The author of this article is Wei Fengchun, Chief Economist at Chuangjin Hexin Fund.
Last week's key viewpoint highlighted increasing divergence amidst market shocks. The marginal tightening of global liquidity directly suppressed the upper limit of market valuations. Entities lacking earnings support and with fragile cash flows faced dual pressures in financing and operations, with prominent downside risks. The market has entered a new stage focused solely on performance. The "narrative trading" that was prevalent last year is fading, and a true era of value investing has arrived. Where will future performance come from? Demand, technology, factors of production, and entrepreneurial spirit are the fundamental sources of value, representing the elements of certainty.
Review of Last Week's Market: Divergence and a Flight to Certainty
From the perspective of the current market cycle, global asset pricing displayed a pattern of internal and external divergence last week. This is essentially the result of a mismatch in pricing between overseas liquidity expectations and domestic capital risk appetite. In overseas markets, the US technology sector led gains, with the Nasdaq 100 Index rising significantly, reflecting a market correction to earlier overly tight expectations for Federal Reserve policy. This is bound to drive a phased recovery in global risk appetite. Commodities showed clear divergence, with IPE Brent crude oil experiencing a significant pullback, reflecting global investors' expectations for an easing of tensions in the Middle East's Strait of Hormuz. Among domestic equity assets, except for the ChiNext Index which slightly followed the overseas uptick, indices like the SSE 50 and Hong Kong stocks, representing small-cap growth assets, remained under pressure, indicating a difference in preference for certainty assets between domestic and foreign capital. The slight strengthening of bond and gold assets also confirms that overall market risk aversion has not yet dissipated.
Against this backdrop, sector performance in the A-share market further reinforced the theme of a defensive premium. Sectors like coal and utilities, which combine low valuations with stable cash flows, led gains. This represents capital crowding into "bond-like assets" in an uncertain environment. Conversely, significant pullbacks in growth and cyclical sectors like computers, defense & aerospace, and basic chemicals reflected the market's reassessment of profit realization timelines and the liquidity environment. The signal for a style shift from "high-growth sectors" to "certainty dividend assets" is clear. Overall, the current market pricing pattern is dominated by "overseas core assets + domestic defensive assets." In essence, under dual constraints of liquidity and economic momentum, this is a systematic choice by capital to concentrate in assets offering a certainty premium.
Reassessing Major Asset Allocation
When macro data weakens from a strong position, the logic of major asset allocation may change. At the beginning of the year, we suggested that bonds should return to the fundamental logic of "fixed income." Mid-year, we proposed that gold should return to its basic role as a safe haven, while clearly stating that the fundamental pricing of risk assets is based on profitability, not storytelling ability. The key viewpoints in the first half of the year focused on judging the trends, structure, and pace of growth assets. Currently, market discussions center on two focal points. First, at the micro level, attention is on "AI crowding" and the underlying herding behavior of investors, which is an inevitable result of the "four highs" we previously mentioned. Second, at the macro level, there is a renewed discussion on economic growth, liquidity, inflation, and policy stimulus.
There is significant divergence on these two focal points. Based on fundamental experience, divergence often indicates increasing risks ahead. Investor sentiment can be described as hesitant and uncertain. At this time, what we need to do is not get entangled in these inconclusive technical indicators, but step outside these frameworks and re-examine the basic logic of major asset allocation.
Key Conclusions
Starting from the basic framework of cycles and asset pricing that we commonly use, the fundamental conclusion is: The core contradiction in the current market is the weak expectation for a recovery in corporate earnings and the marginal tightening of bond market liquidity. Asset allocation needs to return to the underlying logic of the "certainty premium," using a balanced mindset to address the dual constraints of cycles and valuations.
1. Stock-Bond Relative Valuation: Cyclical Repricing of Risk Premium and Asset Attractiveness
Looking at the stock-bond yield spread and risk premium rate, the current spread between the 10-year government bond yield and the CSI 300 dividend yield is -1.02%, below the moving average. Meanwhile, the risk premium rate for the Wind All-A Index is 2.47%, near its historical median. This structure does not simply indicate "stocks strong, bonds weak." Instead, it reflects a rebalancing of stock-bond relative valuation from a cyclical perspective: the risk compensation for stocks has not entered an extremely overvalued range, and the stock-bond attractiveness still favors equity assets. This means the market remains in a configuration window of "equities first," but valuation constraints have begun to emerge.
