CITIC Securities Co., Ltd.: The second half of the year will mark the starting point of an annual-level uptrend in the A-share market

According to the Vast Finance APP, CITIC Securities has released the investment panorama for the second half of 2024. The team believes that the three major narratives that have suppressed the performance of A-shares in the past 3 years - the transformation of economic momentum, the capital market ecosystem, and the strategic game between China and the US - will all reach major turning points. With policy, price, and external signals gradually being verified, the A-share market will usher in the starting point of an annual-level uptrend in the second half of the year. The main drivers will be the effectiveness of policies and the improvement in profit quality. It is recommended to seize the strategic window to embrace the major turning point, shifting the focus of allocation from low volatility dividends to high-quality growth. Below is a summary of the research report: Although there is still pressure on the overall macroeconomic operation, it is expected that policies will continue to focus on new momentum, bringing about comprehensive efforts, and highlighting the bright spots in the economic structure. It is expected that industrial prosperity will continue to recover rapidly, with investment maintaining the pattern of "manufacturing > infrastructure > real estate". The consumption structure shows the resilience of service consumption, and exports are expected to trend upwards due to inventory replenishment cycles and the drive from the "Belt and Road" economies. It is expected that the annual GDP growth target of 5% will be achieved. The three major narratives that have suppressed the performance of A-shares in the past 3 years - the transformation of economic momentum, the capital market ecosystem, and the strategic game between China and the US - will all reach major turning points. With policy, price, and external signals gradually being verified, the A-share market will usher in the starting point of an annual-level uptrend in the second half of the year. The main drivers will be the effectiveness of policies and the improvement in profit quality. It is recommended to seize the strategic window to embrace the major turning point, shifting the focus of allocation from low volatility dividends to high-quality growth. Global markets: Looking ahead to the second half of 2024, the fundamentals and policies of major overseas economies may gradually diverge. It is expected that the Federal Reserve may not cut interest rates this year, maintaining high rates to continue suppressing demand and inflation. Asset allocation recommendations: stocks > commodities > bonds. For US stocks, it is expected that earnings recovery and diffusion may occur in the second half of the year, potentially leading to style rotation. Focus on three main themes: ample cash flow, reasonable valuation, and benefiting from the upward investment cycle. As for Hong Kong stocks, the easing of external disturbances, domestic policy focus, expectations of reduced dividend taxes, and the impact brought by the reevaluation of growth stocks may sustain the rebound of Hong Kong stocks. Focus on three main themes: major financials, consumer + technology, and consumer electronics. Bond market: Looking ahead to the second half of the year, it is expected that the central tendency of the 10-year government bond yield will continue to decline; the "slow bull" market in credit bonds is expected to continue, with selective opportunities in the credit market still offering excess return potential; opportunities can be expected in the convertible bond market amid volatility, with a focus on the core of the switch between old and new economic momentum at the industry level, considering both top-down and bottom-up approaches. Image Source: Research and Drawing by CITIC Securities Research Department Gathering new momentum, embracing major turning points Macro level: Focusing on new momentum Since the beginning of this year, the macroeconomic fundamentals have shown differentiation under the transformation of old and new momentum. Manufacturing investment has performed well, while pressures on real estate and infrastructure investment continue to increase. The 20th Central Committee of the Communist Party will convene in July, and it is expected to use economic system reforms in finance, state-owned enterprises, finance, technology, and energy as the starting point to embark on a new journey of Chinese-style modernization At the same time, looking globally, the U.S. election is the main theme affecting the geopolitical situation in the second half of the year. The systematic decline in the credibility of the United States' commitments may create opportunities for China's diplomatic breakthroughs and enterprises going global, but localized geopolitical conflicts may also affect global risk preferences. Figure 1: Four new macro characteristics under the transformation of economic growth momentum Source: CITIC Securities Research Department Figure 2: The main train of thought proposed at the Third Plenary Session of the Political Bureau in April Source: Chinese government website, CITIC Securities Research Department Tax and Fiscal Reform: It is expected that the allocation of responsibilities between the central and local governments will be more closely matched with financial rights. On one hand, the central government will proactively take on more cross-regional public service expenditures, ensuring a connection between people, land, and money; on