CITIC Securities International: Marginal benefits accumulate for Hong Kong stocks as AI dances with non-ferrous metals

According to the Zhitong Finance APP, China Merchants Securities International released a research report stating that in the short term, the fourth quarter will experience a decline followed by a rise. In the absence of incremental positive factors, Hong Kong stocks may continue to fluctuate. However, subsequent marginal positive factors are expected to accumulate, driving Hong Kong stocks upward: the Chinese technology industry, represented by AI, is thriving and continuously achieving innovative breakthroughs; the China-U.S. tariff issue is expected to be resolved; the Fourth Plenary Session of the Communist Party of China is discussing the "14th Five-Year Plan," and incremental industrial policies are expected to bring about improved expectations and boost risk appetite; the expectation of interest rate cuts by the Federal Reserve continues to strengthen, which is beneficial for foreign capital inflow into Hong Kong stocks. The allocation strategy is four offensives (non-ferrous metals, technology, electricity, insurance) + two bottom positions (turnaround, dividends).

The main viewpoints of China Merchants Securities International are as follows:

Market factors: Marginal positive factors in fundamentals, policies, liquidity, and valuations strongly support Hong Kong stocks.

In terms of fundamentals, although China's macro economy continues to marginally slow down and is in a deflationary cycle, the new economy represented by technology is experiencing strong growth (with a half-year report profit growth rate of 31.7%), providing strong support for the stock market.

In terms of policy, the U.S. tariff threats against China have escalated, but the turmoil may only be a short-term disturbance, constituting a typical TACO trade. The long-term competition between China and the U.S. in technology and trade is inevitable, but both sides hold leverage, and a breakdown is unlikely, with a high possibility of subsequent easing. It is expected that the value of the renminbi will remain stable, laying a stable foundation for investing in Chinese assets. After the Fourth Plenary Session, more measures are expected to emphasize the effective implementation of fiscal and monetary policies. The "14th Five-Year Plan" will introduce incremental policies in areas such as technological innovation, national security, expanding domestic demand, and "anti-involution," boosting market risk appetite.

In terms of liquidity, U.S. inflation has become moderate, and employment issues are the core of policy, making "preventive interest rate cuts" imperative. The potential government shutdown in the U.S. reinforces expectations for interest rate cuts. It is expected that the Federal Reserve will cut rates twice in Q4 and three times next year, each by 25 basis points. The trend of net foreign capital inflow into the Hong Kong stock market is clear, although the process may be tortuous. Southbound incremental funds are still in the process of continuous market entry and are expected to continue to provide support. Hong Kong stocks are in a valuation trough.

Core viewpoint: decline followed by rise, opening up upward space after fluctuations; medium to long-term upward trend continues.

In the short term, the fourth quarter will experience a decline followed by a rise. In the absence of incremental positive factors, Hong Kong stocks may continue to fluctuate. However, subsequent marginal positive factors are expected to accumulate, driving Hong Kong stocks upward: the Chinese technology industry, represented by AI, is thriving and continuously achieving innovative breakthroughs; the China-U.S. tariff issue is expected to be resolved; the Fourth Plenary Session of the Communist Party of China is discussing the "14th Five-Year Plan," and incremental industrial policies are expected to bring about improved expectations and boost risk appetite; the expectation of interest rate cuts by the Federal Reserve continues to strengthen, which is beneficial for foreign capital inflow into Hong Kong stocks. Structurally, continue to focus on recommending technology/AI and internet, non-ferrous metals, and other directions.

The medium to long-term outlook is more optimistic. With the improvement of the supply-demand structure, the Chinese economic cycle is expected to welcome a turning point in prosperity. Capital expenditure and R&D investment in the technology industry will gradually translate into corporate profits, becoming a new growth engine. After the Federal Reserve enters the interest rate cut cycle, the "dual easing" resonance of China-U.S. policies will continue to attract southbound funds and foreign capital. In the future, improvements in fundamentals, upward revisions of profit expectations, and valuation recovery will drive Hong Kong stocks upward in the medium to long term, presenting a slow bull trend Market Style: Balanced Large and Small Caps, Growth Dominates; Structural Market Characteristics are Obvious

In terms of style, the remaining liquidity in China is rising, which is favorable for small-cap stocks; foreign capital inflows benefit large-cap stocks. Under the balanced effect of these two forces, the styles of large and small caps tend to be balanced. Considering the economic cycle bottoming out and the downward trend of U.S. Treasury yields, the growth style is relatively dominant.

Allocation Strategy: Four Offensives (Non-ferrous Metals/Technology/Electricity/Insurance) + Two Bottom Positions (Turnaround/Dividend)

In terms of structural allocation, it is recommended to adopt the "Four Offensives + Two Bottom Positions" strategy:

"Four Offensives" focus on elastic varieties. Non-ferrous Metals: Driven by the triple factors of U.S. dollar depreciation, low interest rates, and liquidity. Gold is also driven by the rising demand for safe-haven assets due to global geopolitical risks and central bank purchases. Copper mines benefit from supply contraction and demand growth driven by new industries. Technology Stocks: China's AI industry is evolving rapidly, with high prosperity. It has become a new growth engine and is expected to continue making breakthroughs. High-end manufacturing such as humanoid robots and autonomous driving is flourishing. Electricity: The "shovel seller" of the AI revolution. In the short term, themes like controllable nuclear fusion and U.S. stock market reflections; in the medium term, equipment exports; in the long term, power generation and grid construction. Insurance: The improvement in equity investment returns brought about by the rise in the stock market, with Hong Kong insurance valuations significantly lower than A-shares.

"Two Bottom Positions" are suitable for long-term layout and hedging. "Turnaround" Strategy: Represented by essential consumption, after four years of difficulties, it is beginning to show a supply-demand inflection point. However, valuations are still at the historical lowest 20th percentile. Leading companies with competitive advantages can still increase market share and profit margins to achieve alpha growth. High Dividend Strategy: The Hang Seng High Dividend Yield Index has a dividend yield of 6.29%, with stable dividend-paying ability. Driven by the growing demand for "fixed income +" products from southbound funds, residents' deposits are "passively relocating," and the demand for dividend stock allocation remains strong.

Risk Warning

1. Federal Reserve monetary policy; 2) Significant liquidity fluctuations; 3) Macroeconomic data and performance; 4) Geopolitics; 5) Black Swan events