Chen Guo: There is an opportunity for cyclical industries during the transition from bear to bull market. It is expected that China and the United States will jointly lower interest rates by next year.

Zhitong App learned that on December 5th, Chen Guo, the chief analyst of CITIC Securities, stated at the 2024 CITIC Securities Capital Market Summit that the current position of A-shares is in line with the transition from bear to bull market, with valuation rising before earnings. Currently, A-shares face valuation pressure and profit pressure from the US dollar index and US bond interest rates, but there may be improvement next year. He is optimistic about the logic of next year. The first is that the profit growth will turn from negative to positive next year; the second is the improvement in valuation, which will also bring some market trends, that is, the water will flow to the lower level. From the current situation, there are opportunities in cyclical industries.

He also stated that the rise in global asset prices, including the Dow Jones, the Indian stock market, gold, and Bitcoin, is not necessarily a bad thing for A-shares because of the comparative effect. It is expected that China and the United States will jointly cut interest rates next year to boost asset price valuations.

Regarding the US dollar, Chen Guo believes that the decline of the US dollar may exceed expectations because the US dollar has appreciated more than expected. China's real interest rate is well controlled and close to economic growth, while the real interest rate in the United States is relatively low compared to China, and the United States has high inflation, so purchasing power is declining. Theoretically, after this round of epidemic, the US dollar has internal pressure to depreciate due to its strong and extreme printing of money.

In terms of real estate, if we look at the trend of asset prices in the market, we can conclude that the trend of China's housing prices will definitely not be like Japan's real estate market. In the past few years, household savings have been increasing, but real estate prices have not risen, including this year's digestion. Therefore, the risk in the past few years has already been released. When prices adjust again, don't worry about a crash, but rather that prices may stabilize after a certain adjustment. Next year, this situation may occur in some first-tier cities in China, and even in strong second-tier cities.

As for the factors suppressing consumption, it may still depend on the reduction of scar effects and changes in income expectations, which will support consumption. Fiscal policy will be very important next year. To stabilize the real estate market, fiscal policy is also needed, as well as special administrative powers, which Japan does not have. We have sufficient ability and tools for mobilization. At this level, next year will not only stimulate demand, but also exert force on the supply side, including urban villages, affordable housing, and new and old infrastructure.

In this context, Chen Guo pointed out that next year's environment, the first is that profits will improve. The second is the increase in opportunities. This year, we are observing the recovery of the economy itself and have not conducted much demand testing and management. The potential output level is still obvious, and we are still in a position with deflationary pressure. Demand-side management will be strengthened next year. In this context, the profit growth rate next year, whether it is price or quantity recovery, will increase significantly in industries where the profit growth rate accounts for more than 30%. Therefore, investment in business cycles will definitely increase, although it may not be strong at the beginning, but it will definitely increase marginally.

Chen Guo is optimistic about the logic of next year. The first is that the profit growth will turn from negative to positive next year. The second is the improvement in valuation, and the improvement in valuation will also bring some market trends, that is, the water will flow to the lower level. From the current situation, there are opportunities in cyclical industries, especially with the increased efforts to stabilize growth next year.

Of course, there are some specific industries where the valuation center is changing. This is because the supply-demand relationship and industry logic are changing. For example, industries such as computers, coal, and non-ferrous metals should not have a downward shift in valuation center, but rather an upward shift. They are different from most industries in terms of valuation center. In addition, the adjustment cycle of the real estate sector is expected to be not short, and the growth rate of real estate investment next year may improve marginally compared to this year.

Chen Guo believes that there are three lines where profitability will improve: first, there will be some structural elasticity; second, there will be elasticity in the repair of storytelling; and third, there will be options thinking in this stage.

Regarding large and small caps, Chen Guo stated that the odds of small cap stocks may gradually decrease next year, as the valuation percentile of large cap stocks has already significantly decreased. The chip structure may not be optimal yet, but the valuation percentile has already been significantly optimized. The overall performance of the market next year will depend on earnings. The relative performance is changing, as well as the relative position. There may be a lot of incremental funds looking at large-cap stocks, including insurance and foreign capital.

However, this does not mean that small cap stocks are the only opportunities next year. Even if we look at the entire year, not all small cap stock indices may outperform large cap stock indices. Some small cap stocks may be at the forefront, but there will also be small cap stocks at the bottom, and then at some stages, the opportunity for large cap stocks to recover may be very obvious. So next year is not all about small cap stocks.