If there is a growth rebound, which direction will benefit

Growth Stock Investment Opportunities May Have Arrived

Since late May, the market has been consolidating in a phase of temporary volatility. Against the backdrop of macroeconomic twists and turns, with ETF passive funds pouring into the market, assets representing core dividends such as banks and utilities have remained strong, leading the market. However, typical sectors like TMT and new energy in the direction of technological innovation and growth have shown relatively average performance. But recently, the market style has started to change: On one hand, dividend-weighted stocks that were somewhat "crowded" began to see significant corrections starting from the end of August, releasing some liquidity. Meanwhile, branches in the growth direction with relatively high prosperity, or those with oversold stock prices but improving fundamentals or expected improvements, have attracted attention from funds. There have been active performances in sectors such as consumer electronics, energy storage, media, and gaming, which have already stabilized and recovered.

Regarding the index, we believe that the lowest point for A-shares may have passed. Quoting the report "The Recent Lowest Point of A-share Index May Have Passed" by the chief economist team of Soochow Securities on September 4th: On one hand, stock trading often shows the characteristic of "volume bottoming out," and some evidence points to the fact that the lowest turnover rate for A-shares has passed, meaning that the stock price low point may have passed as well. On the other hand, the stock market prices stocks based on expectations, meaning that stock prices often lead profit bottoms. We boldly speculate that we are currently experiencing the lowest point in corporate profits, which implies that the stock price low point may have passed.

Structurally, as we enter September, on one hand, semi-annual performance reports are being released, releasing the stage of uncertainty risk in performance. On the other hand, the window for a U.S. interest rate cut is about to open, global fund rebalancing will help in the valuation recovery of growth directions. Additionally, strong industrial trends such as AI terminals and low-altitude economy will see a series of event catalysts in September. This is a positive time for A-share growth sectors to position themselves actively.

We recommend selecting investment opportunities based on four perspectives

Perspective One: High Prosperity Directions. In the context of relatively pressured index and liquidity environment, some high-quality companies' stock prices may not fully reflect industry prosperity or expectations. Looking at the semi-annual performance, there are many outstanding companies in the technology hardware sector, represented by consumer electronics and semiconductors. According to the semiconductor recovery cycle, semiconductor demand is expected to continue to expand for at least the next year (with global semiconductor sales turning positive year-on-year in November 2023, and the semiconductor prosperity cycle often lasting 2-3 years). Additionally, the demand for AI in computing power and edge hardware has become an incremental factor in this round of recovery. Furthermore, September is the peak season for consumer electronics, with many smart phones and wearable products set to be launched domestically and internationally. We recommend focusing on high prosperity directions led by electronic and other technology hardware.

Perspective Two: Sectors with Oversold Stock Prices but Marginal Improvement in Fundamentals/Fundamental Expectations. Some industries have hit rock bottom in terms of fundamentals, but their stock prices have fully or even excessively reflected pessimistic expectations. There is limited downside for the prices of these assets to further decline. Although it is difficult to predict the turning point of fundamentals, if there are some signals of marginal improvement and they attract attention from funds, there is a high possibility of upward price recovery. For example, military industry with the end of mid-term adjustments and the release of backlogged order expectations, gaming with a better policy attitude and new breakthroughs in domestic production on the industry side, and inverters with high growth in distributed light storage demand in Asia and Africa, and performance turning points driven by the prosperous installation of large storage units in the U.S. The lithium battery sector, which showed improvement in production scheduling from August to September and a clear industry competitive landscape, as well as the gaming sector, which is set to benefit from policy improvements and the upcoming new product cycle.

Perspective Three: Sectors with strengthened industrial trends/policy expectations. In our report "Viewing the Third Plenary Session from a Scientific and Technological Perspective - Significant Increase in Priority of Science and Technology Innovation Policies" released on July 23, we pointed out that with the intertwining of great power competition and technological revolution, the status of science and technology innovation in China's "deepening reform" policy framework has been significantly elevated. With domestic demand recovery slowing down, cyclical sectors lacking upward elasticity, and uncertainty surrounding whether overseas economies led by the United States will experience a "soft landing," there are divergent views on the outlook of the export chain. In this context, varieties with policy support, independent industrial logic, and relative insensitivity to fluctuations in domestic and foreign demand may better align with current market trading preferences. Specifically, sectors worth paying attention to include low-altitude economy with independent industrial policy support, autonomous driving, vehicle-road coordination, semiconductor equipment with a clear trend towards localization, precision instruments, CNC machine tools, and intelligent terminals empowered by AI innovation.

Perspective Four: USD interest rate-sensitive assets. Considering the significant downward revision of US non-farm employment data from April 2023 to March 2024, weaker-than-expected economic data such as the August PMI in the US, and the apparent dovish turn by Powell at the Jackson Hole Global Central Bank Annual Meeting, the likelihood of a rate cut by the US Federal Reserve in September is high. This could lead to a trend of declining USD asset rates, opening up opportunities for interest rate-sensitive assets to benefit from both numerator and denominator improvements. On the numerator side, the high interest rates will marginally ease the suppression of investment and financing in innovative industries such as pharmaceuticals, while post-rate cut, overseas demand for new energy is expected to be unleashed, benefiting some well-positioned photovoltaic energy storage companies. On the denominator side, the narrowing of the interest rate differential between USD and non-USD assets will prompt global fund rebalancing, offering a valuation repair opportunity for the aforementioned interest rate-sensitive assets.

Authors: Chen Li S0600518120001, Chen Gang S0600523040001, Source: Soochow Securities, Original Title: "If Growth Rebounds, What Direction and Targets to Choose"