Fiscal policy is currently the focus of market attention. The policy stance of the Ministry of Finance has exceeded expectations overall, and the shift in policy thinking is more important than the magnitude of the effort. The market is currently in a transitional phase from a major reversal of expectations to a significant inflection point in the trend. After the initial pulse-like rise, the market sees intensified bullish and bearish contention, with the pace of entry of incremental funds from outside the market slowing down. However, the potential scale of funds entering the market remains substantial. It is expected that the market trend will gradually shift from being driven by sentiment in the capital market to being driven by fundamental validation, with the market characteristics transitioning from pulse-like fluctuations to a stable and slow rise.

Fiscal policy stance has exceeded expectations overall, conveying positive signals and improving market sentiment.

1) After the major reversal of expectations, domestic policies are still in an intense implementation period. The policy stance has exceeded expectations, catalyzing a major reversal of market expectations. Policies are being implemented intensively, and investors' expectations of policy intensity are also continuously increasing with the rise in the market. Firstly, in terms of monetary policy, the central bank has reduced the reserve requirement ratio for financial institutions by 0.5 percentage points since September 27, and simultaneously lowered the 7-day reverse repo rate from 1.7% to 1.5%. On October 10, the six major state-owned banks announced that they would uniformly reduce the existing mortgage loan interest rates, excluding second套房 loans in Beijing, Shanghai, and Shenzhen, to LPR-30bps, and complete the adjustment by the end of October. Secondly, in the capital market, the first supportive monetary policy tool was implemented. On October 10, the central bank announced the acceptance of applications for the "Securities, Funds, and Insurance Companies Swap Facility (SFISF)" with an initial swap scale of 500 billion yuan. Lastly, the "Draft Law of the People's Republic of China on Promoting Private Economy (Draft for Comments)" was also published on October 10, making provisions from aspects such as fair competition, investment and financing, scientific and technological innovation, standardized operations, service guarantees, rights protection, and legal responsibilities, effectively stabilizing the expectations of economic entities.

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2) The fiscal policy stance has exceeded expectations overall, conveying positive signals and improving market sentiment. On October 12, the State Council Information Office held a press conference where the Minister of Finance, Lan Fo'an, and others introduced the situation related to "Increasing the Counter-Cyclical Adjustment of Fiscal Policy and Promoting High-Quality Economic Development." The short-term incremental policy clearly resolves risks and enhances the enthusiasm of various market entities. In the long term, it points out that there is still a large space for central fiscal borrowing, conveying a positive signal of fiscal policy. Specifically, the following important deployments are worth noting: ① Debt resolution is further strengthened, with plans to increase the debt limit on a one-time basis to replace the existing implicit debt of local governments on a large scale. ② It clearly supports state-owned banks in replenishing Tier 1 capital to enhance the risk resistance of state-owned banks. ③ Special bonds are introduced to reclaim idle land, reserves, and related tax policies, reflecting the determination of fiscal policy to stabilize real estate. ④ Consolidate grassroots "three guarantees" expenditures, and further strengthen student aid policies. ⑤ Benefiting people's livelihood and promoting consumption are the key focuses of subsequent fiscal policies. ⑥ It is clear that special bonds can be used to purchase existing housing for affordable housing and to resolve the debt of existing government investment projects. Fiscal policy is the core policy variable of this round of market attention. With the strong counter-cyclical fiscal policy taking over, it is conducive to stabilizing the policy expectations that have fluctuated recently and improving market sentiment.

3) In the long term, the shift in policy thinking is more important than the magnitude of the effort. Firstly, in terms of real estate attitude, the policy has proposed for the first time to promote the "stabilization and recovery" of the real estate market. In addition to the current policies that have been implemented, it is believed that future real estate policies are entirely possible to set goals to define space and further exert effort. Secondly, in terms of financial policy, this round of SFISF and repurchase and increase in special loans are widely understood by investors as the central bank providing put option protection for the stock market. Moreover, this round of financial policy generally points to the financial sector adding leverage to support the market and the real economy, which is also a different change in thinking from the past. Lastly, in terms of fiscal policy, the shift in the focus of long-term policy efforts is an important point to watch. It is expected that the focus of future fiscal policy will gradually shift from traditional infrastructure investment to stimulate the economy and tax rebates to support industries, to benefiting people's livelihood and promoting consumption, and fiscal policy will have a more direct impact on the balance sheets of residents. In addition, judging from the density of this round of policy implementation, under the requirement of "action first," after the first round of policies from various departments have been preliminarily implemented, it is expected that subsequent local policies will also enter an intense implementation period.

Bullish and bearish contention intensifies, and the pace of entry of incremental funds from outside the market slows down, but the potential scale of funds entering the market remains substantial.

