Strategy：Behind Shifts in Large and Small Cap Styles

ArnslyslWANGYISACNo.S05705z005n001 wanay012893ghtsc.comSFC No. BMO373+(86) 21 2897 2228 Huatai Research 13 August 2024 | China (Mainland) Weekly Ourcore views While the market underwent a pulsed rebound due to policy-driven trading in theintensified recently in external markets, yet there has been no sign:of inflow intoChina assets from_ allocation-oriented foreign capital. necessitating furtherobservation on foreign capital reallocation. Given a lack of economic datadisproving the recession trejectory, reversing the recession trading is challenging.small-cap stocks such as the CSI 1000 promise excess returns backed by shifispue peouqe pue soy je sskees Aajod 'suogenea mo pue bry ueemeqrelatively low funding pressure. Looking ahead, we expect rebalancing betweentrend, although macroeconomic fundamentals still need improving. Large capsstrong and weak sectors within the market's fluctuation range to remain a majorwith robust ROEs could maintein a long-term advantage, We recommend focusingon A50 assets and the booming consumer electronics/shipbuilding chain. Fast corrections in external markets amid recession trading US non-farm payrolls have notably fallen since May, with July (114,000) far belowthe Bloomberg consensus (175,000): given this, coupled with the ‘Sahm Rule'resumed, and US bonds and US stocks fell simultaneously. In 4Q18, there wereinterest rate hikes, and 2Y-5Y and 3Y-5Y US Treasury yields saw the firstinversion since 2008, pointing to strengthened recession expectations and arebound in sentiment for averting risk, leading to corrections in previouslyhigh-flying US stocks (mainly tech stocks) and A-shares. Looking ahead, given slack of economic data disproving the recession trajectory, reversing recessionSeptember (Jackson Hole Economic Symposium on 22 August and thesubsequent non-farm payrolls/economic data). Big-and small-cap stocks turning around on trading/themes/capital Since end-July, styles of big- and small-cap stocks have converged, and small-caphigh and low valuations; market adjustments have usually been accompanied bydeclines in strong assets, and investors have tended to shift from high to lowvaluations during position relaxations; this, coupled with small-cap US stockrallies, has given rise to excess rallies of small-cap stocks; 2) for policy, the recentPolitburo meeting paid great attention to sci-tech self-reliance and this, coupledwith the impact of the US election, has benefited small-cap stocks; 3) for capital,while liquidity of small-cap stocks preferred by private funds/margin trading andsecurities lending has outperformed. Looking ahead, the rebalance betweenstrong sectors and weak ones amid market fluctuations may continue, macrofundamentals may have yet to improve, and big-cap stocks with robust ROE maygain an upper hand in the medium to long term, in our view. Releaseof 1H24earningstopeak inlateAugust 110 A-share listed companies had released interim results as of 3 August, withenterprises which have disclosed interim results are mainly engaged in agricultureand power equipment. If we choose seclors where >3% of enterprises havereleased interim resuts as preliminary samples, we find that yoy growth in profit ofpower equipment players in 2Q24 bounced back, potentially driven by energystorage; yoy growth in attributable net profit of utilities firms slowed, potentially asenterprises which have disclased earnings are mainly engaged in thermal powerand an-grid thermal power output has fallen; phamaceutical profit was weak,potentially due to the overseas order policy. According to overall expectations, for2Q24, corporate orders may have picked up, but the price turnaround has yet toarrive en masse; the posilivity for 2Q24 is that electronics sub-fields may havepicked up armid a rebound in cycles, and links with resilient exporis naintainedrobust earnings in 2Q24 Allocating inA50 assetsasbasepositions Last week, the market fluctuated, with a pulsed rebound in the middle of the week,potentially due to policy-driven trading, but sustainability remains to be seen;in the robust performance of the CSl 1000, As companies are releasing interimresults, the market trading may be verified by fundamentals at home and abroadas well as policy, We suggest maintaining previous allocation clues; 1) while thecapabilities of achieving sustained excess relurns may be lirmited given the S/Dexcess-retums environment for small- and medium-cap stocks has been unlocked,pressure; we thus suggest selecling assets with stable average ROE despite thedecline in broader-rmarket ROE as miedium-tern base posilions, such as A50assets; 2) in light of current interim result disclosures, we suggest sectors withbetter-than-expected earnings and earnings sustainability, such as consumerelectronics/shipbuiking. Risks: uncertainties about overseas elections; domestic property sales and interimearnings falling short of our expectations. Disclaimers Analyst Certification the subject securities or issu