1. May or Becomes a Window for A-Share Allocation

Overall, A-shares may be in a window for the repair of risk preference in May. Following the April Politburo meeting, the policy tone has become more proactive, and policies aimed at stabilizing growth may continue to be implemented. The de-stocking of the real estate sector may further intensify, potentially accelerating the recovery of the domestic economy. The upward trend in global manufacturing and the gradual start of the restocking cycle may help maintain relatively high export growth. Overseas, the US non-farm data fell short of expectations, and the FOMC's stance is more dovish, with expectations of interest rate cuts increasing. Since late April, domestic medium to long-term interest rates have rebounded, and the M2-M1 spread remains at a high level, with the stock-bond price-performance ratio at a historically high level. Northbound capital has shown a significant net inflow since the end of April, and the micro-liquidity of the stock market is expected to further improve.

1.1 Continuous Efforts in Domestic Policy to Boost Stock Market Risk Preference

(1) Politburo Meeting: More Proactive and Aggressive Stabilization Policies

The key points of the April 30th Politburo meeting are as follows: ① Fiscal policy will take the lead, making good use of ultra-long-term special treasury bonds, accelerating the issuance and use of special bonds, and maintaining the necessary strength of fiscal expenditure. In terms of monetary policy, it is necessary to flexibly use policy tools such as interest rates and reserve requirement ratios. ② In the real estate sector, for the first time, the concept of "digesting existing housing and optimizing incremental housing" was proposed, with a more positive tone and greater emphasis on the implementation of housing delivery. ③ In terms of risk resolution, debt reduction and stable development go hand in hand. It is necessary to deeply implement local government debt risk resolution plans to ensure that provinces and cities with high debt risks can truly reduce debt while maintaining stable development. The overall tone of local government debt reduction remains unchanged, but the pace may be adjusted to take into account the stable development of the local economy. ④ In terms of expanding domestic demand, large-scale equipment upgrades and the replacement of consumer goods with old ones remain key points, with significant room for growth in areas such as manufacturing equipment upgrades and the demand for bulk consumer goods. ⑤ The concept of "new quality productive forces" was once again emphasized, with a focus on strengthening the layout of national strategic scientific and technological forces, actively developing venture capital, and strengthening patient capital to serve the new quality productive forces through the capital market. Expectations for key industry policies such as AI and low-altitude economy are expected to be further enhanced. ⑥ In terms of foreign trade, actively expanding intermediate goods trade, service trade, digital trade, and cross-border e-commerce exports, supporting private enterprises to expand overseas markets, and increasing efforts to attract and utilize foreign investment. Exports and overseas markets are expected to be highly prosperous this year, and opportunities with certainty should continue to be seized. ⑦ It was decided to hold the third plenary session of the 20th Central Committee in July, and there may be breakthroughs in deepening reforms.

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(2) Real Estate Policy: Further Relaxation of Purchase Restrictions in Multiple Cities, Accelerating the De-stocking Process

The April 30th Politburo meeting did not mention the construction of the "three major projects," and the policy statement on real estate still focuses on "housing delivery" and "de-stocking." According to Wind data, the inventory-to-sales ratio of commercial housing in the top ten cities in April was 25.11, and the current real estate inventory-to-sales ratio is already at a historical high level, indicating that the real estate de-stocking process is expected to accelerate further. Since the end of April, first and second-tier cities such as Beijing, Tianjin, Chengdu, Nanjing, and Wuhan have continued to optimize and adjust demand-side policies, mainly including optimizing purchase restrictions, reducing down payment ratios, lowering mortgage interest rates, and reducing transaction taxes. The Politburo meeting proposed for the first time to digest existing housing and optimize incremental housing, and it is expected that both existing and incremental policies will progress in parallel, which may lead to some improvement in real estate sales.

