Haitong International released a research report stating that based on fundamentals, it maintains its judgment that Hong Kong stocks are highly likely to see a rebound rally in October. Although fundamental recovery still needs time, overseas bond market volatility has triggered overly crowded pessimistic trades, causing Hong Kong stocks to adjust far beyond what fundamentals would justify. Therefore, a subsequent rebound in Hong Kong stocks may only require short covering to initiate, and may not need to wait for a full recovery in the economy and earnings. Whether US long-end Treasury yields can stop their sharp rise is the key variable that opens up room for Hong Kong stock repair. Defensive counterattack, grounded in fundamentals, respond to all changes with constancy. Currently, among the factors influencing global equity pricing, the rise in US long-end Treasury yields, deteriorating risk appetite, and short-term corporate earnings have already been fairly fully priced in. However, the upper limit of long-term sustainable growth for technology companies, that is, the natural growth rate, is severely under-priced by the market, and this is the real opportunity in the autumn of the AI rally. In the era of high interest rates, carefully select fundamentals, tap into the main line of superintelligence applications, and allocate to deep-value assets in non-technology sectors. The main views of Haitong International are as follows:

Market Outlook — US and European Bond Turmoil Unlikely to Trigger a Crisis, Maintain View That "Global Stocks Are Expected to Move from Risk-Off to Risk-On in October"

1. The US Bond Turmoil Will See a Turning Point, and the Sharp Rise in 10-Year US Treasury Yields in Late September Is Unsustainable

First, the 10-year US Treasury yield recently rose to around 5.3%, fairly fully pricing in various macro fundamentals for the year. Since May, we have continuously warned of the "summer cold wind" risk and regarded the unexpected rise in US long-end Treasury yields as a "gray rhino" facing global risk assets, predicting that it could rise above 5% in the third quarter and reach around 5.3% in extreme cases. The market has now moved to this level. Entering the third quarter, this risk gradually materialized. On September 30, the 10-year US Treasury yield closed at 5.29%, the highest since June 2007, accumulating a rise of 91bp since the end of June. The market's pricing of the policy rate by the end of 2027 is about 4.8%, nearly 70bp higher than the median in the Fed's September dot plot, indicating that rate hike expectations have been priced in quite fully. Second, the main contradiction in the current rise of US long-end Treasury yields has shifted from the level of rates to the speed of the rise. The high level of US Treasury yields itself has fundamental foundations such as a relatively strong US economy and relatively strong inflation. What truly deserves attention is the excessively rapid pace of the rise since September. In recent weeks, the acceleration of US Treasury yields has been extreme: the MOVE index rose from 78.6 to 110.45 in late September, and the rate rise shifted from an orderly increase under low volatility to an acceleration under high volatility. Since September, the rise in US Treasury yields has gone through two stages: policy repricing and trading-driven amplification. In the earlier period, short-end yields led, real rates dominated, and the curve flattened, which was a typical repricing of the policy path. After September 23, yield movements began to diverge from policy pricing: the probability of a rate hike declined, 2-year yields fell back, while 10-year and 30-year yields continued to rise, and the curve shifted from bear flattening to bear steepening, stemming from a contraction in risk budgets under a high-volatility environment combined with weakened market absorption capacity at quarter-end. Third, the "surge" in US Treasury yields since September is difficult to sustain, and overseas bond market turmoil is unlikely to evolve into a global financial crisis. We believe in common sense: any sustainable change should be relatively steady, and continuous and violent surges are often unsustainable. It is not advisable to excessively seek reasons to justify short-term surges. On the contrary, we maintain our previous judgment — it is highly probable that US long-end Treasury yields will oscillate at high levels and then decline in October. 1) Policy and fundamental conditions are beginning to turn. Weakening employment and widening credit spreads are increasing the probability of downward revisions to policy expectations. September nonfarm payrolls were significantly below expectations, and high-yield bond spreads widened notably during the same period. The self-tightening of financial conditions is beginning to constrain policy expectations. Historical experience shows that weakening data accompanied by Fed confirmation of no further tightening is an important scenario for a significant decline after a sharp rise in rates. 2) Trading-driven amplification factors may fade, and high US Treasury yields amid high growth are beginning to attract allocation demand. The US bond turmoil is not the European debt crisis of years past. In the short term, as the quarter-end passes, trading factors may gradually fade. Long-end market absorption has not yet failed. In the September 10-year and 30-year reopen auctions, the proportion absorbed by primary dealers was at a low since 2023, indirect bidders accounted for nearly 80%, and the awarded yields were below the pre-issuance trading yields. Less passive absorption by dealers and higher participation by end investors indicate that long-end supply can still be absorbed by the market at current yield levels. In the medium term, the US economy maintains strong resilience, and US long-end Treasury yields may continue to oscillate at high levels, but this is a high interest rate matched with high growth. On the investment side, US Department of Commerce data show that real business equipment investment in the US grew at an annualized quarterly rate of 13.4% in the second quarter, continuing the double-digit growth of 15.5% in the first quarter. On the consumption side, real personal consumption expenditures in the US grew at an annualized quarterly rate of 3.8% in the second quarter; real final sales to private domestic purchasers, covering consumption and private fixed investment, grew 4.6%, significantly faster than 1.8% in the first quarter. 3) The recent European bond market turmoil is unlikely to evolve into another European debt crisis or a new global financial crisis. Instead, it may cause European funds to flow into the US Treasury market for safe haven, which is short-term favorable for lowering US long-end Treasury yields. Recently, European government bond markets have shown notable volatility, but performance across countries has been highly divergent. German government bonds still attract safe-haven funds, with pressure mainly concentrated in countries with tighter fiscal constraints, weaker growth, and rising sovereign risk premiums, reflecting a revaluation of country-specific fiscal risk. More critically, US funding markets and Treasury cash market liquidity indicators remain normal, and historically, this may become a subsequent safe haven.

