

The host asked, as the year is more than halfway through, the market is led by dividends, growth is recovering, and value is returning. What are your expectations for investment opportunities in the second half of the year?

Chen Guo judged that the most crucial point in the second half of the year is the reversal of profit growth from negative to positive.

Market expectations for domestic demand are beginning to improve, and policies will continue to focus on expanding domestic demand. Trading to expand domestic demand will boost related industries and increase market risk appetite, providing opportunities for growth stocks. Industries such as home appliances, machinery, electronics, and defense are worth paying close attention to