China Merchants Securities released a strategy research report stating that over the past month, the market experienced a volatile decline, with growth sectors undergoing significant corrections, while defensive and policy-favored directions relatively outperformed. Looking ahead to October, macro conditions at home and abroad are simultaneously entering a "landing verification" window, and A-shares are expected to move toward "earnings as king, balanced offense and defense." On the domestic front, counter-cyclical adjustment is intensifying, drags from domestic demand are gradually weakening, and the economy continues to show "moderate aggregate growth with industries leading." On the overseas front, U.S. inflation stickiness has exceeded expectations, deepening the "growth-price-fiscal sustainability" trilemma, but the period of maximum pressure on the denominator side is expected to ease as uncertainties are resolved. After macro landing at home and abroad, earnings verifiability becomes the core pricing anchor. At the meso level, the prosperity mainline is shifting from "broad-based gains" to "separating the genuine from the false." Combining multiple dimensions including meso-level prosperity, profitability, chip distribution, valuation, trading, cycle stage, and track value, October should de-emphasize index fluctuations, focus on prosperity and earnings, and balance allocation with some domestic demand directions, with key attention on electronics (semiconductors), power equipment (batteries, grid equipment), non-ferrous metals (industrial metals, precious metals), pharmaceutical biology, agriculture, forestry, animal husbandry and fishery, and banking.
Market Performance Review
Over the past month, A-shares experienced a volatile decline, with growth sectors undergoing significant corrections, while defensive and policy-favored directions relatively outperformed. The market mainline was the game between rising overseas inflation and interest rate pressures versus continuously intensifying domestic policy support. At the beginning of the month, the market surged then pulled back amid the intertwining of recovering fundamental data and rising overseas tightening expectations, with high-level tech chips loosening and risk appetite gradually cooling. Mid-month, the Federal Reserve's first rate hike of the year landed, and the market interpreted it as "bad news exhausted," with tech growth rebounding on heavy volume. At month-end, the market surged then pulled back before the holiday, dominated by holiday risk aversion and profit-taking. Domestic policies intensively stepped up to stabilize growth, but the market recovery lacked sustainability. By sector, real estate, pharmaceutical biology, and banking relatively outperformed, while non-ferrous metals, power equipment, and machinery equipment underwent larger corrections, with allocation tilting toward defense and balance.
Looking ahead to October, industry allocation recommendations mainly revolve around prosperity and earnings catalysts. On the macro front, the domestic economy is marginally improving, with external demand and corporate capital expenditure constituting the main support, while domestic demand recovery still requires policy impetus. Exports maintain strong resilience, with tech industry demand and advanced manufacturing expansion driving production recovery, and the prosperity of manufacturing, construction, and small and medium enterprises improving somewhat. However, real estate, government spending, and household consumption remain weak, and the aggregate improvement has not yet fully diffused. On the price side, upstream price increases coexist with advanced manufacturing prosperity recovery, while terminal consumer price recovery is relatively slow, reflecting insufficient demand and poor cost transmission, and corporate profit improvement remains structural. On the policy side, counter-cyclical adjustment is intensifying, with PSL expansion, increased relending quotas, housing loan interest subsidies, and accelerated fiscal fund disbursement advancing in coordination, expected to gradually improve domestic demand expectations by supporting project implementation and reducing financing and home purchase costs. On external factors, overseas tightening expectations are marginally cooling, expected to ease valuation pressure on A-shares, but long-end U.S. Treasury yields still constitute a constraint. U.S. growth resilience coexists with inflation pressure, and combined with fiscal sustainability concerns, long-end rates remain elevated, suppressing equity asset valuations. Recently, employment and core inflation data came in below expectations, and Fed officials' rhetoric turned more cautious, pushing market rate hike expectations lower. The firm believes October will likely see a rate hike pause, expected to reduce the suppression of tightening expectations on A-share valuations and risk appetite, supporting a phase of recovery. Additionally, before the midterm elections, Trump's desire to stabilize the economy and capital markets,压低 energy prices, and pursue diplomatic achievements provides momentum for easing U.S.-Iran tensions. If substantive progress is made, it could further support A-shares by reducing oil price and inflation disruptions and improving global risk appetite.