(3) After the "New Nine Articles," the Implementation of Supporting Stock Market Policies is Expected to Accelerate

The trend of "survival of the fittest" in capital market policies is evident. After the introduction of the "New Nine Articles," the China Securities Regulatory Commission and the stock exchanges have publicly solicited opinions on a series of institutional rules, and the "1+N" policy system guided by the "New Nine Articles" is gradually taking shape and being implemented. Subsequent details in areas such as IPOs, delisting, dividends, and standardized shareholding reduction will continue to be optimized, and high-quality companies will gain more recognition in the market. The capital market ecosystem will further shift towards high-quality development and improving long-term returns for investors. The investability and return rate of the capital market are expected to be improved in the long term.

The following institutional optimizations are expected to have a profound impact on the stock market ecosystem: ① IPO: Raising the financial standards for mainboard/GEM listings, strictly evaluating the scientific and technological attributes of the STAR Market, and achieving "quality improvement and quantity reduction" in IPOs. ② Delisting: Ensuring that all companies that should be delisted are delisted, reducing the delisting threshold, and expecting a steady increase in the number of delisted companies. ③ Dividends: Implementing risk warnings (ST) for dividend distribution, encouraging mid-term dividends and multiple dividends, and enhancing companies' enthusiasm for dividend distribution. ④ Shareholding reduction: Upgrading the shareholding reduction system comprehensively to strictly prevent circumvention. ⑤ Emphasizing shareholder returns: Supporting the construction of a "long money, long investment" policy system to promote medium and long-term capital entering the market.1.2 U.S. Non-Farm Payrolls Fall Short of Expectations, FOMC Stance Doves, and Rate Cut Expectations Strengthen

In April, the U.S. added 175,000 non-farm payrolls, with the unemployment rate slightly rising to 3.9%. The average hourly earnings increased by 0.2% month-on-month and 3.9% year-on-year, both below market expectations, reflecting potential signs of downward inflation. The Fed's May FOMC meeting took a dovish stance, indicating that the timing of rate cuts depends on data, but the next move is unlikely to be a rate hike. It also stated that starting in June, the monthly redemption cap for U.S. Treasury bonds will be reduced from $60 billion to $25 billion, slowing the decline in its securities holdings. The FOMC is committed to restoring inflation to the 2% target. Expectations for a rate cut in the U.S. have increased, which is conducive to the repair of risk appetite in the stock market. In April, stock markets in Hong Kong and other places have already seen a significant rebound.

1.3 Exports Maintain High Vigor, and the Recovery of Economic Endogenous Dynamics Needs Further Improvement

Domestically, the economy has structural highlights but still lacks momentum, with expectations for growth-stabilizing policies further rising. The manufacturing PMI index in April was 50.4%, remaining in the expansion range for two consecutive months; the new orders index was 51.1%, a decrease of 1.9 percentage points from the previous month, still in the expansion range; the new export orders index was 50.6%, a decrease of 0.7 percentage points from the previous month, and continues to expand, indicating that the overall export business of enterprises continues to improve. Overall, the manufacturing industry continues to recover, exports are relatively strong, and the driving effect of external demand is quite evident.

Overseas, the global PMI is about to enter a new round of expansion cycle, with major economies generally at the bottom of the PMI and moving upward, and the global manufacturing demand is expected to recover further. Looking at the U.S. inventory cycle, since July 2023, U.S. sales have begun to rise year-on-year, but the strength of the rebound is relatively weak; in January of this year, U.S. inventories rebounded slightly year-on-year, and it is expected to gradually enter the active restocking phase. The upward trend in global manufacturing and the gradual start of the restocking cycle will help China's exports maintain relatively high vigor.