the other hand, the proportion of direct taxes will gradually increase to create stable tax sources for local governments. SOE Reform: In the short term, the SASAC may improve market value management through encouraging listed companies to repurchase shares, increasing cash dividends, increasing shareholdings by major shareholders, and implementing equity incentives. In the medium term, there is ample space for the securitization of SOE assets. Through strategic mergers and reorganizations, injecting high-quality assets and divesting non-performing assets, companies can expand their scale and improve profitability. In the long term, continuous improvement of ROE and efficiency is the key to success. Financial Reform: On one hand, continue to resolve risks in key areas such as real estate, local government debt, and small and medium-sized financial institutions. On the other hand, the new "Nine Articles of the State" has indicated the direction of capital market reform. Follow-up attention will be on policy implementation, including strict control over the capital market's "in and out", promoting enhanced investor returns, accelerating the construction of first-class investment banks and institutions, and facilitating the entry of medium to long-term funds into the market. Technological Innovation: Supporting the development of new productive forces with technological system reform may be a key focus of reform. On one hand, it is expected that the 20th Third Plenary Session in July will systematically elaborate on the connotation of the new productive forces system. On the other hand, new productive forces have become a key focus of policy at the policy level, with its scientific connotations and development ideas becoming increasingly clear. It is expected that after the Third Plenary Session, multiple innovative fields will receive policy support, such as low-altitude economy, digital economy, and biomedicine. Energy Reform: Under the dual carbon goals and energy security strategy, the pace of electricity system reform is accelerating, and a national unified electricity market system may gradually be established. At the same time, the importance of energy green and low-carbon transformation is highlighted. Energy consumption and carbon reduction targets may gradually shift from "hard constraints" to "carbon tools", enhancing environmental constraints on industries with excess capacity, increasing enterprise green costs, and driving industrial structural transformation and upgrading. Tax and Fiscal Reform: More closely matching the allocation of responsibilities between the central and local governments with financial rights Source: Ministry of Finance, "China Financial Yearbook", Wind, CITIC Securities Research Department SOE Reform: SASAC will include market value in the assessment of central SOE leaders, promoting the increase of central and state-owned enterprises' market value through multiple channels Source: SASAC, CSRC, CITIC Securities Research Department Figure 5: Financial Reform - Implementing the "1+N" policy in the capital market, safeguarding the bottom line of risks such as real estate and local government debt Source: State Council, CSRC, CITIC Securities Research Department Figure 6: Energy Reform - Bi-directional supply-demand interactive operation mode of the power grid Source: CITIC Securities Research Department Figure 7: Technological Innovation - New quality productivity becomes a key focus at the policy level Source: CCID Consulting, Huawei official website, Beijing Public Data Open Platform, CITIC Securities Research Department forecast Looking ahead, although there are still pressures on the macro total operation, it is expected that policies will continue to focus on new drivers, bringing comprehensive efforts that will highlight the bright spots in the economic structure. It is expected that industrial prosperity will continue to recover rapidly, with investment maintaining the pattern of "manufacturing > infrastructure > real estate". The consumption structure shows the resilience of service consumption, and exports are expected to trend upwards due to inventory replenishment cycles and the drive from the "Belt and Road" economies. In terms of prices, the two major price indices have rebounded from the lows of the year, with PPI expected to moderately rise driven by the increase in commodity prices, and CPI expected to gradually increase supported by the reversal of the pig cycle and service prices. In terms of monetary policy, there may be a mid-year reserve requirement ratio cut, pushing for a reduction in deposit rates and LPR, and the growth rate of social financing may show an initial increase followed by a decrease. It is expected that the annual GDP growth target of 5% will be achieved. Table 1: Outlook on macro policies and forecast of major economic indicators Source: Wind, CITIC Securities Research Department Forecast A-share Market: The Starting Point of Annual-level Rally in the Second Half of the Year The three major narratives that have suppressed the performance of A-shares in the past three years, namely the transformation of economic momentum, the capital market ecosystem, and the strategic game between China and the United States, are all expected to reach major turning points. Firstly, the initial results of the "establish first, eliminate later" transition of economic new and old momentum are beginning to show, with enterprises under high-quality development shifting focus from scale to profitability, avoiding vicious competition. Secondly, the new "Nine Articles of the State" will