Huatai Securities: Emphasizing Strategic Allocation Opportunities in Broker Stocks

Huatai Securities points out that since the beginning of this year, the overall market has been improving, with sector performance continuously growing. However, the stock prices of securities firms have declined, forming a contrast and divergence from past logical trends, possibly due to influences such as capital behavior, risk appetite, and policy guidance. Looking ahead, the sector’s performance stability and sustainability are relatively good, and factors such as easing capital restrictions, market style balancing amid geopolitical fluctuations, and increased policy support for the capital market are expected to create a window for valuation recovery. This presents a strategic allocation opportunity for securities stocks.

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Huatai Securities: Is There a Rebound for Securities Stocks?

Since the start of this year, the overall market has been improving, with sector performance continuously increasing. However, securities stocks have fallen, diverging from past logical trends, possibly due to influences such as capital behavior, risk appetite, and policy guidance. Looking ahead, the sector’s performance stability and sustainability are relatively good, and factors such as easing capital restrictions, market style balancing amid geopolitical fluctuations, and increased policy support for the capital market are expected to create a window for valuation recovery. This highlights a strategic allocation opportunity for securities stocks.

Key Points

What are the reasons for the decline in securities stocks this year?

Since the beginning of the year, the securities index has fallen by 8%, ranking among the largest declines in the industry, diverging from fundamentals. This is mainly influenced by four factors: 1) Capital pressure. Since the start of the year, core broad-based ETFs have experienced continuous net redemptions, with a total scale exceeding 1 trillion yuan, including approximately 600 billion yuan and 100 billion yuan net outflows from the CSI 300 and SSE 50 ETFs respectively (securities firms’ weight about 5%), creating phased pressure. 2) Policy stabilization. Measures such as raising margin requirements and trading regulations have guided the market toward a slow bull trend, reducing sector flexibility. 3) Changes in incremental capital structure. Quantitative private funds, representing higher risk appetite, tend to favor small and mid-cap and high-elasticity sectors, with lower allocations to securities firms. 4) Concerns over sustained performance. Past performance of securities firms fluctuated greatly with market volatility, leading to worries about future growth and exerting downward pressure on the sector.

How sustainable is the growth of securities firms’ performance?

Historically, securities firms’ performance has shown pulse-like growth with high volatility, raising concerns about the sustainability of growth. However, over the past two years, market capacity has significantly increased, with more investors and listed companies entering the market. Medium- and long-term funds have continued to flow in, and operations across various business lines have improved, with diversified development and increased international business quality, significantly reducing performance volatility. Looking ahead, under the policy tone supporting the development of the capital market, a slow bull environment is expected. We believe securities firms will continue to diversify their businesses, shifting from pulse-like growth to steady growth, with improved performance stability. The mismatch between valuation and performance offers strategic allocation opportunities.

Where does the securities sector currently stand?

Currently, the sector’s valuation and position are both at low levels compared to similar market environments in history. Since 2018, the A-share securities index’s PB valuation average during various sector rallies has been about 1.46x-1.82x, peaking near 2.5x, with the top ten large securities firms averaging about 1.44x-2.02x. In contrast, market activity remains high, with A-shares trading around 2 trillion yuan, a new normal. As of March 16, the PB of the A-share securities index is only 1.37x, with large securities firms averaging just 1.33x, and the H-share Chinese securities index PB at only 0.74x. Additionally, the sector is mainly held by individual investors, with institutional and long-term funds holding relatively low positions; as of the end of Q4 2025, active equity funds held only 0.72% of their portfolios in securities stocks.

What factors could catalyze a sector turnaround?

The stability of the domestic capital market has improved, and geopolitical uncertainties overseas have increased, leading to marginal changes in sector restrictions. The industry is transitioning from high volatility to steady growth, gradually revealing its value. 1) Diminished capital disruptions. After large net outflows from broad-based ETFs, marginal impacts are decreasing. 2) Positive policy trends. Since December 2025, there have been statements about easing restrictions on high-quality institutions, with supporting measures related to top securities firms’ capital, derivatives, and internationalization expected to be implemented. 3) Overseas disturbances may lead to risk appetite convergence, with funds favoring low-volatility, steady-return directions. Under low valuation and supported by performance, securities firms have the capacity for “high to low” absorption. 4) In Q1 2026, benefiting from trading activity, margin financing, and investment banking recovery, performance still has high growth potential. Overall, the downside space for the sector is limited, and the upside options are significant. Attention should be paid to valuation recovery opportunities.

What are the main investment themes currently?

The sector’s valuation and positions are at historically low levels, but the long-term trend of steady growth in the capital market remains unchanged. We believe this is a strategic allocation window, and recommend focusing on three main themes: 1) Leading securities firms with low valuations and strong comprehensive strength, especially those with international business leadership; 2) Mid- and small-cap securities firms benefiting from regional industrial advantages, particularly in direct and follow-on investments in tech startups; 3) Structural opportunities arising from regional mergers and acquisitions.

Risk warnings: Policy support may fall short of expectations; capital market performance may underperform expectations.

Risk Warning

1. Policy support may fall short of expectations. Policy strength is a key driver of market rises. If subsequent policies are less effective than expected, market volatility could increase.
2. Capital market performance may underperform. Business areas such as brokerage, proprietary trading, and capital intermediaries are highly correlated with stock market conditions. Poor market performance will impact securities firms’ earnings.

(Source: Cailian Press)