In terms of consumption, offline consumption and service consumption have recovered relatively well, and travel during the May Day holiday has rebounded quickly. According to data from the Ministry of Culture and Tourism, during this year's "May Day" holiday, the total number of domestic tourism trips in the country was 295 million, a year-on-year increase of 7.6%; the total expenditure of domestic tourists was 166.89 billion yuan, a year-on-year increase of 12.7%. According to data from the National Immigration Administration, during this year's "May Day" holiday, the national border inspection authorities ensured a total of 8.466 million entries and exits of Chinese and foreign personnel, a year-on-year increase of 35.1% compared to the same period in 2023. After the April Politburo meeting, we believe that expectations for growth-stabilizing and domestic demand expansion policies have further increased, and fiscal policy may be more forceful compared to the first four months of this year. Recently, some key cities have further relaxed real estate policies, and the recovery of economic endogenous dynamics needs further improvement.

1.4 Medium and Long-Term Interest Rates Have Risen, and Stock Market Liquidity is Expected to Further Improve

Due to factors such as the expectation of real estate policy relaxation, the central bank's stance on long-term bond yields, and concerns about bond supply, medium and long-term interest rates have risen since late April. The current RMB exchange rate is still volatile, and the use of monetary policy in the future may still be relatively cautious. The M2-M1 spread is still at a high level, and under this macro-liquidity background, the micro-liquidity of the stock market is expected to further improve.

From the perspective of the stock-bond price ratio, we use the EP ratio of the Wind All A, CSI 300, and CSI 500 to the 10-year government bond yield to construct the stock-bond price ratio indicators. Overall, the stock-bond price ratios of the three stock indices are all near the double standard deviation, and the percentiles of their stock-bond price ratio indicators are all above 95%.

Looking at the incremental capital in the stock market, since late April, there has been a significant net inflow of northbound capital. On April 26, the single-day net inflow of northbound capital was 22.4 billion yuan, setting a new record for the single-day net inflow of the Shanghai-Hong Kong Stock Connect. The May performance period has passed, and expectations for growth-stabilizing policies continue to rise, and the risk appetite for A-shares continues to improve. The stock market has cost-effectiveness, and the liquidity of the stock market is expected to continue to improve, with more incremental capital likely to be deployed in A-shares.2. Industry Perspective: Enhanced Expectations for Steady Growth, Accumulation of Positive Market Signals

Overall, the A-share market in May may be in a window for the repair of risk appetite. Following the April Politburo meeting, the policy tone has become more proactive, with steady growth policies likely to continue to exert force, further intensifying efforts to reduce real estate inventory, and possibly accelerating domestic economic recovery. The upward trend in global manufacturing prosperity and the gradual start of the restocking cycle are conducive to maintaining relatively high export vitality. Overseas, the US non-farm data fell short of expectations, and the FOMC's stance is dovish, with expectations for interest rate cuts somewhat strengthened. Since late April, domestic medium to long-term interest rates have rebounded, the M2-M1 spread remains at a high level, and the stock-bond price-performance ratio percentile is at a historical high. Northbound capital has shown a significant net inflow since the end of April, and micro liquidity in the stock market is expected to further improve after the earnings period.

Recommended industries include:

(1) Dividend Sector: After the implementation of the "New Nine Articles" and related supporting policies, the market's emphasis on dividends has further increased. Focus on investment opportunities in continuous and stable dividends, increased buybacks and share repurchases, and expectations for mergers and acquisitions.

(2) Cycle: Steady growth policies are expected to further intensify, with expectations for the real estate chain and cyclical industries rising. Key attention should be paid to industries such as real estate, chemical engineering, and construction machinery.

(3) Going Global: Expanding into overseas markets may be a feasible way to digest domestic capacity, increase corporate profits, and residents' income. Long-term investment opportunities in going global include areas such as automobiles, home appliances, innovative drugs, and cross-border e-commerce.

(4) Technology: It is recommended to focus on the key implementation directions of policies related to "new quality productivity." The artificial intelligence direction, represented by AI, has long-term certainty for industrial transformation, and future performance is expected to gradually be realized. The gradual implementation of AI applications may still bring opportunities for sector valuation increases. It is recommended to pay attention to domestic GPU computing power and the status of overseas AI applications. The performance of the pharmaceutical sector is expected to gradually rebound, with some sub-segments having opportunities related to going global.