redefine the market's investment and financing functions, reshaping the market ecosystem with investors as the focus, and increasing A-share return expectations. Thirdly, the balance of the strategic game between China and the United States is tilting towards China, with China's strategic initiative gradually strengthening and playing a more important role in global affairs. As policy, price, and external signals are gradually validated, the A-share market is expected to see the starting point of an annual-level rally in the second half of 2024. In terms of policy signals, the focus is on the implementation of reforms in priority areas following the Third Plenum, strengthening new productive forces; in terms of price signals, under the smooth transition of old and new momentum, key observations include the stabilization of house prices in core cities and the effectiveness of production control and price maintenance; in terms of external signals, the waning global influence of the United States and China's proactive diplomatic breakthroughs are notable. The market outlook for the second half of 2024 will be mainly driven by the effectiveness of policies and the improvement in profit quality. The next investment paradigm for A-shares will shift from focusing on scale to profitability, transitioning from the PEG framework of cyclical investment to free cash flow growth premium, aiming to enhance investment returns through high-quality development. The third quarter will be a period of signal observation, where policy effects determine the pace, profit recovery determines the trend, and external factors determine the space. It is recommended to seize the strategic window to embrace the major turning point, gradually shifting the focus of allocation from low volatility dividends to high-quality growth. Figure 8: A-share Market Investment Strategy in the Second Half of 2024 Source: CITIC Securities Research Department Table 2: Forecast of Profit Growth Rate (%) for CSI 800 Companies in 2024 Source: Wind, CITIC Securities Research Department Forecast Global Outlook: Differentiation Breeds New Opportunities, Stocks > Commodities > Bonds Looking ahead to the second half of 2024, the fundamentals and policies of major economies overseas may gradually diverge. We expect the Federal Reserve to refrain from cutting interest rates this year, maintaining high rates to continue suppressing demand and inflation; the European Central Bank is expected to cut interest rates for the first time in June, with European industrial production activity likely to be the first to enter a recovery phase; the Bank of Japan may raise interest rates twice in the second half of the year, and the potential rebound in actual consumer demand momentum is worth monitoring. In terms of asset allocation, we believe that stocks > commodities > bonds Figure 9: Illustration of the economic cycle of each economy Source: CITIC Securities Research Department Table 3: Economic Outlook for the United States, Europe, and Japan in the second half of 2024 Source: Forecast by CITIC Securities Research Department US Stock Market: Style Rotation Expected in the Second Half The upward trend in the US banking system's reserve funds and the performance recovery of the "Big Seven" have been the two main drivers of the US stock market bull market since October 2022. Looking ahead to the second half of the year, it is expected that the recovery of US stock market performance will see diffusion, with buybacks and money market funds expected to provide incremental funds. However, the main issues facing the second half of the year are the concentration of trading and overvaluation. If the US experiences an unexpected downward inflection point in liquidity, there is a possibility that the US stock market may see a style rotation similar to the "big cut small, high cut low" trend from mid-July to the end of October last year, temporarily suppressing US stock valuations and dragging down overall performance. But with the start of a new round of monetary easing cycle, coupled with the diffusion trend of performance recovery, we are relatively optimistic about the performance of the US stock market after this point in time. In terms of industry allocation, it is recommended to focus on three main themes: ① Industries with ample cash flow such as information technology, optional consumption, and healthcare; ② Industries with relatively reasonable valuations such as energy, utilities, and real estate; ③ Industries benefiting from the investment upturn cycle such as construction, engineering machinery, and power companies. Figure 10: Investment Strategy for the US Stock Market in the second half of 2024 Source: Forecast and drawing by CITIC Securities Research Department Hong Kong Stock Market: Resilience in the Rebound Since late April, Hong Kong stocks have led the global market in a rebound. We believe that this round of rebound in Hong Kong stocks is driven by the reversal of investors' accumulated pessimistic expectations over the past three years, propelled by valuation recovery. The four main drivers of this round of Hong Kong stock rebound can be categorized as: 1) Easing of external disturbances (geopolitical and liquidity expectations); 2) Convergence of domestic policies (five cooperation measures with Hong Kong and real estate policies); 3) Expectations of reduced red-chip dividends tax for Hong Kong stock connect (if implemented, it is expected to catalyze continuous inflow of southbound funds); 4) Reevaluation and pricing of growth stocks in the Hong Kong stock market. In comparison to