Meso Level: Focus on Areas with High Third-Quarter Earnings Growth or Improvement
October enters the third-quarter earnings disclosure period, and earnings clues become an important consideration for October industry allocation. 1) Industrial enterprise profits are narrowing, and overall third-quarter earnings improvement is expected to be limited, with TMT and resource products still the main growth support, mid-stream manufacturing and optional consumption marginally improving, and the pharmaceutical industry maintaining relatively high growth. 2) Since August, earnings estimates have been revised upward for electronics, non-bank financials, coal, pharmaceutical biology, basic chemicals, non-ferrous metals, real estate, and petroleum and petrochemicals. 3) AI computing power chain, resource products, and some mid-to-high-end manufacturing earnings growth rates are expected to remain leading, and areas with high third-quarter earnings growth or improvement are expected to be mainly concentrated in the AI industry chain (communication network equipment and devices, printed circuit boards, copper-clad laminates and upstream materials, memory chips, computing power chips, semiconductor packaging and testing, consumer electronics components and assembly, etc.), resource products (non-ferrous metals, petroleum and petrochemicals, coal, basic chemicals, etc.), mid-to-high-end manufacturing (marine equipment, construction machinery, general equipment, etc.), as well as pharmaceuticals, securities, textile manufacturing, etc.
Prior Performance, Trading Concentration, and Monthly Effects
1) Over the past two months, the market shifted from previously concentrated herding to a more balanced style, with overall underperformance relative to the Wind All-A index mainly concentrated in areas with relatively excess capacity, such as energy metals, batteries, construction machinery, photovoltaic equipment, and passenger vehicles. Some industries that had fallen more previously and are related to domestic demand began to outperform the broader market, such as decoration and furnishing, medical services, household goods, aquaculture, and real estate. 2) Recently, market trading conditions have continued to diverge, with relatively low trading shares in consumption/cyclical areas such as baijiu, infrastructure construction, steel, cement, and hotels and catering. Sectors such as medical services, wind power equipment, chemical pharmaceuticals, biological products, optical optoelectronics, general equipment, and communication equipment have trading volume shares and turnover rates at historically high percentiles. 3) Every October, industries with a relatively high probability of generating excess returns are mainly concentrated in electronics, non-bank financials, and low-valuation areas, such as building decoration, transportation, pharmaceutical biology, and textiles and apparel.
Combining multiple dimensions including meso-level prosperity, profitability, chip distribution, valuation, trading, cycle stage, and track value, October should de-emphasize index fluctuations, focus on prosperity and earnings, and balance allocation with some domestic demand directions. It is recommended to position around three clues, with key attention on: 1) AI computing power chain earnings realization directions, such as electronics (semiconductors); 2) Global capital expenditure and resource products directions, such as power equipment (batteries, grid equipment) and non-ferrous metals (industrial metals, precious metals); 3) Low-valuation and domestic demand balanced directions, such as pharmaceutical biology, agriculture, forestry, animal husbandry and fishery, and banking.
This Period's Sector Recommendations
Electronics (Semiconductors): AI capital expenditure continues to diffuse toward wafer manufacturing, storage, and high-speed interconnect, and third-quarter earnings enter a concentrated verification period. 1) The global semiconductor expansion cycle remains in an uptrend, with global semiconductor sales year-over-year growth continuing to expand, and equipment demand sustainability is relatively strong. 2) Third-quarter earnings will be a key window to verify earnings realization, with AI server volume continuing to drive demand for high-end PCB, CCL, AI power supplies, and high-speed interconnect, and promoting volume-price improvement in DRAM, NAND, and advanced packaging segments, with industry profits expected to continue high growth. 3) Domestic substitution is advancing from complete equipment to high-barrier components and materials, and segments with lower localization rates and longer customer verification cycles have relatively greater growth space and profit elasticity. 4) On the industry catalyst front, TSMC confirmed price increases by process node and continued to raise equipment procurement quantities, with advanced packaging supply and demand remaining tight, and prices and capital expenditure resonating.