The valuation of the Wind All-A Index is at 23.93 times, with a near-decade percentile as high as 96.70%, near 2 standard deviations. Valuation constraints have become a core pressure point for equity assets. From a cycle theory perspective, high valuations correspond to high expectations for future profits. However, among profit factors, the percentile for year-on-year growth in net profit attributable to parent company owners is only 35.10%. The pace of profit recovery is clearly lagging behind valuation expansion, forming a typical "cycle divergence between valuation and profit." This divergence dictates that the allocation logic for equity assets must shift from "driven by valuation expansion" to "driven by profit realization." High-valuation growth sectors face pressure for valuation regression during cyclical convergence, while sectors with strong profit certainty will gain a relative premium.
2. Equity Allocation: Dual Constraints of the Profit Cycle and Trading Sentiment
The marginal change in the profit factor is the core anchor for current equity allocation: the percentile for year-on-year growth in net profit attributable to parent company owners has recovered from 16.20% to 35.10%, indicating a weak recovery signal in the profit cycle. However, downward pressure still exists in the third quarter, and the slope of the profit recovery has not yet formed a trend confirmation. In cycle theory, the slope of the profit cycle recovery determines the valuation anchor for equity assets. In a weak recovery environment, the market struggles to support sustained expansion of high valuations. The matching degree between valuation and profit will become the core standard for stock selection.
On the trading front, the A-share annualized turnover rate is at a historical low (5.91%), but the sentiment indicator has rebounded to a relatively high level of 60.76%, forming a combination of "low turnover + sentiment recovery." This structure reflects the characteristics of a market in a存量博弈 (stock game) state. In an environment with insufficient incremental capital, sentiment recovery is难以支撑全面行情 (difficult to support a broad market rally). Capital is more inclined to concentrate in sectors with high certainty. Among style factors, the growth-value valuation spread is 13.09. Although it has fallen slightly from previous levels, it remains above the moving average. This indicates that the market has not yet completed a style shift. A balanced allocation between growth and value remains the optimal solution, both avoiding the cyclical downside risk of excessively high growth valuations and capturing the profit certainty premium in value sectors.
3. Bond Allocation: Cyclical Return of Liquidity Tightening and Interest Rate Pricing
On the bond side, the 10-year government bond yield percentile is 4.74%, at a historical low. The five-year credit spread (AAA) percentile has risen to 8.67%, and the DR007 percentile is 11.89%. Signals of marginal tightening in liquidity are clear. From a cyclical perspective, current bond market pricing has fully reflected earlier easing expectations. Marginal tightening in liquidity will drive the interest rate anchor back to a neutral range. The China-US interest rate differential percentile has risen to 7.02%, with strengthening external constraints further compressing the room for domestic interest rate declines.
Changes in the funding environment are the core variable for bond allocation: DR007 is in an upward trend, while the Shibor (weekly) percentile has fallen to 4.06%, reflecting a shift in short-term funding conditions from extreme宽松 (looseness) towards温和中性收敛 (moderate neutral tightening). In cycle theory, liquidity拐点 (inflection points) often correspond to定价拐点 (pricing inflection points) for bond assets. The previous low-interest-rate environment priced in an easing cycle. Current liquidity tightening意味着 (implies) declining odds for bonds. A coupon strategy will become the core logic for bond allocation. Duration strategies require caution. Spread repair for credit bonds still awaits further confirmation from the economic fundamentals.
4. Asset Allocation Conclusion: Certainty Premium Under a Balanced Configuration
Based on the theoretical framework of cycles and asset pricing, the core logic of current asset allocation is "equities as the foundation, bonds for defense, balanced styles, focused on certainty." On the equity side, the allocation direction should balance value and growth, focusing on sectors with strong profit certainty and reasonable valuations, while avoiding thematic assets with high valuations and low profit realization. On the bond side, focus on a coupon strategy, control duration, avoid valuation risks from rising interest rates, and use bonds as the portfolio's liquidity and defensive foundation. The overall portfolio should maintain a balanced configuration. By dynamically balancing the stock-bond ratio, it can应对 (address) the risks of divergence between valuation and profit during cyclical convergence, achieving稳健收益 (steady returns) under the certainty premium. Returning to certainty is essentially a restart of the previous HALO strategy, which is a sound approach to dealing with divergence.
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