the three rounds of pessimistic expectation reversals in 2022 that led to the rebound of Hong Kong stocks, we believe that the current valuation recovery trend in Hong Kong stocks still has resilience. It is recommended to focus on three main themes: 1) The large financial sector benefiting from continuous policy releases and the reversal of pessimistic sentiment, especially the insurance and real estate industry chain; 2) Consumer and technology industries with potential for valuation recovery to continue; 3) Benefiting from the domestic consumer goods trade-in program, US inventory replenishment, and improving industry sentiment in the consumer electronics sector. Chart 11: Hong Kong stocks rebound with resilience, focusing on three major themes Source: CITIC Securities Research Department forecast, drawn Seven Industry Outlook Financial Industry: Insufficient effective demand, focusing on stock selection from the supply side As industrialization and urbanization come to an end, insufficient effective demand has become a factor restricting the development of the financial industry. At the macro level, phenomena such as idle funds exacerbating, stock issuance of funds being blocked, and negative growth in social financing scale are all manifestations of insufficient demand; at the industry level, narrowing interest spreads in the banking industry, declining profit margins in the insurance industry, and fee reductions in the securities and fund industry are also releasing price signals of "supply exceeding demand" in financial services. Before the new driving forces of economic growth are clearly identified, the financial industry needs to address new challenges such as the decline in the average social capital return rate, exposure of risks for highly leveraged economic entities, activation of inefficient existing assets in society, and the need for capital support for new quality productivity. This poses higher requirements for the direction, method, and efficiency of financial resource allocation, and the financial industry needs to open a new chapter from scale competition to quality competition through supply-side reforms. We recommend shifting the investment perspective of the financial industry to the supply side, focusing on companies with cost reduction and efficiency improvement capabilities and business model moats. Large financial institutions are expected to leverage policy support and economies of scale to become the main force serving new quality productivity and maintaining financial stability; while small and medium-sized financial institutions, in an environment where industry access and regulatory requirements are increasing, need to stand out from the competition with location advantages and distinctive operations. Banks: Promoting cost reduction and efficiency improvement, valuation repair is expected. Under the background of structural reforms in financial supply-side, cost reduction and efficiency improvement are the core themes of current bank operations and management. The policy direction implied by the Political Bureau meeting at the end of April to solidify the macro foundation, combined with optimized real estate policies, is conducive to investors increasing risk appetite. In this context, internal elastic varieties in the banking sector are advantageous; under the low interest rate environment, there is still room for dividend logic, and the high certainty return contribution of dividends is still favored by investors. It is recommended to focus on large banks that fully interpret the dividend theme. Insurance: A strict regulatory cycle will drive the industry into a new stage of cost reduction and efficiency improvement, and the beta market of insurance stocks is expected to continue. In the short term, we expect the life insurance industry to be in a phase of marginal improvement, with performance expected to improve year-on-year starting from the second quarter of 2024. Pay attention to macro and policy marginal changes, and recommend balanced allocation of major listed companies. In the long term, low debt costs are the main source of alpha for insurance stocks, and cost reduction and efficiency improvement by insurance companies create long-term value. For more industry insights, refer to Chart 12. Chart 12: Financial Industry Investment Landscape Source: Research Department of CITIC Securities Infrastructure and Modern Services Industry: Reform Unleashes Market Vitality, Dividends Highlight New Blue Chip Value In 2024, the electricity system, especially in terms of utility pricing, will further deepen market-oriented reforms. In response to the deep-seated risks in the real estate market, policies have not only solidified the responsibilities of market entities, but also encouraged the release of real demand by digesting inventory, restoring the confidence of market participants, breaking through the conversion boundary between existing commercial housing and affordable housing, and creating a new development model for the real estate sector. Utility companies, property service companies, leading real estate companies, leading construction companies, transportation and logistics companies, and building materials companies have all to varying degrees increased their dividend levels and placed greater emphasis on shareholder returns. Overall, the dividend yield of industry chain blue-chip companies has become more attractive. Looking ahead to the second half of 2024, the macroeconomy is stable and improving, with most companies' profits and shareholder returns entering an upward trend, especially