Before the holiday break, A-shares surged under the guidance of various policies, with the Shanghai Composite rising from 2,700 to 3,336. Looking back, the high points were 3,424 in July 2022, 3,400 in April 2023, and 3,100 in May 2024. Now, it is approaching the post-COVID reopening highs of 3,400, when the index rose from 2,900 in early November 2022 to 3,400 by late April/early May. This current surge is much faster than in previous cycles. In the long run, the only major resistance level is around 3,700, which was the pre-lockdown high before the Shanghai lockdown in May 2022 drove the market down to about 3,000. Based on current trends, we estimate a target range of around 3,700 points.
Additionally, all sectors have been rising during this rally, with the banking sector seeing a slight pullback after its rapid earlier ascent. We believe that as the market cools, certain sectors will have more upside potential. Undervalued central state-owned enterprises (SOEs) and state-owned enterprises (SOEs), particularly in banking, transportation, healthcare, and real estate, present good opportunities. As the market attempts to reach 3,700 over the next four trading days, there appear to be few significant hurdles. Here’s our outlook:
- Delay in Fiscal Policy Expectations: The much-anticipated fiscal policy has yet to materialize. Discussions around fiscal stimulus have been widespread, with numerous economists calling for stronger counter-cyclical measures. Liu Shijin has proposed a ten trillion yuan fiscal stimulus package focusing on both investment and consumption, while Yu Yongding has advocated for a major short-term fiscal package in the fourth quarter, mainly targeting infrastructure investment. Media outlets like Bloomberg have repeatedly reported on the central government’s deliberations around fiscal policy. However, the September 26 Politburo meeting emphasized monetary policy as the primary tool for macroeconomic control, with a more conservative stance on fiscal policy. The risk of a multi-trillion fiscal package appearing on time remains high. We believe the central government has funds available, but they are concentrated at the central level, while local governments face financial constraints and a shortage of viable projects. The key issue for the central government is finding the most efficient way to allocate funds.
- Mixed Domestic Macroeconomic Data: On September 30, the September PMI data was released, showing slight improvement. Manufacturing PMI rose from 49.1 to 49.8, while non-manufacturing PMI declined from 50.3 to 50.0. The 49.8 figure marks the fourth-best performance of the year. However, the Caixin PMI fell from 50.4 to 49.3, highlighting the complexity and uncertainty of September’s data. Nevertheless, the “three arrows” of monetary policy announced on September 24 and the Politburo meeting on September 26 have largely cleared the way for the stock market. September’s data is unlikely to have a major impact on the market, with the focus shifting to high-frequency data for October.
- Middle East Tensions and Potential Delay in U.S. Rate Cuts: On October 1, Iran fired approximately 200 missiles at Israel. In response, President Biden expressed his full support for Israel. That evening, oil prices surged 5%, and Israel is expected to retaliate against Iran in the coming week, likely targeting oil and nuclear facilities. If the conflict escalates, oil prices will spike again. Additionally, U.S. non-farm payrolls far exceeded expectations in September, with the unemployment rate falling to 4.1% and 254,000 new jobs added. This confirms a soft landing for the U.S. economy. The Nasdaq saw significant intraday volatility but stabilized by the close. Real estate-related stocks experienced steep declines. The combination of escalating Middle East tensions and stronger-than-expected macro data may slow the Fed’s pace of rate cuts, which is unfavorable for global capital markets. The key risk remains the Middle East.
- Increased Intraday Volatility: This week, the Hang Seng Index saw wild intraday swings, testing the resolve of investors. Since September 24, the Hang Seng has led global markets, but the increasing intraday volatility has made trading more difficult, particularly for those using leverage. However, A-shares below 3,700 points still have considerable upward momentum.
Strategy: At this stage, we believe the best targets are undervalued state-owned and central state-owned enterprises, with a focus on short-term trading (T+0). While market sentiment is highly bullish, caution remains essential. Consistently taking profits to boost overall returns, while aligning portfolio positions with volatility, is key to navigating this environment.