Market Bottom Solidifies, Earnings Bottom Requires Patience

Guojin Securities published a research report stating that fiscal policy efforts may increase the improvement of residents' and enterprises' balance sheets, thereby consolidating the "market bottom." Guojin Securities will also maintain an optimistic attitude towards this round of "rebound" market trends, recommending to allocate funds when the market is low in the direction of "technology > consumption." At the same time, considering that overseas risks still exist, the market's ability to sustain a "reversal" in the future still depends on the emergence of the "profit bottom." If subsequent fiscal policy efforts can focus more on the "asset side," such as investment, promoting salaries, and employment, it is expected that the "profit bottom" for domestic enterprises will be brought forward, and at that time, a longer-term "reversal" market trend will be initiated. Considering that: it still takes a certain amount of time for macroeconomic policies to be transmitted to the improvement of fundamental data, the "profit bottom" is expected to appear in 2025Q3.

I. The overall fiscal policy is positive, with the core being efforts on the "liability side"

The signal of "expansionary fiscal policy" is clear, with ample space and a potentially accelerated pace. At the press conference, it was mentioned that "it is expected that the national general public budget revenue growth will not meet expectations," "China's finance has enough resilience, and through the adoption of comprehensive measures, it can achieve a balance of revenue and expenditure and complete the annual budget target," as well as "counter-cyclical regulation is not limited to the above four points; these four points are policies that have already entered the decision-making process, and Guojin Securities is also studying other policy tools. For example, the central finance still has a large space for borrowing and increasing the deficit." Although no specific scale figures were mentioned, the attitude is positive, providing a certain imagination space for future fiscal efforts. This meeting basically clarified that there is room for increasing the deficit, and the repeated mention of the room for increasing the deficit may show the central government's determination to increase leverage, also marking a significant positive change in fiscal policy attitude after the monetary policy shift at the end of September. We are waiting for the statutory procedures to be completed to release more signals. In fact, against the background of macroeconomic pressure this year, the growth rates of public finance revenue (August month-on-month -2.8%) and government fund revenue (August cumulative year-on-year -21.1%) are both in negative growth, and fiscal expenditure progress is relatively slow (as of August 2024, public finance expenditure progress is 60.9%); however, judging from the finance minister's statement on "completing the annual budget target," the subsequent fiscal expenditure progress is expected to accelerate, possibly through issuing additional government bonds to fill the fiscal gap.

Fiscal efforts may focus on the "liability side" of local governments, enterprises, and residents, including: debt resolution, stable real estate, and improving livelihood areas. Specifically: (1) Resolving local government debt: Since 2023, debt resolution work has achieved phased results, and the overall risk of local debt has been alleviated; looking at the rest of the year, there are 2.3 trillion special bond funds (pending issuance + issued but unused funds) available for use across various regions, supporting local areas, especially high-risk areas, to resolve existing debt risks and clear arrears to enterprises. (2) Real estate: The policies that have been introduced mainly aim to promote the stability and recovery of the real estate market from three aspects: supply, demand, and risk resolution; subsequent support for real estate will continue from three aspects: ① allowing special bonds to be used for land reserves; ② special bonds to purchase existing commercial housing; ③ optimizing and improving tax policies. (3) Livelihood areas: Increase support and protection for key groups, and subsequently, increase the support for student groups, etc. In addition, it also mentioned (4) issuing special treasury bonds to support large state-owned commercial banks in supplementing core tier-one capital. The above four items are four incremental measures of counter-cyclical fiscal policy adjustments, similar to previous monetary policies, all aimed at repairing residents' balance sheets, thereby promoting consumption and investment. Previously, monetary policy mainly alleviated residents' debt pressure by lowering existing mortgage interest rates and other means from the liability side, and this fiscal policy will continue to focus on the "liability side," committed to improving the balance sheets of local governments, enterprises, and residents: on the one hand, resolving local debt will greatly reduce the pressure of local debt resolution, freeing up more resources for economic development; banks supplementing capital to enhance risk resistance also increases banks' willingness to lend, which is helpful for promoting corporate investment demand; on the other hand, stabilizing or even improving the performance of residents' asset side (incremental policy arrangements for the real estate market to "stop falling and stabilize"; "three guarantees" policy arrangements), enhancing residents' consumption ability and willingness, and promoting the warming of consumption expectations.

II. The market's upward trend is expected to continue, with a continued recommendation for mid-cap growth > consumption

Fiscal efforts may increase the improvement of residents' and enterprises' balance sheets, thereby consolidating the "market bottom." Guojin Securities will also maintain an optimistic attitude towards this round of "rebound" market trends, recommending to allocate funds when the market is low in the direction of "technology > consumption." At the same time, considering that overseas risks still exist, the market's ability to sustain a "reversal" in the future still depends on the emergence of the "profit bottom." If subsequent fiscal policy efforts can focus more on the "asset side," such as investment, promoting salaries, and employment, it is expected that the "profit bottom" for domestic enterprises will be brought forward, and at that time, a longer-term "reversal" market trend will be initiated. Since late September, there has been a significant increase in positive factors at the macro level: the 924 series of monetary policy "combination punches," the political bureau meeting at the end of September, and this fiscal policy meeting, etc., the macro policy adjustments are generally positive, and some policies have been gradually implemented recently, committed to effectively improving residents' balance sheets and driving market expectations to warm up. However, considering that: it still takes a certain amount of time for macroeconomic policies to be transmitted to the improvement of fundamental data, the "profit bottom" is expected to appear in 2025Q3, before which the market is still in the stage from "market bottom" to "profit bottom," that is, the rise in market trends comes more from the expansion of the denominator (driven by liquidity and sentiment). Corresponding to the style and industry allocation level, maintain a focus on recommending those with: mid-cap + oversold + low valuation + dividend rate revision of "growth > consumption," especially growth will also benefit from the highest proportion of repurchase plan scale.