compared to long-term interest rates. We expect investments in infrastructure and modern services industries to focus on two main themes: policy reforms unleashing industry vitality and dividend allocation waiting for valuation recovery. Electricity Utilities: The reform of the electricity system is underway, and the development of ancillary service markets will benefit from improved pricing mechanisms. With current moderate growth in electricity demand, the profitability of utility companies is expected to continue to improve. We anticipate that the vast majority of utility companies we cover will achieve double-digit earnings growth. The low interest rate environment is not only favorable for corporate operations but also highlights the value of utility companies as high dividend assets. Real Estate: Policies are highly focused on real estate risks and are making efforts to end the vicious cycle of continuous asset price declines. After May 2024, the speed of policy issuance has significantly accelerated, effectively releasing real demand and actively digesting existing supply. Policies that respect market supply and demand rules are restoring the confidence of market participants. We expect that starting from the core areas of core cities in mid-2024, the real estate market will enter a stage of wave-like recovery. Although in the long term, the overall scale of real estate development in China has peaked, the 15-30 core cities with population and industrial potential still have ample room for real estate development. Construction: The industry will continue to benefit from infrastructure-driven investment, with future incremental infrastructure investment in China likely to come more from the direction of new infrastructure. We are optimistic about the three main themes of the construction industry under the State-owned Assets Supervision and Administration Commission's market value assessment system, the fundamental adjustment of real estate companies under the relaxation of real estate policies, and the continuous expansion of overseas engineering markets empowering overseas companies for growth. For more industry insights, refer to Figure 13. Figure 13: Investment Map of the Infrastructure Industry Source: Research Department of CITIC Securities Manufacturing Industry: Focus on Pro-cyclical Recovery and Long-term High Prosperity Track Since 2023, the manufacturing industry has gradually shifted its focus from "expectation gap" and "capacity reduction" to the "resonance of replenishing inventory" between China and the United States and its strength and weakness changes in the first half of 2024 China is characterized by a slow replenishment of inventory, while the inflation rate of upstream resource products is faster than the speed of demand recovery in the middle and lower reaches, causing some pressure on the profit margins of midstream manufacturing. The United States is characterized by a replenishment cycle during the period of macro demand and expectations downturn, which continues to drive the prosperity of Chinese export chain companies. Looking ahead to the second half of 2024, whether upstream inflation can continue to transmit downwards against the backdrop of downstream recovery will determine whether midstream manufacturing can significantly increase profits. In addition, domestic equipment upgrades, overseas economies with sustained high resilience, long-cycle prosperity in sectors such as power equipment/transportation equipment, as well as bottoming out in industries such as real estate/defense, provide strong resilience and elastic expectations for China's manufacturing industry. Industrial goods, military products, and consumer goods each present their own logic of recovery in the manufacturing industry. Overall, the pro-cyclical recovery, coupled with accelerated equipment upgrades and policies, will boost the recovery of general manufacturing, power equipment, and consumer demand. Some sectors with low correlation to economic cycles maintain long-term prosperity, with the main contributing factors being counter-cyclical equipment investment (such as construction in ultra-high voltage and nuclear power fields), equipment and electrical appliances going global (power equipment, new energy, ships, forklifts, oilfield services, tools, household appliances, etc.), continued domestic substitution and demands for self-controllable products (agricultural machinery, industrial machinery, semiconductor equipment, etc.), new technological iterations (new technologies in photovoltaics and batteries, emerging energy and energy storage, humanoid robots and drones, new intelligent equipment and weapons, etc.). Therefore, we are optimistic about the continued recovery and upward valuation center of the manufacturing industry in the second half of the year, with the market expected to receive dual support from EPS and PE. We recommend two main themes: the pro-cyclical recovery and the long-term high prosperity track immune to short-term cycles. Chart 14: Investment Map of the Manufacturing Industry Source: Research Department of CITIC Securities Healthcare Industry: Clear Turning Point Opportunity in the Second Half of 2024 In the first half of 2024, the pharmaceutical industry continued to face the most severe medical anti-corruption storm in nearly a decade, with significant impacts from the clinical end to the industrial end. Coupled with recent changes in international geopolitical factors and the deepening uncertainty brought about by the new leadership of medical insurance and the Health Commission in strengthening