Power Equipment (Batteries, Grid Equipment): Batteries enter a production scheduling and profit recovery phase, while computing power load growth, energy transition, and grid upgrades jointly open up long-term demand space for grid equipment. 1) On batteries, production scheduling continues to improve month-over-month, with power batteries, energy storage batteries, and some material segments still maintaining relatively fast year-over-year growth, and third-quarter industry profits expected to continue recovering. 2) On technology and policy, the national-level plan for new-type batteries proposes goals including preliminary large-scale application of all-solid-state batteries, and the industry will shift from single-route competition to coordinated development of lithium, sodium, solid-state, and flow batteries, with equipment, solid-state electrolytes, and high-safety materials having medium-to-long-term incremental growth. 3) Grid equipment has relatively higher certainty, with a large number of new energy and data center projects constrained by grid connection capacity, and computing power load growth will drive ultra-high-voltage expansion, distribution network intelligence, etc., with transformers, switchgear, secondary equipment, and energy storage PCS all expected to benefit.
Non-Ferrous Metals (Industrial Metals, Precious Metals): Industrial metals benefit from emerging demand expansion while supply is constrained, and precious metals continue to benefit from central bank gold purchases, overseas macro landing, and geopolitical risks. 1) The core contradiction for copper is shifting from traditional real estate demand to supply constraints and new demand expansion, with profits potentially concentrating toward the resource end and high-value-added copper material segments. 2) For aluminum, domestic capacity ceiling constraints are clear, industry operating rates are high, and grid, new energy vehicle, photovoltaic, and packaging demand provides support, combined with Middle East geopolitical disruptions leading to overseas production cuts, the price center is expected to be supported. 3) The medium-to-long-term logic for precious metals remains intact, with global central bank net gold purchases growing year-over-year, and reserve diversification and geopolitical risks still constituting bottom support for gold prices, but short-term attention is needed on the dollar, real interest rates, and ETF fund changes. 4) On earnings, copper and gold resource companies benefit from rising metal price centers, and third-quarter earnings are expected to continue high growth; electrolytic aluminum companies' per-ton profit and cash flow are expected to remain elevated.
Pharmaceutical Biology: Innovative drug going overseas and CXO order recovery form industry resonance, and pharmaceutical industry profits are expected to continue recovering. 1) On the policy side, the "15th Five-Year Plan for Pharmaceutical Industry Development" proposes goals including innovative drug industry scale and R&D investment intensity, with the R&D investment floor rising, favorable for innovative drugs, clinical services, CDMO, and upstream scientific research demand expansion. 2) On the going-overseas side, global pharmaceutical companies have begun systematically purchasing Chinese assets, and recent geopolitical restrictions on BD are expected to ease, with overseas licensing expected to continue high prosperity. 3) On the earnings side, the market is about to enter the third-quarter earnings expectation trading window, with market pricing logic shifting from "valuation-driven" to "earnings verification," and new product volume ramp-up, BD revenue recognition, and innovative drug industry chain recovery expected to drive further improvement in pharmaceutical profits. 4) On industry catalysts and events, international medical conferences are密集, and potential data readouts and licensing collaborations may form catalysts.
Agriculture, Forestry, Animal Husbandry and Fishery: Climate disruptions raise price elasticity in the planting chain, industry supply-demand structure continues to improve, and profits are expected to recover cyclically. 1) On the planting chain, El Niño has been confirmed and will strengthen into a super event, and the impact of climate anomalies on agricultural product prices typically has a time lag, with tightening supply expectations expected to push related product price centers upward. 2) On seed industry, food security, agricultural subsidies, and biological breeding industrialization constitute medium-term support, and as third-quarter pre-sales gradually begin, if grain prices and planting returns improve, seed demand, pricing power, and channel collections are expected to recover simultaneously. 3) On hogs, hog and piglet prices have declined year-over-year, supply pressure has not been fully alleviated, and low hog prices will further test the cash flow of high-cost breeding entities, with the industry investment logic shifting to "deepening losses—capacity reduction—supply-demand rebalancing."