1) Under the fluctuation of policy expectations, the short-term pulse-like rise and fall of A-shares lead to intense bullish and bearish contention. This week, policies have been intensively implemented, policy expectations have fluctuated, policy contention has intensified, and market fluctuations have increased. Firstly, within the six trading days from September 24 to October 8, the Shanghai Composite Index, ChiNext Index, and CSI 300 have cumulatively risen by 27.0%, 66.6%, and 32.5%, respectively. Such pulse-like short-term increases are also very rare in the history of A-shares, corresponding to a rapid increase in market turnover. On September 30, the market turnover of A-shares reached 2.6 trillion yuan, breaking the historical high of 2.36 trillion yuan on May 28, 2015, and this record was refreshed to 3.48 trillion yuan on October 8. Secondly, while the market valuation has been rapidly repaired in this round, the valuation differentiation across various industries remains significant. As of October 11, among the dynamic valuations of the 29 first-level industries of CITIC, 11 industries are still below the 25% percentile since 2010; the dynamic valuations of the CSI 300, CSI 500, and ChiNext Index are 11.1X, 15.2X, and 21.4X, respectively, which are the 69%, 40%, and 11% historical percentiles since 2010. Lastly, the market is still mainly driven by capital market sentiment, with fundamental validation as a supplement, which remains the main characteristic of this round of market trends. After a rapid short-term increase, investors' expectations of subsequent policy intensity have diverged, and some investors' willingness to take profits has increased after a rapid short-term increase, leading to intense short-term bullish and bearish contention in the market.

2) The pace of entry of incremental funds from outside the market has slowed down, but the potential scale of funds entering the market remains substantial. Behind this round of pulse-like market trends, the concentrated entry of incremental funds led by retail investors is the main characteristic, and on the product side, passive fund subscriptions represented by ETFs have significantly increased. Firstly, searching for "A-share account opening" on Baidu Index will show two peaks since September 24, with the first peak on September 30 and the second peak on October 8. Secondly, accompanied by the market's violent fluctuations, the net subscription amount of ETFs mainly participated by retail investors in this round has fluctuated, with the total net subscription amount of ETFs in the two cities being 689, 1014, 491, and 43 billion yuan from September 30 to October 10. On October 11, the ETFs on the Shanghai Stock Exchange had a net redemption of 20.4 billion yuan, and the ChiNext ETF also recorded a net redemption on October 10 after a series of large net subscriptions. Again, following the fluctuations in market sentiment, the short-term growth rate of this round of financing balance also first rose and then fell, with a single-day net increase of 196, 449, 1100, 373, and 14 billion yuan from September 27 to October 10. Lastly, as the market rapidly repaired in the short term, since September 24, a total of 88 companies have announced pre-disclosure of share reduction. The pace of entry of incremental funds from outside the market has slowed down, but the potential scale of funds entering the market remains substantial.3) Institutional capital behavior is significantly differentiated, but it is difficult to dominate market direction in the short term. Firstly, there is little change in the adjustment of public fund positions and the redemption of applications. According to the calculation of the Quantitative and Allocation Group of CITIC Securities Research Department, as of October 11th, the overall positions of current public ordinary stock type, stock-biased hybrid type, and flexible allocation type products are 79.6%, 73.6%, and 68.8%, respectively, with little change this week; according to the channel research of CITIC Securities, the net redemption rate of the sample public fund this week (the week of October 9th) is 0.37%, which is the lowest value in nearly 8 weeks since the end of August. Secondly, the position of the sample active private equity continues to increase. Since the end of September, the position of the sample active private equity has started to rise, increasing by 2.1 percentage points to 71.0% on the week of September 27th, and on September 30th, with only one trading day, the position of the sample active private equity increased by 2.0 percentage points to 73.0%. Thirdly, in terms of foreign capital, according to Refinitiv data, the sample funds tracking MSCI China have seen a large net inflow for two consecutive weeks, mainly driven by passive funds. This week (the week of October 9th), the net inflow of active and passive funds reached as high as 4.2 and 80.9 billion US dollars, respectively, continuing to set the largest net inflow since 2015. Finally, entering the fourth quarter, some long-term institutional capital with absolute return assessment has a strong desire to reduce positions after the short-term rapid rise of the market in this round, but it cannot dominate the market direction under the current liquidity environment.

Fiscal policy exceeds expectations, and the market enters a gear shift period.

Fiscal policy is the focus of the current market, and the policy stance of the Ministry of Finance is generally beyond expectations. The transformation of policy thinking is more important than the magnitude of the effort. The market is currently in the transition stage from a major reversal of expectations to a major turning point in the market. After the pulse-like rise in the market, the game between bulls and bears has intensified, and the pace of entry of incremental funds from outside the market has slowed down. However, the scale of potential market funds is still large. The market will gradually shift from being driven by capital sentiment to being driven by fundamental verification, and the market characteristics will shift from pulse-like rises and falls to stabilization and slow growth. In terms of allocation, it is still recommended to focus on low P/B and domestic demand repair as the main line. In terms of the revaluation of the low P/B style, industries such as real estate, banking, non-bank finance, and construction materials are one of the most clear main lines. In terms of the valuation repair of the domestic demand plate, it is recommended to focus on the consumer Internet that is both offensive and defensive, the dairy, mass catering, and other necessary plates with low valuation and high return, and the wine, human resources, hotels, and other cyclical directions driven by the repair of economic expectations.

Risk factors

The friction in the global technology, trade, and financial fields intensifies; domestic policy and economic recovery are not as expected; domestic and foreign macro liquidity tightens beyond expectations; the conflict in Russia and Ukraine, and the Middle East region further escalates; the digestion of China's real estate inventory is not as expected.