centralized procurement and cost control, we believe that the healthcare industry is accelerating into a new cycle of major breakthroughs. Under the integration of industry winners and losers, increased concentration, and the establishment of a series of trends such as innovation, the industry is also embarking on a new chapter of growth. We believe that 2024H2 is the best opportunity to lay out excellent tracks and companies in the pharmaceutical industry at the bottom. We recommend focusing on the following main lines in the second half of the year horizontally: ① Selecting winners in the post-centralized procurement era, from leading companies undergoing consolidation and mergers accelerated by reshuffling to "barefoot" companies benefiting from some centralized procurement; ② Breaking through by going global, strengthening the breakthrough model of new growth space outside domestic competition for enterprises; ③ As the industry destocking cycle ends, combining product necessity to welcome the upward price turning point in upstream raw materials and other industries at the bottom of recovery; ④ Relying on innovation to break through, focusing on "innovative hot products" and truly innovative enterprises entering the payback period; ⑤ Brand enterprises welcoming positive changes under the new wave of state-owned enterprise reforms; ⑥ Sector opportunities under the new policy of nationwide equipment renewal and transformation. Chart 15: Investment Map of the Medical Health Industry Source: CITIC Securities Research Department Technology Industry: Focus on AI Industry Chain Innovation and Overseas Opportunities Since the beginning of 2024, due to factors such as market style changes and geopolitical disturbances, CITIC's electronics, computer, and media indices have fallen by 12%, 16%, and 10% respectively, while the communication and automotive sectors have seen slight increases of 3% and 1%, performing weaker than the Shanghai and Shenzhen 300 Index. Benefiting from the rebalancing of foreign capital's allocation needs in emerging markets and the valuation cost-effectiveness advantage of Hong Kong stocks, the Hong Kong stock market has achieved better performance this year, with the Hang Seng Index/Hang Seng Technology Index rising by 14%/8% respectively. Looking ahead to the second half of 2024, we believe that under the promotion of industrial policies, technological innovation, and overseas expansion, the technology sector will usher in investment opportunities. The investment theme will continue to revolve around AI industry chain innovation, while also considering structural opportunities in sub-sectors such as overseas expansion. AI Industry Chain: We believe that the fundamentals of the technology industry will continue to improve, with AI remaining the core investment theme in the second half of the year. ① Computing power industry and domestic substitution: Optical communication modules, AI servers, AIDC, and other infrastructure and AI cloud computing platforms will maintain high prosperity. In the process of external rebalancing, industries such as AI chip design and semiconductor manufacturing will focus on ensuring self-reliance and controllability. ② AI applications: With the upgrade of domestic large models and the development of multimodal capabilities, we are optimistic about the landing opportunities for AI applications and solutions in various fields such as enterprise office, management, education, and the Internet. These are expected to commercialize through subscription models, forming a closed loop of "large models - applications - commercialization." ③ Intelligent terminals: The adaptation of domestic large model end-side capabilities and innovative interaction methods will also bring investment opportunities in new areas such as consumer electronics, smart cars, robots, and more. Overseas Expansion and Recovery: Focus on opportunities in sub-sectors such as the Internet, consumer electronics, automobiles and new energy vehicles, and operators. In the second half of the year, we recommend focusing on structural investment opportunities brought about by technology going global, industry innovation, and valuation recovery. In terms of overseas expansion, cross-border e-commerce is driving Internet and related service providers to explore new growth curves. There are sub-sector opportunities in consumer electronics such as mobile phones, entertainment devices, home TVs, wearables, and smart homes. Brand manufacturers' internal and external expansion strategies are expanding incremental space. The global advantages in passenger cars, commercial vehicles, batteries, and other fields are evident, with companies in the sector actively expanding their overseas businesses. In addition, opportunities in the Internet and operator sectors are also worth noting: the Internet sector's overseas valuation cost-effectiveness is prominent, and stable profits, cash flows, and active shareholder returns are expected to attract foreign capital inflows to drive sector valuation recovery Telecom operators achieve steady growth in performance, optimize cost control, provide favorable support for profit growth, leading companies increase dividend payout ratio and shareholder returns, and dividend yield still remains highly attractive. Figure 16: Investment Landscape of Artificial Intelligence in the Technology Industry Source: CITIC Securities Research Department Figure 17: Investment Landscape of Technology Industry Going Global and Recovering Source: CITIC Securities Research Department Consumer Industry: Focus on Expected