Country gold strategy: the emergence of new drivers

Sinolink released a strategic research report stating that the current A-share market is approaching the high point of the "924 market" under the promotion of policy themes, but the core driver has shifted to optimistic expectations for the bottoming and rebound of enterprise ROE. The bank expects domestic demand-side policies to focus on "stability first", with greater demand increments coming from overseas. Although the pace of valuation repair is ahead of fundamentals, individual stocks and industries show significant differentiation, with pro-cyclical sectors (such as food and beverage, coal, petroleum, and petrochemicals) still in the early stages of repair, and overall market downside risks are controllable. In terms of asset allocation, the bank recommends focusing on upstream resource products, capital goods, non-bank financial institutions, and consumer sectors related to people's livelihood. Key points from Sinolink: Market status: Valuation expansion is not at its peak, profit recovery will take over policy themes This week, A-shares approached the high point of the "924 market" (the Shanghai Composite Index touched 3813 points, close to the previous high of 3674 points on October 8, 2024), with policy themes leading the gains. Investors are concerned about the downside risks in the market after a short-term overheating of sentiment. In the view of the bank, the core driver behind the current rise is the optimistic expectation of the bottoming and rebound of enterprise ROE, not just speculation around policy themes. Therefore, with the realization of profit rebound, the market trend will continue to repair. Although A-share valuations are running ahead of the pace of fundamental repair, they are not extreme. Only 20.7% of individual stocks broke through previous highs in July. Looking at industries, in pro-cyclical sectors such as food and beverage, coal, and petroleum and petrochemicals, individual stock repairs are still in the early stages. "Antidote to internal competition" and further consolidation of demand-side policies to reinforce profit bottom Recently, "antidote to internal competition" and demand-side policies have once again strengthened. The policy effects may appear more quickly than the comprehensive policy in 2024: firstly, companies are going through a continuous three quarters of self-cleansing since the fourth quarter of 2024; secondly, manufacturing companies have achieved a bottoming out and rebound of profit margins in the first quarter of 2025, with inventories being cleared; finally, in terms of overall prices, price pressure comes from production materials, while core CPI has bottomed out and risen seasonally in the second quarter of 2025. If the "antidote to internal competition" continues to be implemented, driving industrial raw material prices up, CPI is expected to move out of the low range. This week's events related to "antidote to internal competition" reflect the three-dimensional drive of "legal revision - state-owned assets leading - industry consultations", with the scope expanding from manufacturing to including various industries including the service industry. As the "antidote to internal competition" policy deepens gradually, demand-side policies continue to be accurately implemented, with fiscal expenditures focusing on "light investment" and "heavy livelihood", while also accurately supporting traditional industry demand through a "double" approach. The downstream power stations of the Yarlung Tsangpo River, which received much attention this week, are a typical example. In the first half of this year, the issuance of government bonds exceeded the same period in the past five years, with social security and employment, education, science and technology, energy conservation, and environmental protection expenditures in the general public budget growing by more than 5% year-on-year, in line with the budget direction at the beginning of the year. Looking ahead, as the leverage ratio of the government rises rapidly under the background of local governments "securitizing" debts, with limited space compared to comparable countries and economic entities, the bank expects domestic demand-side policies to continue to focus on "stability first", with greater demand increments coming from overseas. External demand: After tariff relief, investment expectations are key Recently, the Trump administration reached "unequal agreements" with Japan, the Philippines, Indonesia, and Vietnam, achieving significant political results in terms of tariff actions, leaving room for a shift in focus for subsequent policies. With the gradual manifestation of the inflationary effects of tariffs in the United States, the likelihood of a shift in policy focus is high. At this point, it may be beneficial to "stop when things are going well" on the tariff issue with China, easing tariffs to lower import prices and bring inflation back into the range suitable for a Fed rate cut. The bank mentioned the disruptive effect that inflation may have on overseas investments in a previous weekly report, but the direction of overseas investments is clear, with the US government prioritizing the reshoring of manufacturing and promoting AI competition on an equal footing, and the tariff agreements announced this week also include substantial investments in the US. The acceleration of US investment will be an important macroeconomic topic. Clear capital return views, embracing the pro-cyclical Although the market is close to its previous high, the extent of valuation expansion compared to the "super running" speed of fundamental repair is not high. There is considerable differentiation between individual stocks and industries, and there are still "undervalued assets" to be explored. Domestic policies continue to follow the policy direction set at the beginning of the year: promoting clearance while supporting demand. The downside risks of economic downturn are low, and expectations for ROE recovery are driven by overseas tariff relief and the opening of investment cycles. At the stage of the reversal of corporate profitability bottoming out, the bank's recommended asset allocation is: firstly, upstream resource products (copper, aluminum, petroleum and petrochemicals) and capital goods (construction machinery, heavy trucks, forklifts), intermediate products (steel, electronic components) that benefit from the rising demand for overseas physical assets and the advancement of the domestic "antidote to internal competition" policy; secondly, equities will outperform bonds in the future, and the long-term asset base of insurance will benefit from the bottoming out of capital returns, with a focus on non-bank financial institutions; thirdly, domestically, policies centering on "people's livelihood" and incremental policies related to consumption are worth looking forward to, stable profit and dividends from consumption driven by both quantity and quality can be used as a "hedge" for banks: food and beverage, home appliances; overseas, policies surrounding the "AI industry competitiveness" and the attention to computing power and infrastructure are worth watching. Risk warning: Domestic economic recovery falls short of expectations, foreign economic downturn significantly.