China Securities Co., Ltd.: Be patient during the bottoming process and wait for opportunities to go long

China Securities Co., Ltd. released a research report stating that the market has recently remained in the second round of deleveraging since late September. This week, A-shares shifted from a previous unilateral decline to high-volatility oscillation. Current market pressure mainly comes from three aspects: first, repeated Middle East geopolitical tensions and high oil prices, combined with local debt risks in economies such as France and expectations of further Federal Reserve rate hikes, have kept overseas liquidity tight; second, overseas Q3 earnings were mixed; third, domestic liquidity pressure has not yet been fully absorbed, and concerns about position reduction by absolute-return funds remain. A positive signal is that since October, market-stabilizing funds have gradually entered the market. The key to subsequently confirming a bottom lies in whether incremental market-stabilizing funds, stabilization of margin financing funds, continued ETF absorption, and the absence of new lows in previously leading decliners on negative news can gradually emerge. Historical experience shows that the formation of a medium-term bottom is often tortuous. Stay patient and wait for opportunities to go long. Second round of deleveraging continues The market has recently remained in the second round of deleveraging since late September. This week, A-shares shifted from a previous unilateral decline to high-volatility oscillation. Some oversold segments began to see long covering, but the sustainability of the rebound remains insufficient. Rotation among technology growth, dividend defensiveness, and thematic investment was rapid, indicating that the market has not yet formed a stable consensus on incremental funds. Compared with the first round of adjustment in July, market pressure this round no longer comes solely from crowded trading and concentrated liquidation of leveraged funds, but from the superposition of domestic fund structure adjustment and overseas macro constraints: first, Middle East geopolitical tensions have repeatedly flared, oil prices remain high, overseas inflation and interest rate constraints have not been lifted, and local debt risks in highly indebted economies such as France have further raised global risk premiums; second, overseas Q3 earnings were mixed. Although AI capital expenditure is still expanding, hardware price increases have begun to suppress PC terminal demand, some core cloud vendors' free cash flow turned negative, and market pricing of the computing power industry chain is shifting further from investment scale to input-output efficiency; third, domestic liquidity pressure has not yet been fully absorbed, concerns about position reduction by absolute-return funds such as fixed income plus and insurance funds remain, margin balances continue to decline, and market absorption relies more on market-stabilizing funds such as broad-based ETFs. The market has recently remained in the second round of deleveraging since late September. Current pressure mainly comes from three directions: 1) Repeated Middle East geopolitics keep oil prices high, and overseas liquidity constraints have not been lifted First, Middle East geopolitical conflicts have repeatedly flared. High oil prices constrain overseas liquidity through two channels: inflation expectations and bond yields. Since 2026, the Middle East situation has repeatedly disrupted global crude oil supply. Oil prices have fluctuated repeatedly between supply disruption expectations and strategic reserve releases, but the price center has consistently remained elevated. On October 16, Brent crude oil futures rose 3.7% to US$109.86 per barrel, touching US$110 per barrel intraday for the first time since May; affected by energy supply risks in the Middle East and Russia, international oil prices have cumulatively risen more than 75% year to date. Oil prices remaining high means that the disturbance from energy prices to inflation has not fully faded. Major central banks find it difficult to quickly shift to easing because of a single decline in inflation data, and the center of overseas risk-free rates therefore remains quite sticky. Second, the high interest rate environment is exposing the fiscal fragility of some highly indebted economies, and France has become the center of recent pressure in the European bond market. French government debt as a share of GDP reached 118% in Q2 2026, while the fiscal deficit ratio remained around 5%. Delayed fiscal consolidation and weak economic growth have jointly weakened its medium-term debt-servicing capacity. In the bond market, the yield premium of French 10-year government bonds over German government bonds widened to 174 basis points on October 22, the highest level since 2011; during the same period, the spread of Italian government bonds over German government bonds also widened to 127 basis points, indicating some spillover of French risk. For equity assets, simultaneous increases in long-end rates and credit spreads will raise both discount rates and risk compensation requirements. Third, a brief pause in FOMC rate hikes does not mean the current tightening cycle is over. On October 28, the Federal Reserve voted 10 to 2 to keep the federal funds rate target range unchanged at 3.75%-4.00%, but both dissenters advocated an immediate 25 basis point hike; the statement continued to emphasize that inflation is elevated and that the policy focus remains on bringing inflation back to the 2% target in a timely manner. After the meeting, market pricing of subsequent tightening did not cool significantly. As of October 29, CME FedWatch showed a 78.4% probability that the Federal Reserve will raise rates by 25 basis points in December; for the January 2027 meeting, the market expected the combined probability of a cumulative 25 or 50 basis point hike to reach 92.8%. Bank of America also adjusted its policy forecast to 25 basis point hikes in December 2026 and March 2027. 