Banking: Real estate policy support and fiscal-financial coordination improve asset quality expectations, and high dividend allocation value is manifested. 1) Banks' relative advantage comes from dividend certainty, and in stages of increased market volatility and high tech growth crowding, stable cash flow and lower PB can attract medium-to-long-term funds such as insurance, wealth management, and ETFs. 2) The impact of the real estate policy combination on banks is generally positive, with mortgage interest subsidies borne by fiscal authorities, helping reduce resident home purchase costs without directly compressing bank loan returns; PSL rate cuts and relending tool expansion are favorable for affordable housing, urban renewal, and real estate storage projects to obtain medium-to-long-term funds. 3) On the earnings side, if deposit cost declines can partially offset loan yield declines, combined with stabilizing non-performing loan generation rates, bank profit growth may gradually bottom out.
Sector Prosperity Review and Outlook
Meso-level indicators and prosperity indices show that currently high-prosperity or marginally improving areas are mainly concentrated in some mid-to-high-end manufacturing and some consumption areas such as military electronics, batteries, computer equipment, aquaculture, home appliances, and chemical fibers.
Upstream Resource Products: Steel and coal supply constraints are strengthening, and geopolitical disruptions support crude oil price increases. Traditional peak-season steel demand is expected to improve, with steel prices oscillating and recovering; restocking combined with winter storage initiation, rigid demand is expected to support coal prices at high levels; petroleum and chemicals may continue high-level oscillation with structural divergence, with upstream oil and gas, refining, and refrigerants relatively favored; non-ferrous prosperity may maintain high-level oscillation and structural divergence, with copper, aluminum, and strategic minor metals relatively favored, and precious metals maintaining resilience.
Mid-Stream Manufacturing: Internal and external demand divergence continues, and going-overseas and high-end equipment prosperity is rising. Photovoltaic supply clearance and price recovery still need time to verify, and energy storage orders and "Golden September and Silver October" stockpiling are expected to support lithium battery production scheduling continuing positive growth; on military, global arms restocking demand continues to release, and air defense, missile defense, and high-consumption weaponry are expected to maintain high prosperity; on machinery, construction machinery exports maintain resilience, domestic demand continues to decline, and automation and high-end equipment demand is growing rapidly; on automobiles, exports remain the main support, and the new vehicle cycle is expected to concentrate realization.
Consumption/Pharmaceuticals: Terminal demand remains weak, and the double holiday catalysts combined with "Double Eleven" pre-sales are expected to boost consumption in the short term, with innovative drug prosperity continuing. Post-real-estate-cycle consumption remains mainly driven by inventory renewal and policy; National Day banquets and gift-giving demand are expected to drive further improvement in baijiu, dairy products, and leisure food sales, but still mainly structural recovery; optional consumption continues to diverge, with beauty expected to benefit from "Double Eleven" pre-sales, and gold jewelry more dependent on gold price stabilization; service consumption remains a direction with relatively high certainty; innovative drugs and related CXO are expected to maintain prosperity, with the sector further concentrating toward enterprises with core pipelines and realization capabilities.
Finance and Real Estate: Real estate policy "combination punches" land, bank net interest margins stabilize, and non-bank prosperity diverges. Real estate is closer to "sales stabilizing first, investment still lagging," and "Golden September and Silver October" transactions are expected to improve in stages; banks continue "scale growth slowing, net interest margin stabilizing, profit mildly recovering"; securities prosperity declines with industry divergence intensifying, and insurance value rate improvement is expected to support valuation, but still constrained by relatively low investment returns.
Information Technology: AI computing power and storage demand remain robust, price increases continue to diffuse, and hardware-side earnings are expected to continue high growth. On electronics, AI computing power capital expenditure and storage price increases remain the two main lines, and domestic semiconductor prosperity continues upward; on communications, optical interconnect and AI network upgrades remain the core driving force; on computers, priority should be given to directions where AI revenue begins to realize; on media, AI applications and going overseas remain the main sources of elasticity.