2. Fundamentals Will Be Key to Fourth-Quarter Market Performance; Against a Backdrop of High Overseas Rates and High Macro Volatility, Investment Needs to Be Grounded in Fundamentals and Respond to All Changes with Constancy

First, differences in fundamentals have recently been fully reflected in equity pricing. Amid overseas bond market turmoil, the earnings resilience of US stocks constitutes a winner-takes-all advantage. 1) From the Citi Economic Surprise Index, from the end of August to October 2, the US rose from 17.1 to 37.7, indicating that the degree to which economic data overall exceeded expectations strengthened; the euro area fell from 82.2 to 74.5, still maintaining a relatively high positive level; Japan fell from 67.8 to 19.6, with the degree of outperformance clearly weakening; China fell slightly from -33.2 to -35.6, still overall below market expectations, but already repaired from -45.4 in mid-September, with recent negative surprises easing somewhat. 2) From the manufacturing PMI, global manufacturing still shows resilience, but the pace of repair across economies has diverged. In September, the US ISM manufacturing PMI edged down 0.1 percentage point to 54.5, while the new orders index instead rose to 55.3, with demand still supporting manufacturing expansion; the euro area manufacturing PMI rose from 52.7 to 52.9; Japan fell from 54.9 to 54.1, still in a relatively high prosperity range. China's official manufacturing PMI rebounded from 49.8 to 50.1, returning to expansion territory. 3) From earnings forecasts, US stock earnings expectations have continued to be revised upward and are stronger, while Hong Kong stocks are gradually emerging from lows with marginal improvement. The year-on-year growth rate of S&P 500 forward 12-month EPS forecasts rose from 32.06% at the end of June to 37.61% at the end of September, with earnings support still relatively strong; during the same period, the year-on-year growth rate of Hang Seng Index forward 12-month EPS forecasts rose for three consecutive months to 6.94%, and earnings forecasts for Hang Seng TECH rebounded to 8.89%. Second, roses have spring, and bitter herbs also have spring. Fourth-quarter market performance should focus on fundamental "expectation gaps" and the "cost-effectiveness" of stock market fundamentals and valuations. Based on fundamentals, we continue to be optimistic about the US stock market in the fourth quarter, but after recent new highs, the cost-effectiveness of US stock fundamentals and valuations has declined, and we should be alert to short-term shocks to US stocks from惯性 upward moves in US Treasury and European yields. Based on fundamentals, we still maintain our judgment that Hong Kong stocks are highly likely to see a rebound rally in October. Although fundamental repair still needs time, overseas bond market volatility has triggered overly crowded pessimistic trades, causing Hong Kong stocks to adjust far beyond what fundamentals would justify. Therefore, a subsequent rebound in Hong Kong stocks may only require short covering to initiate, and may not need to wait for a full recovery in the economy and earnings. Whether US long-end Treasury yields can stop their sharp rise is the key variable that opens up room for Hong Kong stock repair. Specifically: 1) The current "expectation gap" in Hong Kong stock fundamentals is relatively large. Investors examine China's economy and economic policy with a microscope and draw pessimistic conclusions, ignoring the principle that the direction of China's economic policy is certainly more important than any specific policy, and underestimating the ability of policy to ultimately stabilize domestic demand and the economy. What is more worth grasping now is the repair opportunity under low expectations, with subsequent earnings then verifying the sustainability of the rally, which better fits the pricing characteristics of Hong Kong stocks. 2) Hong Kong stocks currently have relatively good cost-effectiveness in earnings and valuation, with extremely low risk appetite, and indicators such as short selling and valuation have reached extreme values. On October 2, the Hang Seng Index fell 2.60%, losing the 24,000-point level. On that day, short selling accounted for 27.34% of total market turnover, the fifth highest since 2015; the Hang Seng Index forward 12-month forecast P/E fell to 9.97 times, and the AH premium index rose to 126.77, further expanding the discount of H shares relative to A shares. These indicators show that investors have become relatively cautious in pricing Hong Kong stocks, and defensive and hedging demand is also relatively concentrated. 3) Hong Kong stocks are expected to first decline and then rise in October, accumulating strength for a breakout. Attention can be paid to Hong Kong stock volatility indicators, US Treasury yield trends, and US stock trends. On the one hand, from historical experience, phased bottoms in Hong Kong stocks mostly appear when the volatility index spikes. The Hang Seng Volatility Index is currently 19.34 and has not yet clearly expanded. If volatility rises further later, the probability of a phased bottom will increase significantly. On the other hand, pay attention to when US long-end Treasury yields oscillate and decline. Once the external environment stabilizes, the current concentrated short selling and hedging trades in Hong Kong stocks may see short covering. If US long-end Treasury yields indeed end their sharp rise in October and gradually decline as we expect, the external discount rate pressure facing Hong Kong stocks will ease accordingly; with mainland China interest rates relatively stable, the China-US interest rate differential will also narrow, further improving the relative attractiveness of Chinese assets. If overseas bond market volatility declines simultaneously, the risk compensation required by investors will also fall, jointly promoting Hong Kong stock valuation repair along with the decline in the risk-free rate. If US Treasury pressure eases, the US stock market may spread from technology-weighted leaders to broader areas, also providing further support for a Hong Kong stock rebound.