2) Overseas Q3 earnings were mixed, and the computing power industry chain has begun to shift from capital expenditure pricing to cash flow and input-output pricing. On the one hand, rising prices of hardware such as memory have begun to suppress PC terminal demand, and Intel's Q4 guidance was significantly below market expectations. Strictly speaking, Intel's Q3 operating performance was not weak: quarterly revenue was US$16.5 billion, up 21% year on year. However, the company expects Q4 revenue of only US$15 billion-US$16 billion, below the average analyst expectation of about US$17 billion. After the earnings release, Intel's stock price fell more than 22% at one point in after-hours trading. By business, Intel's data center and AI business revenue rose 78% year on year to US$7.3 billion, but client business revenue fell 5% to US$8.1 billion, with strong AI demand and pressure on the PC business coexisting. Management explicitly pointed out that memory prices are an important obstacle facing the PC market and expects the global PC market to contract 12% in 2026 and further contract 10% in 2027. This shows that price increases upstream in computing power do not only affect profit distribution within the industry chain. When cost increases exceed terminal manufacturers' ability to absorb them, they may also suppress sales volume in reverse through higher finished-product prices and longer replacement cycles. The computing power industry chain is therefore gradually shifting from the previous "rising volume and price" phase to a differentiated phase of "strong upstream prices and pressured downstream demand." On the other hand, core cloud vendors' capital expenditure is still growing, but deteriorating free cash flow is weakening the market's tolerance for AI investment. Alphabet's Q3 revenue rose 25% year on year to US$127.6 billion, and Google Cloud revenue rose 103% year on year to US$30.7 billion, indicating that demand for AI infrastructure and cloud services remains strong. At the same time, the company's Q3 capital expenditure reached US$51.36 billion, up 114% year on year, while free cash flow fell to negative US$9.07 billion, negative for the second consecutive quarter. However, the company still maintained its 2026 capital expenditure guidance of US$195 billion-US$205 billion and expects capital expenditure to increase significantly in 2027. Therefore, this round of adjustment in overseas technology stocks does not mean the AI industry trend has reversed, but rather that the market's pricing standards for the computing power industry chain are rising. In the short term, it is necessary to continue observing PC sales, memory prices, cloud vendors' free cash flow, and 2027 capital expenditure guidance to judge whether these concerns are temporary financial fluctuations or are spreading to broader industry segments. 3) Domestically, the core issue remains liquidity. Position reduction by absolute-return funds and absorption by market-stabilizing funds are occurring simultaneously. Unlike July, when the adjustment was mainly driven by concentrated deleveraging of margin financing positions, in the second round of adjustment since late September, the market is more concerned about passive position reduction by absolute-return funds such as insurance and "fixed income plus." Such funds focus on absolute returns and drawdown control. Once the technology sector continues to decline and triggers net value and risk control constraints, selling tends to be passive and continuous. At the same time, since October, market-stabilizing funds have gradually entered the market. From October 15 to 23, equity ETFs recorded total net inflows of RMB225.055 billion; from October 19 to 23, broad-based index ETFs recorded net inflows of RMB153.382 billion, the highest weekly level since 2026. This means that the current situation is not simply a lack of buyers, but simultaneous expansion of passive selling and bottom-supporting buying. The market is in a bottoming stage of fund structure rebalancing. The key going forward is not the magnitude of a single-day rebound, but whether incremental market-stabilizing funds can continue to cover the reduction pressure from margin financing positions and absolute-return funds, and gradually shift from concentrated support to sustained inflows. Overall, the second round of domestic deleveraging is underway, and the decline in margin balances in October reached the July level. Initial characteristics of a medium-term bottom are emerging. Compared with the previous unilateral decline, the market began to see some degree of