Recovery, Layout Structural Opportunities Although overall consumer data achieved a smooth transition in the first quarter of this year, a "watershed" appeared after March, showing the demand characteristic of "a quieter off-season" in consumption. With last year's low base, retail sales in April continued to be lower than market expectations, indicating that consumer demand remains weak. Currently, the long-term pessimism in the market towards the Chinese consumer market stems from concerns about household consumption power and the potential impact of China's population trends on consumption. However, we believe that the income growth of Chinese residents is still stable at present, and the demographic shift will have limited impact on consumption in the next 10-20 years. We believe that the short-term elasticity of consumer valuation repair is more dependent on the overall expectations of the domestic macroeconomic environment, and an uplift in economic expectations often amplifies the elasticity of consumer valuation repair. Considering the base effect, and with the expectation of economic recovery driving a rebound in consumption in the second half of the year, as well as CPI rebound easing price pressures, we believe that consumption will continue to warm up. Currently, consumer allocation mainly depends on valuation repair driven by policy advancement and economic recovery. We recommend actively allocating to leading companies in industries such as liquor, consumer internet, and beauty that have fallen to low valuations. At the same time, we suggest paying attention to the right opportunities in the pig farming sector, the opportunities in the catering industry chain under the backdrop of CPI rebound, continuing to layout the elasticity from textile manufacturing order income to performance realization, and the improvement in brand growth rate after transitioning from the low base period in the second half of the year. In the medium to long term, on the demand side, focus on rational consumption (substitution of domestic brands), happy living, technological iteration (smart home, biomanufacturing, etc.) and other structural trends, while on the supply side, focus on incremental opportunities in going global and sinking. Figure 18: Investment Landscape of Consumer Industry Source: CITIC Securities Research Department forecast, drawing Energy and Materials Industry: Focus on Expectations of Commodity Demand Recovery and Opportunities in Emerging Industry Materials Commodities: Expectation of Demand Recovery, Resource Prices Supported Since 2024, benefiting from supply constraints and the increasing popularity of commodity investments in the context of inflation, the upstream resource sector has shown overall strength. At the same time, influenced by factors such as the "temperature difference" in the domestic economy and disturbances in overseas raw material supplies, sub-sectors have differentiated, with globally priced commodities such as gold, copper, and crude oil experiencing significant price increases or showing high resilience, while domestically priced commodities such as rebar steel and thermal coal have shown weakness. Looking ahead to the second half of 2024, the main bearish factors for commodity industry investments in 2024 come from concerns about the weakening demand for Chinese real estate. With the introduction of policies such as domestic real estate, equipment renewal, consumer goods replacement, and the ongoing high prosperity of consumption in the direction of energy transformation, the expectation of a recovery in domestic demand in the second half of 2024 continues to strengthen. Internationally, despite the back and forth of loose liquidity and re-inflation trading, benefiting from the recovery of manufacturing in emerging economies and potential restocking demand in Europe and the United States, coupled with the persistently high supply chain risks caused by geopolitical conflicts, resource prices are supported. ① It is expected that the supply-side logic will continue, and it is recommended to focus on commodities such as crude oil, copper, tin, phosphate ore, and manganese ore that have long-term supply constraints or price increase effects due to short-term disturbances. ② With the continuous introduction of domestic policies and the expectation of demand recovery brought about by domestic and international resonant restocking, the aluminum sector is expected to continue to be strong, while the steel and coal sectors have profit redistribution and mild price recovery expectations. ③ It is expected that the game between international re-inflation and rate cuts will continue in the second half of the year, combined with the warming of risk aversion sentiment, making the precious metals sector still an optimal investment direction. Materials: Dual-Drive of Policy and Innovation, Diversified Industrial Opportunities Currently, investment opportunities in the materials sector can be summarized into three driving factors: policy and themes, industry prosperity, and product/technology innovation iteration. Industries primarily driven by policy and themes include synthetic biology, low-altitude economy, and hydrogen energy, which are currently in the early stages of development. Although the current market size is not large, the potential is abundant, and investment opportunities often emerge with the introduction of specific policies and changes in market styles. Industries such as semiconductors, nuclear power, and submarine cables have passed the earliest startup period, and their investment opportunities are