CICC released a research report saying that in 24Q3, there was a marked increase in the total size of public Hong Kong stock holdings, and the southbound ratio increased, but they did not actively increase their holdings. In terms of industry segments, Alibaba-W entered the Hong Kong Stock Connect transaction in September, and its optional consumer sector increased the most. At the same time, new economic sectors, such as consumer services, pharmaceuticals, and biotechnology, saw a similar increase. At the individual stock level, Alibaba-W (09988) is popular as a backup, and public offerings have also increased their holdings of new economic leaders such as Tencent (00700), but CNOOC (00883) and China Mobile (00941) have declined markedly. At the level of heavy holdings, Alibaba and the Hong Kong Stock Exchange (00388) replaced SMIC (00981) and China Shenhua (01088) in the top ten largest stocks.

CICC said that after experiencing a sharp rise at the end of September, especially during the National Day holiday, emotional overdraft and cooling policy expectations led to a correction in A-shares and Hong Kong stocks after the National Day holiday. Basically, they regained nearly half of the increase in the previous period, and fluctuated and consolidated around 20,000 points. Looking ahead, short-term external disturbances are increasing. It is not ruled out that fluctuations will expand further and remain cautious, but the pattern of shocks is still a benchmark assumption, and there is no need to be too pessimistic.

The main views of CICC are as follows:

Overall trend: The total size of public Hong Kong stock holdings has clearly risen, and the southbound ratio has increased, but they have not actively increased their holdings

The total size of public funds that can invest in Hong Kong stocks has increased markedly, but emerging development funds have slowed down compared to the previous quarter. Overall, as of the end of the third quarter of this year, there were 3,701 public funds (excluding QDII) with total assets of RMB 2.36 trillion. The number increased by 103 compared to the second quarter, and the scale also increased by RMB 155.1 billion, accounting for 29.3% and 12.4% of the total 12,615 non-cargo bases and RMB 19.0 trillion.

Among them, there were 2,043 active equity funds (total size 1.57 trillion yuan), which also increased the size by 114.4 billion yuan compared to the second quarter. In terms of issuance, the number of new public funds that can be invested in Hong Kong stocks in the third quarter was basically the same as in the second quarter, with an average monthly increase of 34, but the scale of additions was significantly slower than in the previous quarter, about 30.7 billion yuan (compared with 36 and 63.1 billion yuan in the second quarter). The same is true for active equity funds. The issuance rate was basically the same as in the second quarter, with an average of 20 units per month, but the scale of additions slowed significantly to 8 billion yuan (24.5 billion yuan in the second quarter).

There are no obvious signs that public funding is actively increasing holdings, but the southbound share is rising. The 3,701 public funds mentioned above held Hong Kong stocks with a market value of RMB 455.9 billion, an increase of 21.3% over RMB 375.9 billion in the second quarter. However, considering that in the third quarter of this year, the Hang Seng Index and the MSCI China Index rose by 19.3% and 21.9% respectively, and Hang Seng Technology's increase reached 33.7%, indicating that it was not obvious that public funds actively increased their holdings in the early stages, or that positions were not the main direction of the rebound. Currently, the share of Hong Kong stock holdings is 26.5%, up from 24.1% in the second quarter.

Looking further at active equity funds, Hong Kong stocks held 317.4 billion yuan in the third quarter, which was also slightly lower than the increase in major indices during the second quarter (+17.1%, 271.1 billion yuan in the second quarter). The share of holdings rose from 21.7% in the second quarter to 23.2%, the highest since the end of 2021. However, during this process, the share of public offering in the overall Southbound RMB 2.8 trillion scale rose, rising 2.1 percentage points from 14.0% in the second quarter to 16.1%. This may indicate that apart from public offerings, other types of southbound investors rebound profits from the market rebound.

Industry configuration: Optional consumption increased markedly with Alibaba Connect, and the old economy such as energy and utilities declined

The optional consumer sector increased the most along with Alibaba-W Connect. Conversely, the old economy, such as energy and utilities, declined markedly. The share of old economic holdings fell from 38.4% in the second quarter to 30.8%, and has fallen to the level of the third quarter of 2023. The share of the new economy increased from 61.6% in the second quarter to 69.2% during the same period. In terms of industry segments, Alibaba-W entered the Hong Kong Stock Connect transaction in September, and its optional consumer sector increased the largest share of positions. At the same time, new economic sectors, such as consumer services, pharmaceuticals, and biotechnology, saw a similar increase. In contrast, older sectors of the economy, such as energy and utilities, saw the biggest decline. The return of profits from some investors and the relative performance of the sector may also be responsible for this phenomenon.

