Zhongtai: Reiterating the current investment value of the insurance sector, seize the opportunity of leading cyclical stocks after the easing of broad-based selling pressure.

Zhongtai released a research report stating that since December of last year, the insurance sector has experienced a cyclical logic of "optimistic expectations at the beginning of the year - rising long-term interest rates - index strengthening to enhance profit elasticity". "Short-term observing easing of funding pressure, medium-term observing 'deposit relocation & slow bull continuation' boosting value and profit growth, long-term observing realization of the cyclical logic bidding farewell to hidden worries about interest rate spreads", the bank reiterated the current investment value of the sector. Seize the opportunity of cyclical leaders after the easing of broad based selling pressure. Return to the path of PEV recovery to double, with assets and liabilities flourishing at both ends. Zhongtai's main views are as follows: Domestic broad-based ETF trading level suppression is gradually showing signs of turning, with continuous net inflows into the GF CSI Hong Kong Stock Connect Non-bank ETF highlighting sector fundamentals support. Since the second trading week of January 2026, the trading volume of major broad-based ETFs has significantly increased, showing a noticeable trend of net outflows. The bank weights the cumulative net outflows of broad-based ETFs between January 15th and January 28th, with the following order: CSI 300 Index (62.0%), CSI 1000 Index (15.3%), SSE 50 Index (10.0%), CSI 500 Index (5.4%), ChiNext Index (3.7%), and STAR 50 Index (3.6%). The top ten individual stocks in the non-bank sector on the above indices weighted by the bank are Ping An Insurance, CITIC SEC, East Money Information, Guotai Haitong, China Pacific Insurance, Huatai, China Life Insurance, GF SEC, New China Life Insurance, and CMSC. The non-bank sector has seen some rebound from fund outflows, but the valuation trend does not match the improving fundamentals at both ends of assets and liabilities. It is worth noting that during the above statistical period, the bank ranks the net inflows of cross-border theme ETFs, and the GF CSI Hong Kong Stock Connect Non-bank ETF (513750.SH) had net inflows of 2.86 billion yuan, indicating ETF investors are bullish on the non-bank sector of Hong Kong stocks, corroborating the fundamental logic. At the same time, there are signs of cooling and retreat in recent hot thematic stocks, and the bank expects the upward momentum of sector valuation brought by the easing of broad-based ETF selling pressure. The bank believes that insurance stocks are the preferred choice in the current cyclical sector. The bank is optimistic about the valuation catalysis of the insurance sector as cyclical varieties rebound, and the advantages of the insurance sector mainly include: 1) Individual insurance and bancassurance channels drive each other, leading to a better-than-expected performance at the beginning of 2026, highlighting the advantages of dividend insurance as a long-term savings alternative in a sustained low interest rate environment. On the one hand, the new single base of individual insurance at the beginning of 2025 is low, while on the other hand, top insurance companies attach more importance to bancassurance channels, with the expansion of cooperation outlets in 2026 combined with the effectiveness of "lump-sum promoting policies" showing results, the bancassurance channel is key to the growth of new business and value throughout the year. In the long term, benefiting from residents' asset re-allocation due to deposit relocation, growth on the liability side is expected to continue, and the bull market in equities is expected to enhance the sales logic of dividend insurance itself; 2) Since the beginning of 2026, the main broad-based indexes of A shares have shown an upward trend, with not enough surcharge from stocks. It is believed that under the pattern of a slow bull market in equities, insurance stocks have opportunities for valuation and performance resonance. Based on the bank's calculation of the asset allocation structure in 1H25, assuming a 20% increase in stock holdings, the corresponding increase in net profit is over 40%, making insurance stocks currently attractive due to their undervaluation and high elasticity. Pay attention to the significance of the signal when long-term interest rates break through the 2.0% integer mark. Currently, there is a divergence in market expectations for the future trend of the ten-year bond yield interest rate, with doubts about whether it can sustainably break through the 2.0% integer mark. The bank evaluates the reasonableness of the average valuation of P/EV of listed insurance companies in A-shares by observing the difference between the ten-year bond yield and investment yield assumptions, credit spreads, and term spreads. Looking back, if the long-term interest rate breaks through the 2.0% integer mark, it is equivalent to the previous 5.0% investment yield assumption corresponding to about 3.0% (the same as the 4.0% investment yield assumption currently corresponding to a 200bps spread), and the P/EV valuation is expected to gradually approach 1 times. Zhongtai Fixed Income team believes that the 10-year bond range in 2026 may be between 1.7% and 2.1%, presenting a "mountain" trend. Long-term interest rates are difficult to decline, and against the backdrop of rising inflation expectations, the valuation center of insurance stocks is expected to rise. At the same time, the bank also recommends investors to observe whether credit spreads and term spreads can maintain improvement. The bank expects that in the 2025 annual report, listed insurance companies will generally not adjust their embedded value economic assumptions, and EV growth will return to recovery growth. When using P/EV to value life insurance companies, investors' expectations for future NBV growth rate are an important reference factor for determining valuation. Clarifying that the rebound of ROEV can drive the valuation back above 1 times. The bank expects the average EV growth rate of listed insurance companies from 2025 to 2027 to be 10.6%, 10.9%, and 10.8%; and the NBV growth rate to be 34.7%, 21.7%, and 10.0%. Risk warning: Decline in long-term interest rates, continued poor growth in the beginning of the year, etc.