mainly driven by changes in industry prosperity. At specific time points, related materials are driven by industry beta and have high growth potential. The third driving factor is mainly the innovation and iteration of products/technology, such as the beginning of the era of fast charging for lithium batteries, which poses new requirements for battery materials. The increase in demand for C919 aircraft drives the high-temperature alloy and related industrial chains, investment opportunities are implied in the layout of Huawei's supercharging piles with silicon carbide and liquid-cooled gun lines, the development and penetration rate improvement of solid-state batteries also bring demand for solid-state electrolytes, the trend of automotive lightweighting also brings an increase in demand for magnesium alloys, and breakthroughs in individual industry black technology are expected to bring new growth points. Looking ahead to the second half of 2024, ① Emerging industries such as synthetic biology, low-altitude economy, and hydrogen energy are expected to flourish under the promotion of policies; ② Industries such as semiconductors, nuclear power, and submarine cables are driven by industry prosperity, with clear profit expansion expectations; ③ Materials such as lithium battery materials, high-temperature alloys, and charging pile liquid-cooled gun lines benefit from the innovation iteration of products/technology, and the trend of related industrial chains is positive Figure 19: Investment Map of Energy and Materials Industry (Commodities) Source: CITIC Securities Research Department Table 4: Overview of Investment Opportunities in Energy and Materials Industry (Materials) Source: Financial reports and official websites of various companies, forecasted by CITIC Securities Research Department Investment Strategy In summary, the A-share market in the second half of the year still needs to observe three types of signals. It is currently recommended to adhere to a dividend strategy, focusing on the stability of cash returns, avoiding industries with significant profit cyclicality and intensive speculative funds. Continue to pay attention to hydropower and nuclear power with stable free cash flow returns, as well as property insurance with stable premium growth. With the continuous validation of the above three major signals and the transformation of investment paradigms, high-quality growth stocks represented by the Shanghai and Shenzhen 300 Index, which have continuously improving free cash flow growth capabilities, are gradually taking the lead. Focus on leading companies in the manufacturing industry such as banks (expected improvement in asset quality opening up revaluation space), machinery (equipment renewal and transformation for overseas competition), home appliances (stable competitive landscape, expansion of overseas business, and removal of real estate labels), electronics (expansion of consumer electronics overseas, AI innovation, independent controllable semiconductors), new energy (mergers and acquisitions to optimize the landscape, breakthrough in overseas markets), as well as pharmaceuticals (industry consolidation, breakthrough in overseas markets) and internet and consumer leaders in the Hong Kong stock market where the industry cycle is stabilizing. For the U.S. stock market, it is recommended to focus on three main themes: 1) Industries with ample cash flow such as information technology, discretionary consumption, and healthcare; 2) Industries with relatively reasonable valuations such as energy, utilities, and real estate; 3) Industries benefiting from the investment upturn cycle such as construction, engineering machinery, and power companies. For the Hong Kong stock market, it is recommended to focus on three main themes: 1) The large financial sector benefiting from continued policy implementation and reversal of pessimistic sentiment, especially the insurance and real estate industry chain; 2) Consumer and technology industries with potential valuation recovery; 3) Consumer electronics benefiting from domestic trade-ins, U.S. inventory replenishment, and improved industry sentiment. Figure 20: Gradual Shift in Allocation Focus from Low Volatility Dividends to High-Quality Growth Source: CITIC Securities Research Department Bond Market Investment Strategy In terms of government bonds, it is expected that the central tendency of the 10-year government bond yield will continue to decline in the second half of 2024, with the yield fluctuating in the range of 2.2% to 2.4% in the third quarter. In the fourth quarter, the 10-year government bond yield is expected to break below the 2.2% low point driven by the expectation of loose monetary policy and interest rate cuts In terms of credit bonds, the "slow bull" market is expected to continue, and there is still excess return space in the credit market under careful selection. From the trend perspective, the low-level volatility of spreads increases, and there is a need to be alert to adjusting risks. Regarding convertible bonds, focusing on the core of the switch between old and new economic drivers, considering both top-down and bottom-up approaches, attention should be paid to industries related to going global, energy and utilities, central SOE convertible bonds, industrial thematic catalysts, and the consumer sector. Table 5: Outlook for the bond market strategy in the second half of 2024 Source: CITIC Securities Research Department forecast and compilation This article is from the WeChat official account "CITIC Securities Research", edited by Zhitong Finance: Li Cheng