(3) Investment Strategy: Defensive Counterattack, Adapt to the Era of High Rates and High Volatility, Tap the Main Line of Superintelligence Applications, and Allocate to Deep-Value Non-Technology Sectors

Catalysts for a rebound in Chinese and US stock markets in the fourth quarter: 1. Before the US midterm elections, geopolitical risks cool as expected; 2. The US Treasury market sees a turning point, with long-end Treasury yields oscillating and declining: watch US inflation and employment data, the FOMC decision and post-meeting statements, and Treasury borrowing estimates and refunding announcements; 3. The application of US superintelligence continues to spread, while China's economic policy continues to exert force. Investment strategy: defensive counterattack, grounded in fundamentals, respond to all changes with constancy. Currently, among the factors influencing global equity pricing, the rise in US long-end Treasury yields, deteriorating risk appetite, and short-term corporate earnings have already been fairly fully priced in. However, the upper limit of long-term sustainable growth for technology companies, that is, the natural growth rate, is severely under-priced by the market, and this is the real opportunity in the autumn of the AI rally. Investment recommendations: in the era of high interest rates, carefully select fundamentals, tap the main line of superintelligence applications, and allocate to deep-value assets in non-technology sectors.

Main Line One: Carefully Select Global Technology Leaders and Capture Growth Opportunities from Application Diffusion.

In the coming months, industrial growth and valuation repair of technology assets may resonate, providing continued catalysts for Chinese and US technology leaders to strengthen further. For US technology leaders, supply chain stability and improved financing conditions will help advance computing power construction and application commercialization; for Chinese technology companies, technological and manufacturing advantages will further translate into orders and profits. While grasping cross-border cooperation opportunities, the medium-term allocation to Chinese technology should still emphasize self-controllability. Chinese technology should balance self-controllability with global industrial demand, continue to emphasize security and controllability, private deployment, and industry adaptation needs, focus on enterprises with strong technological breakthroughs, practical usability, and commercialization realization capabilities, and grasp the growth space brought by both the building of independent capabilities and the diffusion of applications. AI applications will see prosperity, and the value of the AI industry chain is expected to spread from merely pursuing model capability further toward security, reliability, and inference applications. 1) The importance of cybersecurity, model governance, and enterprise private deployment will continue to rise. AI security discussions have entered institutionalized coordination at the government level between China and the US. 2) Pay attention to opportunities brought by the landing of AI applications in fields such as biopharmaceuticals and embodied intelligence. AI applications can promote technological innovation in pharmaceuticals, intelligent driving, embodied intelligence, advanced manufacturing, and other fields by optimizing R&D, production, operations, and service processes. 3) The AI ecosystem is connecting, and the combination of sufficiently capable large models and massive application scenarios opens new monetization space for existing traffic, data, and customer relationships. Last week, Meta Muse remained active, further strengthening expectations for AI application commercialization and driving market attention to incremental software and hardware opportunities brought by application diffusion. Similarly, OpenAI will hold DevDay in the early hours of September 30 Beijing time. 4) On the AI hardware side, carefully select opportunities in domestic computing power, semiconductor equipment, advanced packaging, domestic models and computing power coordination, and computing power and energy coordination. The demand for independent computing power and model construction, especially the structural increment brought by growing inference demand, comes not only from external restrictions but also from supply stability, data security, industry adaptation, and cost control.

Main Line Two: Allocate to Deep-Value Assets and Prepare to "Endure" Hong Kong Stocks in the Era of High Overseas Rates and High Volatility.

First, in the fourth quarter, we expect the US economy to remain resilient, and combined with US long-end Treasury yields expected to oscillate at high levels or even decline somewhat, market performance in nonferrous metals, power equipment and energy storage, chemicals, and digital assets is worth watching. Second, Hong Kong stocks may receive joint support from a contraction in risk premium and marginal improvement in earnings. On the one hand, carefully select internet and technology leaders with customer bases, application scenarios, and cash flow support; on the other hand, carefully select mainland high-dividend assets, local Hong Kong stocks, and local Macau stocks.