Guoxin Securities Q2 Stock Market Outlook: Not Afraid of Floating Clouds Obscuring the View

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Source: Guosheng Securities

Key takeaways:① The early-year A-share spring rally continued, and after the geopolitical disruptions in March it entered a period of consolidation. Sector rotation accelerated, with technology growth, resource-based commodities, and value blue chips all performing in succession.② The “fourth wave” pullback doesn’t change the overall bullish sentiment for the whole year. With the external environment improving and domestic demand policies gaining traction, after a short-term pause the A-share market is expected to clear up—rain will be followed by sunshine.③ The market structure is expected to broaden. The AI technology rally may shift from hardware to applications. Against the backdrop of placing emphasis on security considerations, strategic resource commodities are worth attention, as are undervalued “old guard” assets such as liquor and real estate.

Q1 market review: Sudden downpour. At the start of the year, the policy environment was relatively favorable, and the spring rally overall continued. The spring rally began on December 17 last year. In early January, market enthusiasm kept rising, leveraged funds flowed in quickly, and the Shanghai Composite Index hit a streak of seventeen consecutive positive sessions. Hong Kong stocks also moved up accordingly. After that, influenced by market liquidity, the spring rally took a brief pause from mid-January to early February. Risk appetite was disrupted by geopolitical conflict, leading to market volatility and pullbacks since March. This year, sector rotation has accelerated. We measure the strength of A-share sector rotation by using the month-over-month changes in the ranking distribution of returns across 31 first-level Shenwan industries in A-shares. We can see that this indicator has shown a clear rebound since early in the year.

Q2 market outlook: After the rain, the skies clear up. In the mid-to-late stage of a bull market, phased adjustments often occur—namely the “bull market’s fourth-wave” pullback. Still, the broader background of the bull market remains in place. At the moment, neither bull-market time horizon nor market sentiment has reached extremes. From a cyclical perspective, the objective pattern of the A-share bull-bear rotation cycle has always existed. Looking back at history, A-share bull markets turning into bear markets often happen when overall market sentiment runs too hot and the macro environment weakens clearly—and neither of those two conditions is met in this bull market cycle. In Q2, there are hopes of seeing positive signals emerge. After storms, the sun will be seen again. Looking ahead to Q2, some positive signals are already brewing. We believe the market is likely to continue its bull-market move upward in Q2. First, there may be an easing glimmer regarding geopolitical conflicts. Second, the leaders of the United States and China are expected to meet in May. Third, domestic policy efforts combined with the resilience of exports will support a basic-conditions repair.

Sector allocation: The market structure is expected to become more balanced. Going forward, as this bull-market cycle plays out into its later stage, market hotspots will gradually spread, and sector structure is expected to become more balanced. Specifically, we believe you can focus on the following three major directions. Direction 1: The technology mainline won’t change. The AI industry-chain rally will move from hardware to applications. The AI sector’s capital expenditure is expected to maintain high growth, and the compute-power industry chain driven by domestic substitution is still worth watching. Direction 2: Pay attention to strategic resource commodities under security considerations. With a complex external environment, strategic resource commodities’ security premium may move higher for the long term. Combined with the rollout of domestic anti-“involution” policies and support from emerging demand, commodity prices are supported, and strategic resource commodities segments are likely to continue benefiting. Direction 3: “Double-low” real estate, liquor, and other “old guard” assets may see expectations turn around. We refer to the industries that simultaneously meet low valuation and low positioning as “double-low” industries. Based on historical experience, once industries display “double-low” characteristics, future absolute or relative returns tend to be quite significant. From a fundamental perspective, in the recent period there are signs that the fundamentals for liquor and real estate have stabilized. In the next phase, the undervalued real estate and liquor sectors may have potential for recovery.

Risk warning: Overseas and domestic policy progress may fall short of expectations, and economic recovery may show fluctuations.