Compared across industries, media and entertainment, consumer services, and energy have the highest share of holdings; industries such as commercial and professional services, household and personal goods, and essential consumption have lower holdings. Compared to its own historical level, optional consumption, banking, and insurance are already at historically high levels; utilities, durable consumer goods, and clothing are at historically low levels.

At the individual stock level, Alibaba-W (09988) is popular as a backup, and public offerings have also increased their holdings of new economic leaders such as Tencent (00700), but CNOOC (00883) and China Mobile (00941) have declined markedly. Alibaba-W, which the market has been waiting for a long time, attracted widespread attention after it was officially launched in September. In less than a month, the cumulative southbound inflow had already exceeded HK$46 billion, making it one of the top three publicly traded Hong Kong stocks. Tencent is also popular. In contrast, CNOOC and China Mobile declined the most during the same period.

At the level of heavy holdings, Alibaba-W and the Hong Kong Stock Exchange (00388) replaced SMIC (00981) and China Shenhua (01088) into the top ten heavy-held stocks. Among them, Alibaba replaced CNOOC in the top three major stocks in one fell swoop. Compared to the second quarter, the number of funds holding Alibaba-W, Tencent, Meituan-W (03690), and Xiaomi Group-W (01810) increased the most, while the number of funds held by CNOOC, China Mobile, CGN (01164), and CNPC (00857) declined markedly.

Furthermore, at the level of concentration of heavy-duty stocks, the top 3 heavy-held stocks accounted for 39.1% of the market value of the top 100 heavy-held stocks, down 2.8 percentage points from the second quarter, while the top 10 heavy-held stocks, which accounted for the top 100 heavy-held stocks, rose to 59.2% from 58.0% in the second quarter.

Prospects: short-term external disturbances will increase; the overall pattern of shocks will continue, and the structure is still the main line

CICC said that after experiencing a sharp rise at the end of September, especially during the National Day holiday, emotional overdraft and cooling policy expectations led to a correction in A-shares and Hong Kong stocks after the National Day holiday. Basically, they regained nearly half of the increase in the previous period, and fluctuated and consolidated around 20,000 points.

In a sense, it was not surprising that the market retraced. At least it was in line with expectations and previous tips. On the one hand, it was because early market expectations were too well taken into account. The sentiment of 22,500 points included in the Hang Seng Index (implied equity risk premium) is comparable to the optimism corresponding to the high market after the optimization of the 2023 pandemic policy, making it difficult to maintain. On the other hand, policy strength is limited. Stronger policy coordination is needed to maintain the optimism of early 2023. After all, there is still a gap between the current policy strength and fundamentals and the optimization of the 2023 epidemic policy. Therefore, the previous report indicated that the Hang Seng Index was 22,500 points, and adjustments began after the index hit this mark.

After a month of fluctuating trading, the recent nomination of some members of Trump's hawkish team made the risk of being “ignored” concretely, and Hong Kong stocks clearly pulled back as a result. CICC said that previous research reports suggested that some assets, such as the Chinese market and export chain, did not respond clearly to the “Trump deal,” expectations were poor, and there was a need to pay attention to the risk of disturbances. Looking ahead, short-term external disturbances are increasing. It is not ruled out that fluctuations will expand further and remain cautious, but the pattern of shocks is still a benchmark assumption, and there is no need to be too pessimistic.

Looking at the medium term, the root cause of all current problems, such as declining demand, sluggish inflation, and weak credit, which in turn leads to poor profits, is credit contraction, due to the fact that return expectations and financing costs are still inverted. The solution to the “symptoms”: The first is to continue to reduce actual financing costs. CICC estimates that a further reduction in LPR of 40-60 bp in 5 years can resolve the inversion described above. The second is to boost return expectations. According to CICC estimates, the additional fiscal expenditure of 7-8 trillion yuan can match the current social finance growth rate required for nominal growth, and even make up for the output gap since the pandemic. However, the “realistic constraints” of high leverage, interest rates, and exchange rates and the “stress” response function of policies mean that incremental stimulus will occur, but expectations that are too high are unrealistic, unless external pressure increases.

Under the above macro assumption, growth and profit are underpinned, but the magnitude is also limited, so the market has not completely escaped the volatile pattern. “The rebound is intermittent, and the structure is the main line”, which is more similar to the weak balance in the structural market after the 2019 rebound. Under the assumption of an overall volatile pattern, the shift to a structure of “gradual layout on the left side of the slump and moderate profit on the right side of excitement” seems to be an effective strategy. In the industry, it is recommended to focus on three categories: the first is the sector where the industry's own supply and policy cycle is clear. It would be better if there were marginal demand improvements. Some consumer services, home appliances, textiles, and electronics, such as the Internet, would be better. The second is the direction of policy support, such as trends in industries such as home appliances, automobiles, computers, semiconductors, etc. under trade-in; the third is stable returns, such as high dividends for state-owned enterprises.