long covering this week. Historical cases show that the formation of a medium-term bottom is often tortuous. Before margin financing funds stabilize, ETF absorption continues, and previously leading decliners stop making new lows on negative news, the market may still repeatedly confirm the bottom. Staying patient remains the main strategy at this stage. Defense first in allocation, wait for bottom-fishing opportunities 1) Defensive direction: dividend sectors remain the core base position at the current stage. Since late September, the market has remained in the second round of deleveraging, and the relative return advantage of dividend sectors has become more prominent. In terms of interval performance, banks cumulatively rose 4.84%, CSI Dividend and coal edged up, and Hong Kong Stock Connect high-dividend stocks were generally stable; although utilities pulled back, the decline was significantly smaller than that of technology growth sectors. Over the same period, the STAR 50 and ChiNext Index both fell more than 20% cumulatively, reflecting that amid falling risk appetite, high-dividend and defensive assets generally outperformed. From the perspective of stock-bond allocation, the 10-year government bond yield has generally trended downward in oscillation since June and fell to a low of 1.65% at the end of October, while the CSI Dividend Index maintained a relatively steady oscillating trend. Against the backdrop of low long-end rates, the return space for bonds is relatively limited, and the yield attractiveness of high-dividend assets remains supported. Combined with positive factors such as bank dividend payouts, phased increases in coal prices, and growth in utility demand, dividend sectors still have certain defensive allocation value. Since October, dividend-related sectors have continued to be supported by factors such as dividend payouts, energy prices, and fundamental improvement. In banking, ICBC and Agricultural Bank of China paid a total of about RMB82.1 billion in A-share interim cash dividends on October 21, reinforcing the high-dividend allocation logic; in coal, international thermal coal prices rose in phases, providing some support for upstream profit expectations; in utilities, electricity consumption across society rose 3.9% year on year in the first three quarters, and computing-power-related electricity demand grew rapidly, supporting medium- to long-term prosperity expectations for the power industry. In Hong Kong dividends, the valuation of the central SOE dividend index is at a relatively low level over the past year, highlighting its allocation cost-effectiveness. Overall, against the backdrop of market deleveraging and weak risk appetite, dividend assets with stable cash flow, relatively high dividend yields, and low valuations still have relative defensive value. The transportation sector combines profit recovery and high-dividend attributes, and Q3 results further strengthened its defensive allocation value. Among Shanghai-listed companies that have disclosed financial reports, recovering demand for ports and logistics drove profit recovery in the transportation sector, with net profit attributable to parent companies up 73.9% year on year in the first three quarters, standing out among industry samples that disclosed Q3 reports early. Among them, QINGDAO PORT's revenue rose 8.68% year on year in the first three quarters, net profit attributable to parent companies after deducting non-recurring items rose 2.97% year on year, and net cash flow from operating activities rose 28.90% year on year; Beijing-Shanghai High Speed Railway's revenue and net profit attributable to parent companies rose 2.57% and 4.02% year on year, respectively, in the first three quarters, reflecting the relatively stable operations and cash flow characteristics of core transportation infrastructure assets. From a fundamental perspective, transportation demand was generally stable, and some freight indicators improved marginally in September. Data from the Ministry of Transport showed that in the first three quarters, national commercial freight volume rose 2.3% year on year, port cargo throughput rose 0.7% year on year, and container throughput rose 4.5% year on year; in September, port cargo throughput rose 2.6% year on year, and cross-regional passenger flows rose 5.1% year on year. For transportation sector allocation, it is recommended to focus on leaders in expressways, railway passenger transport, and ports with stable cash flow, relatively high dividend payout ratios, and low valuations: cash flow visibility for expressway and railway assets is relatively strong, while ports benefit from both throughput growth and profit recovery. By contrast, the aviation sector still faces cost pressure from high oil prices, and the shipping sector has greater profit elasticity but stronger cyclical attributes, so it should not be simply equated with defensive transportation assets. For overall allocation in defensive sectors, it is recommended to use dividend assets with high dividend yields, low valuations, and stable cash flow as the defensive base position, with focus on banks, transportation, coal, utilities, and Hong Kong dividends. The banking sector benefits from marginal stabilization of interest margins, generally stable asset quality, and improved interim