Multi-Dimensional Review
Profitability: From the ROE historical percentile distribution, non-bank financials, communications, and non-ferrous metals rank high in profitability, with insurance, communication equipment, and industrial metals ROE percentiles at historical highs, and minor metals, consumer electronics, and batteries also at relatively high percentiles; real estate, decoration and building materials, household goods, infrastructure construction, banking, baijiu, home appliances, photovoltaic equipment, wind power equipment, and passenger vehicles have ROE percentiles at historical lows. This period's recommended industrial metals and batteries have ROE percentiles at the forefront, with relatively strong profit-side support.
Earnings Expectations: As the third-quarter earnings disclosure window approaches, analysts' consensus earnings expectations for some industries have been revised upward over the past month, including energy metals, chemical fibers, decoration and furnishing, semiconductors, chemical raw materials, commercial retail, and medical services; consensus earnings expectations for some industries have been revised downward, with biological products, aviation airports, cement, photovoltaic equipment, aquaculture, software development, and passenger vehicles seeing relatively large downward revisions.
Chip Distribution: Public mutual funds mainly increased positions in semiconductors, communication equipment, general equipment, consumer electronics, special equipment, automation equipment, minor metals, and computer equipment in the second quarter, with relatively high position shares in semiconductors, communication equipment, batteries, chemical pharmaceuticals, baijiu, and securities; this month margin funds increased positions in communication equipment, general equipment, special equipment, auto parts, wind power equipment, insurance, and batteries. From the past decade's percentile perspective, industries such as semiconductors, communication equipment, general equipment, special equipment, automation equipment, minor metals, and chemical fibers have public fund position shares above the 80th percentile.
Valuation Levels: Currently, many industries have valuation percentiles at decade highs, with automation equipment PE TTM percentile above 90%, and aquaculture, general equipment, communication equipment, military electronics, wind power equipment, coal, cement, decoration and furnishing, steel, and household goods above 80%; securities, insurance, industrial metals, batteries, seasoning fermented products, hotels and catering, beauty care, computer equipment, baijiu, and energy metals have percentiles below 20%, among which insurance, banking, infrastructure construction, securities, industrial metals, shipping ports, and home appliances have PE TTM absolute levels at the lowest tier of the entire market, with relatively ample safety margins. Compared with this period's recommendations, batteries and industrial metals have valuation percentiles at low levels, and banking has absolute valuation at the lowest tier.
Trading Analysis: In September, market trading activity declined somewhat, and trading turnover in previously concentrated herding areas marginally retreated. Industries with turnover rate percentiles at moderately above-average levels and in upward trends this period mainly include passenger vehicles, military electronics, general equipment, and chemical products. Industries with relatively high trading concentration and in upward trends this period mainly include wind power equipment, medical services, optical optoelectronics, general equipment, and semiconductors.
Cycle Stage: Currently, the domestic economy overall presents a weak recovery pattern, with domestic demand recovery pace relatively slow, external demand relatively strong, and old and new growth drivers continuing to diverge, with the aggregate fundamental recovery slope relatively moderate. However, market liquidity maintains a reasonably accommodative environment, policy support continues to intensify, and combined with the steady advancement of industrial upgrading trends, A-shares are overall in a cycle transition stage from valuation recovery to earnings verification. From a medium-to-long-term perspective, technological innovation remains the core growth mainline; at the same time, attention can be paid to areas of high export growth and domestic demand recovery to balance volatility in the technology sector.
Track Value: From a short-term perspective, October focuses on five tracks with marginal improvement: domestic computing power, overseas computing power, innovative drugs, robotics, and non-ferrous metals. From a medium-to-long-term perspective, it is recommended to use cycles as the axis and supply-demand as the anchor, paying attention to the progress of society-wide intelligence under the new technology cycle, the autonomous controllability of related industry chains under the domestic substitution cycle, cost reduction and efficiency improvement across the carbon neutrality industry chain under the "dual carbon" cycle, and the increase in electric intelligent vehicle penetration under the major trend of electrification and intelligence.
Risk Warning: Industry support falling short of expectations, macroeconomic fluctuations.