Today, the Hong Kong stock market and the A-share market experienced a significant decline. The reasons for the drop are nothing more than concerns about the sustainability of stimulus policies and a risk-averse behavior due to uncertainty about whether subsequent policy measures will meet expectations.

From the author's perspective, such circumstances seem familiar. In years like 2016, 2019, and even at certain points in early 2009, the similar sharp rises followed by market retracements and low sentiment are akin to what we are witnessing today.

The next question is, after the sharp decline, what does the market look like going forward? In the author's view, the current pullback is a normal market adjustment, and there are three major reasons to be more bullish moving forward.

1. The determination to actively implement policies remains unchanged.

With the support of policies, the economic fundamentals have improved, driving some stocks to establish long-term trends, which is what we should look forward to in the next phase.

Regarding this round of market movement, taking October 8th as the dividing line, from September 24th to October 8th, the policy inflection point was established, and the rapid influx of transactional funds became a one-sided bullish force for the index. The overheated sentiment of short-term funds reached its peak on the first trading day after the long holiday. On October 8th alone, margin funds inflow reached 107.5 billion, and the two-way financing transaction ratio approached 12%. It is estimated that individual investors' net inflow was around 110 billion based on small orders. When the risk of overheating was just beginning to emerge, industry insiders timely guided the market to cool down, marking a phase transition in the market trend.

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At present, investors' focus on policies is mainly on fiscal policy. The concerns about fiscal policy may be specifically reflected in three aspects: First, how willing is the central government to leverage? This point received an affirmative response at the Ministry of Finance's press conference on October 12th—"The central finance still has a considerable debt space and room for increasing the deficit."

Second, what is the deployment of short-term, medium-term, and long-term effective fiscal mechanisms? The press conference emphasized long-term mechanisms, proposing to increase support for local debt resolution, and issuing special treasury bonds to support state-owned banks in replenishing core tier-one capital. In terms of short-term measures such as "filling gaps" in fiscal expenditure within the year, the press conference mentioned, "China's finance has enough resilience, and by taking comprehensive measures, it can achieve a balance of revenue and expenditure, and complete this year's budget goals."

The third point lies in the structure of fiscal expenditure. The press conference focused on debt resolution, real estate inventory collection, and some livelihood deployments (higher education, etc.). The potential deployments in the consumption field that investors are more concerned about (such as fertility/low-income groups, etc.) require further policy observation.

Overall, the Ministry of Finance's press conference on October 12th affirmed the determination to actively implement fiscal policies. In terms of policy details, it is necessary to closely follow the Standing Committee of the National People's Congress, which is expected to be held in late October or early November. If fiscal, monetary, and real estate policies can form a relatively strong joint cooperation, then the stabilization of credit is expected, and the market's central axis of fluctuation is likely to rise.2 The trend of China's industries deeply integrating into the global economy remains unchanged

In the medium term, there are still opportunities for trading based on the decline in the global interest rate center and the recovery of the global economy.

Firstly, although the high non-farm data in the United States in September led to a significant reduction in interest rate cut expectations, the current interest rate futures prices of the Chicago Mercantile Exchange show that there is still a 25bp reduction in November, and the probabilities of a 25bp and 50bp reduction in December are roughly equal. This indicates that before the end of this year, U.S. interest rates will decrease by at least 50bp.

Therefore, the certainty of interest rate cuts will continue to support interest rate-sensitive sectors. For the Hong Kong stock market, it is mainly the pharmaceutical sector, technology and internet, and the real estate sector.

The second is the prosperity trade, which is based on the performance of listed companies. In November, the Hong Kong stock market will usher in the third quarter earnings season, and investors focus on China's G-end and overseas B-end transactions, which benefit from equipment renewal or new infrastructure investment, as well as the rise in external demand. Among them, the upward trend of engineering machinery, industrial control automation, power grid equipment, and optical communication is prominent.

Specifically, the growth of data center business driven by the overseas AI artificial intelligence wave has led to a surge in global copper cable business demand. The leading company in the copper cable sector is in China's A-shares, called "Shen Yu Shares", and its stock price has risen by as much as 9 times since the beginning of the year. It is a typical successful case of Chinese industry chain shares benefiting from "overseas B".

For investors, refusing to follow the crowd and patiently and carefully exploring stocks and investment opportunities can find such niche high-quality targets.

3 The trend of credit recovery and domestic economic upgrading remains unchanged

After the high gradient valuation repair ends, the direction of the market's fluctuating operation depends on whether the credit cycle can shift from a downward trend to a stable stage driven by a combination of policies. Like in the market's spring restlessness at the beginning of 2019, there was a "loose money, tight credit" phenomenon that is very similar to the current situation. And after the stock market peaked locally in April, the trade dispute in May led to a market decline.

However, the credit cycle was subsequently opened. The improvement of the credit cycle relies on the joint drive of monetary policy, real estate policy, and fiscal policy, leading to the improvement of the economic fundamentals and the recovery of the consumption side, so the market situation was able to continue in July.Since the "9·24" policy combination and the "9·26" Politburo meeting, the deployment of monetary and real estate policies has gradually taken effect, entering the stage of policy effectiveness verification. Recently, statements from the central bank and the Ministry of Finance have significantly warmed investors' confidence and sentiment; in addition, some real estate chain varieties, such as home appliances and home furnishings, have shown signs of stabilizing domestic demand under the influence of front-end policies (trade-in policies). If credit cycles and high-frequency real estate data show a clear trend of recovery, there may be opportunities for risk premium reassessment in the real estate chain and domestic consumer demand.

4 Summary

If we start from the time point of the Federal Reserve's interest rate cut on September 18, then up to the highest point before this round on October 8 (the Shanghai Composite Index is calculated based on the opening price on October 8), the Hang Seng Index has risen by 32.6%, the Hang Seng Technology Index has risen by 52.3%, the Shanghai Composite Index has risen by 28.9%, the Shenzhen Component Index has risen by 44.1%, and the ChiNext Index has soared by 66.3%.

Such a huge increase has been accumulated in half a month, which also means that a huge profit has been accumulated. So, if there is a slight change, it is very normal for the profit to choose to settle. Therefore, although there is a correction, it is also reasonable.

The development of the market is always like two aspects of a contradiction. The initial excitement will inevitably evolve into a period of depression, and in the depression and doubt, there are new opportunities. As investors, the most important thing at present is to recognize that the determination to further strengthen policy has not changed, the pattern of China's deep integration into the global industrial chain has not changed, and the trend of credit recovery and improvement of the economic fundamentals has not changed. Based on these factors, the future market is still expected. For the Chinese stock market, we might as well have more confidence.