In August, the Wind All-A Index fell by 3.97%. Structurally, large-cap indices such as the CSI 50 and the CSI 300 were relatively resilient, while mid- and small-cap indices like the CSI 500, CSI 1000, and CSI 2000 experienced larger declines. At the industry level, all 31 first-tier industries recorded declines, with oil and petrochemicals, coal, media, and banking being relatively resilient, while defense, agriculture, beauty and care, and building materials saw significant drops.

The reasons for this include, firstly, the absence of expected policy announcements in August, with real estate, monetary, and fiscal policies all maintaining their resolve. Secondly, concerns about mid-year earnings reports and the fear of financial "bombs" have dampened the market's bullish sentiment.

Comparing globally, among the major indices in August, A-shares performed the worst, with the CSI 300 falling by 3.51%; Hong Kong stocks performed the best, with the Hang Seng Index rising by 3.72%. The divergence between A-shares and Hong Kong stocks is related, firstly, to the appreciation of the RMB, which has increased the attractiveness of Hong Kong stocks, and secondly, to the industry structure, with the Hang Seng Index, for example, having a higher weight in financial and internet leaders, both of which performed well in August.

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Towards the end of the month, the market showed some encouraging signs: firstly, on the 29th and 30th, A-share trading volumes continued to increase, with the total turnover on the 30th rising by 269.4 billion yuan to 876.6 billion yuan, setting a new high for the month, indicating that market trading sentiment began to become active; secondly, there were signs of a shift in market style, with the sci-tech innovation and TMT sectors stopping their decline and leading the gains, while the banking sector saw a correction from high levels, indicating an increase in market risk appetite.

After a continuous decline and bottoming out, an increase in trading volume coupled with a rise in risk appetite typically signifies the end of an adjustment. In September, investors can look forward to a new round of upward trends. Specifically, the policy front and external environment are both conducive to an upturn in A-shares.

From a policy perspective, it is highly likely that the market in September will continue to trade on expectations of significant policy announcements.

Since July, China's exports have shown signs of marginal slowdown; coupled with the global manufacturing PMI falling below the boom-bust line, a slowdown in the growth of major developed economies, and the recent rapid appreciation of the RMB, exports in August are likely to continue slowing down. The slowdown in external demand will intensify the pressure to stabilize domestic demand. Regarding the three major policies of real estate, currency, and finance, there are points to look forward to in September.

In terms of real estate, both volume and price have declined and are still searching for a bottom. In August, the average daily transaction area of the top 30 medium-sized cities was 225,000 square meters, a year-on-year decrease of 26.59%, an increase of 10.11 percentage points from July. At the same time, the listing price of second-hand housing in cities across the country is still in a downward channel, with no signs of bottoming out. Stabilizing real estate is of great significance for stabilizing domestic demand, and in September, under the pressure of stabilizing growth, the market will still be full of expectations for real estate policies.

Regarding monetary policy, as the Federal Reserve begins the interest rate cut cycle in September, it opens up space for domestic monetary policy. Based on the "supportive policy" tone, the probability of further interest rate cuts in China in September is high. Regardless of whether it materializes, at least before September 20th, the market will trade on the expectation of interest rate cuts.

In terms of fiscal policy, the fiscal performance from January to July was not strong, which, in turn, means that the market is looking forward to further efforts and more significant support from fiscal policy. Looking at the broad fiscal expenditure, which includes public fiscal expenditure and government fund expenditures, from January to July, China's broad fiscal expenditure was 19.67 trillion yuan, a year-on-year decrease of 2.03%, which is still a significant drag compared to the 5% GDP growth target. With the slowdown in exports, fiscal expenditure will be forced to continue to increase its efforts and catch up with the progress, and at least on an annual basis, it should not become a drag on GDP.From a peripheral perspective, RMB assets may be entering a new round of allocation cycles.

As the global economy enters a cycle of interest rate cuts, the depreciation pressure on the RMB exchange rate is alleviated, and under the drive of capital inflow, RMB assets such as A-shares and Hong Kong stocks are expected to see an increase in valuation.

Since 2022, the RMB has entered a depreciation cycle against the US dollar, depreciating from 6.3060 to 7.3745. During this period, a large number of export-oriented enterprises chose to hold US dollar assets. With the RMB recently entering an appreciation cycle again, these funds will gradually flow back to the domestic market. It is difficult to estimate the specific amount, but according to a report by Bloomberg on August 27, Stephen Jen, CEO of the British hedge fund Eurizon SLJ Capital, said that as the Federal Reserve lowers interest rates, Chinese companies may sell $1 trillion worth of US dollar-denominated assets.

In addition, the implementation of interest rate cuts by the Federal Reserve may still trigger a reversal of the yen carry trade, and the US and Japanese stock markets may face adjustment pressure again. Under the seesaw effect, as a global asset valuation lowland, the attractiveness of RMB assets to global capital will also increase.

Considering the domestic fundamentals, policy aspects, and peripheral factors, it is highly probable that A-shares and Hong Kong stocks will start a round of rising trends in September.

Since the overall performance of the A-share market in September is optimistic, which industries are expected to lead the increase? Looking at the mid-year reports, as of August 29 (4,800 companies announced mid-year reports), out of 31 first-level industries, 18 industries saw positive year-on-year revenue growth, and 17 industries saw positive year-on-year growth in net profit attributable to the parent company, with a mixed performance. However, the market pays more attention to marginal changes.

Comparing the mid-year reports with the first-quarter reports, 17 industries saw a sequential increase in revenue growth, including non-bank finance (8.12%), non-ferrous metals (6.98%), basic chemical industry (5.17%), power equipment, agriculture, forestry, animal husbandry, fishery, computers, electronics, beauty care, etc., with an increase of more than 4 percentage points; 16 industries saw a sequential increase in net profit attributable to the parent company, including agriculture, forestry, animal husbandry, fishery (161.73%), steel (60.97%), comprehensive, non-ferrous metals (46.34%), building materials, computers, power equipment, automobiles, non-bank finance, real estate, etc., with an increase of more than 10 percentage points.

Whether it is revenue or profit, more than half of the industries have shown marginal improvement, opening up space for a new round of structural trends.

For investors, they should first avoid sectors where both revenue and profit are deteriorating at the margin, such as national defense, military, social services, public utilities, food and beverages, media, construction decoration, communications, household appliances, machinery and equipment, etc. Unless there is a clear signal of a bottom in performance, these sectors will find it difficult to achieve excess returns, even if the market sentiment warms up in September due to the downward pressure from the fundamentals.

As for which sectors will lead the increase, it still largely depends on policy expectations. If the market trades on real estate policies, the real estate chain will have excess performance; if the Federal Reserve lowers interest rates, it will benefit the TMT, pharmaceutical, and other growth sectors; if fiscal policy stimulates consumption, the large consumer sector is worth looking forward to.