CICC September Allocation Monthly Report: Focus on dividend assets with fundamental support, as well as high-growth industries in line with industrial transformation trends

According to the latest information from CITIC Securities APP, CICC released a research report stating that looking ahead, the current market already shows many characteristics of being close to the bottom, with limited downside risks. The restoration of investor confidence requires the accumulation of more positive factors, with a focus on the counter-cyclical adjustment intensity of domestic monetary and fiscal policies. In September, it is recommended to continue monitoring the implementation of China's stable growth and medium- to long-term reform-related policies. The upcoming interest rate cut by the external Federal Reserve will also bring about allocation changes. It is suggested to pay particular attention to dividend-paying sectors with stable profitability and strong dividend capabilities, thematic concepts that may benefit from the Federal Reserve's interest rate cut, and growth industries expected to benefit from domestic industrial policy support and an improved supply-demand structure.

Key Points from CICC:

Main Strategy: Focus on the progress of stable growth policies.

In August, the market fluctuated downward, with trading volume and turnover rate decreasing, and investor sentiment reaching a relatively low level in recent years. Structurally, along with the market adjustment, the rotation speed of growth themes is fast but lacks sustainability. The ChiNext Index continued to adjust, while sectors with high dividend capabilities and supported performance maintained relative returns. The prices of companies in sectors such as banks and expressways, which had reached historical highs, have adjusted. Looking ahead, the current market already shows many characteristics of being close to the bottom, with limited downside risks. The restoration of investor confidence requires the accumulation of more positive factors, with a focus on the counter-cyclical adjustment intensity of domestic monetary and fiscal policies.

1. The economic fundamentals are temporarily slowing down, and investors are expecting policy efforts and implementation.

July's economic and financial data indicated a temporary weakness in domestic demand, with August's PMI data still below the boom-bust line. Structurally, there is differentiation in the economy, manifested in the differentiation between real estate and non-real estate, domestic and foreign demand. Stable growth policies need to be supported, with recent investor attention increasing on policy enhancements in the real estate sector. Since the end of May, commodity prices related to domestic demand have fallen in sync with the stock market. The recent slight rebound in the commodity market may reflect investors' expectations of enhanced stable growth policies. In terms of monetary policy, the central bank has optimized interest rate control mechanisms, and after the Federal Reserve's interest rate cut, policy space is expected to further open up. In terms of fiscal policy, domestic fiscal revenue was under pressure in the first half of the year, and the issuance of special bonds in August and September is expected to accelerate.

1. The interim results of A-share companies have been released, confirming the trend of improved conditions in certain industries.

The interim results of A-share listed companies have been fully disclosed, with the net profit attributable to the parent company of all A-share companies decreasing by 3% year-on-year, and the non-financial net profit attributable to the parent company decreasing by 5.5% year-on-year. Structurally, the performance of upstream industries such as petroleum and petrochemicals has significantly improved, benefiting from exports in machinery, automobiles, power grids, the TMT sector including semiconductors, consumer electronics, computing power, as well as agriculture, forestry, animal husbandry, fisheries, and utilities.

1. In September, the Federal Reserve is expected to start cutting interest rates, and the RMB exchange rate has entered a two-way fluctuation phase.

Since July, fundamental data such as the U.S. labor market and manufacturing PMI have weakened. Under the baseline scenario, the U.S. economic growth is slowing but not in recession, and the Federal Reserve may adopt a preemptive interest rate cut. Powell has already signaled a rate cut in September at the Jackson Hole meeting, and CME Fedwatch shows that the market expects U.S. interest rates to decrease by 200 basis points by September next year Recently, the spread between China and the United States has increased, easing the pressure on the RMB exchange rate. In addition, the second round of the U.S. presidential debate is about to take place. With Biden dropping out and Harris joining the race, there have been some changes in the election dynamics. Historical data shows that in the months leading up to the election, the U.S. stock market usually experiences adjustments, with increased market volatility from August to November. The election process may affect the risk appetite of the A-share market.

Allocation Suggestions:

In September, it is recommended to continue monitoring the implementation of China's stable growth and medium- to long-term reform-related policies. The imminent rate cut by the U.S. Federal Reserve will also bring about allocation changes. It is recommended to focus on dividend-paying assets with fundamental support and high-growth industries that align with industrial transformation trends. The following allocation strategies are suggested for the next 1-3 months:

1. Focus on sectors with stable profitability, strong dividend-paying capacity and willingness. In the short term, the high dividend style may experience a temporary pullback, but some industries still have allocation value after undergoing adjustments. The high dividend allocation characteristics have shifted from the denominator end to the numerator end, focusing on areas where cash flow continues to improve, capital expenditure growth slows down, and dividend ratios increase, such as utilities, infrastructure, etc.

2. With the upcoming rate cut by the U.S. Federal Reserve, pay attention to thematic concepts that may benefit. Historical data shows that during the Fed rate cut cycle, there is a high probability of gold price increase. The rise in gold prices is expected to improve profit expectations for related A-share sectors. Additionally, the downward interest rate is helpful in easing financing constraints for technology companies. Growth sectors that have undergone adjustments may have opportunities for rebound, such as AI, AI applications, innovative pharmaceuticals, etc.

3. Growth industries benefiting from domestic industrial policy support and improving supply-demand dynamics. For example, industries such as consumer electronics, semiconductors, etc., which are benefiting from the increase in localization demands and cyclic repair, as well as new energy sectors like lithium batteries that are expected to see improved supply-demand dynamics under policy guidance.

Overweight Industries and Recommended Logic for September:

Utilities: 1) Low correlation with economic cycles, good earnings certainty; 2) High dividend advantage, ample free cash flow.

Infrastructure: 1) Stable high cash flow, low capital expenditure; 2) Market-oriented reform of railway ticket prices; 3) High dividend advantage, good free cash flow.

Precious Metals: 1) Rate cut trading supports the strength of precious metal prices; 2) Global risk asset volatility increases, highlighting the defensive advantage of precious metals.

Electronic Hardware: 1) Overseas rate cut expectations help valuation recovery; 2) Semiconductor industry cycle momentum accumulates; 3) High certainty of profit improvement; 4) Industry chain concept catalyst.

Electrical Equipment: 1) Attractive valuation; 2) Exports support the performance of the power grid; 3) Under policy support, the supply-demand dynamics of the industry are expected to marginally improve.

Mainly underweight industries in September: Environmental protection and water services, e-commerce, architectural decoration and engineering, building materials, medical services