dividend mechanisms, giving it relatively strong certainty of dividend returns; The transportation sector benefits from recovering port and logistics demand and Q3 profit recovery. Leaders in expressways, railway passenger transport, and ports have stable cash flow and strong dividend capacity, further highlighting their defensive allocation value; The coal sector, supported by stricter safety supervision, narrowing supply elasticity, and winter storage restocking demand, is expected to keep the coal price center relatively high. Combined with leading companies' strong cash flow and dividend capacity, it has certain offensive and defensive characteristics; The utilities sector has relatively stable profit and cash flow, with expectations of stabilizing and rebounding electricity prices and high-dividend characteristics providing dual support; Hong Kong dividends benefit from valuation discounts on some A/H shares and relatively high dividend yields, giving them certain allocation appeal amid increased market volatility. Overall, it is recommended to maintain a dividend base position, control risk exposure to high-valuation growth sectors, and wait for the market adjustment to fully play out before gradually increasing offensive allocations. 2) Offense: rotation in growth themes resonates with absorption by market-stabilizing funds; focus on physical AI, commercial space, and ETF volume expansion directions. This week, rotation within growth sectors accelerated, and prosperity clues spread from simple earnings delivery to resonance among "industry trends, policy catalysts, and fund absorption." In the short term, the index level still needs to digest volatility, but directions such as physical AI and commercial space have clear industry trends and dense policy catalysts. Increased trading in broad-based and growth ETFs also indicates that absorption strength during the market adjustment has strengthened somewhat. First, in the physical AI direction, industrial competition is extending from Siasun Robot&Automation bodies to computing platforms, simulation data, and scenario implementation. Counterpoint Research estimated on October 26 that by 2030, cumulative global shipments of humanoid Siasun Robot&Automation AI accelerators will exceed 1 million units, with a compound growth rate of about 144% from 2026 to 2030; Nvidia holds an advantage in GPUs and computing stacks, while manufacturers such as Tesla and XPeng are entering through automotive-grade chips and vertical integration capabilities. Domestically, the Shanghai Municipal Commission of Economy and Informatization announced the "Action Plan for Accelerating the Development of a New Generation of Intelligent Manufacturing" on October 27, explicitly proposing the development and promotion of physical AI equipment and proposing to promote 8,000 humanoid Siasun Robot&Automation units into factories by 2028. The medium-term industrial space for physical AI has become clearer, but the industry is still in the early stage of large-scale implementation. In allocation, it is recommended to prioritize segments such as AI accelerators, GPUs and computing stacks, automotive-grade chips and vertical integration, and industrial scenario validation, with downstream orders, shipments, and actual working hours as indicators for confirming prosperity. Second, in the commercial space direction, policy focus is extending further from constellation construction to terminals, satellite-terrestrial integration, and space computing power. The "15th Five-Year Plan for National Informatization," made public on October 26, included satellite internet in the top-level national informatization plan for the first time, explicitly proposing to develop direct-to-satellite services for terminal devices, promote integrated satellite-terrestrial network development, and explore forward-looking research and technological layout for space computing power; on October 29, the Ministry of Industry and Information Technology held a symposium on accelerating the construction and development of a new-generation communications network, further proposing coordinated advancement of basic networks, space networks, international networks, and integrated networks. The policy trajectory indicates that commercial space is shifting from being driven by single launch events to the construction of space information infrastructure and cultivation of application ecosystems. Industry chain demand is expected to gradually spread from satellite manufacturing and rocket launches to ground equipment, terminals, and operational services. In allocation, it is recommended to focus on subdirections such as satellite batch production, reusable rockets, ground terminals, and space computing power, with key tracking of constellation launch, order implementation, and capital expenditure delivery. Overall, the growth direction remains mainly structural rotation. For physical AI, watch industry penetration and order validation; for commercial space, watch the transmission of policy into capital expenditure and constellation orders; for ETFs, use them to judge fund absorption and entry. In the short term, it is not advisable to chase single-day gains. After trading activity continues to be active and thematic relative returns form resonance, then further increase offensive positions.