- The report discusses the valuation of convertible bonds (CB) using the pricing deviation indicator, which is calculated as the ratio of the CB price to the CCBA model price minus one. As of August 15, 2025, the pricing deviation indicator for the CB market is 5.42%, placing it in the 99.9th percentile since 2018, indicating a high valuation zone[6] - The report also mentions a rotation strategy between CBs and a stock-bond portfolio based on the pricing deviation indicator. The strategy involves calculating a Z-score from the pricing deviation and its standard deviation over the past three years, then adjusting the CB weight accordingly. This strategy has historically generated stable excess returns[21][23] - The report evaluates different CB strategies, including a low-valuation strategy, a low-valuation plus strong momentum strategy, a low-valuation plus high turnover strategy, a balanced debt-enhanced strategy, a credit bond replacement strategy, and a volatility control strategy. Each strategy is constructed using specific factors and has shown varying degrees of absolute and excess returns since 2018[33][36][40][44][48][52] Model and Factor Construction 1. **Pricing Deviation Indicator**: - **Construction Idea**: Measure the deviation of CB prices from their theoretical values - **Construction Process**: - Calculate the pricing deviation as follows: $ \text{Pricing Deviation} = \frac{\text{CB Price}}{\text{CCBA Model Price}} - 1 $ - Use this indicator to assess the valuation level of the CB market[6] - **Evaluation**: Indicates that the CB market is currently in a high valuation zone[6] 2. **Rotation Strategy Between CBs and Stock-Bond Portfolio**: - **Construction Idea**: Rotate between CBs and a stock-bond portfolio based on CB valuation - **Construction Process**: - Calculate the Z-score of the pricing deviation: $ Z = \frac{\text{Pricing Deviation}}{\text{Standard Deviation (3 years)}} $ - Adjust the CB weight using the Z-score: $ \text{CB Weight} = 50\% + 50\% \times \text{Z-score} $ - Allocate the remaining weight to the stock-bond portfolio[21] - **Evaluation**: This strategy has historically generated stable excess returns[21][23] 3. **Low-Valuation Strategy**: - **Construction Idea**: Select CBs with the lowest valuation deviations - **Construction Process**: - Use the CCB_out model to calculate the pricing deviation: $ \text{Pricing Deviation} = \frac{\text{CB Price}}{\text{CCB_out Model Price}} - 1 $ - Select the 15 CBs with the lowest deviations in each of the debt, balanced, and equity-biased categories (total 45 CBs) - Ensure the selected CBs have a balance of over 300 million and a rating of AA- or above[33] - **Evaluation**: This strategy has shown strong stability and significant absolute and excess returns since 2018[33] 4. **Low-Valuation + Strong Momentum Strategy**: - **Construction Idea**: Combine low valuation with strong momentum for higher elasticity - **Construction Process**: - Combine the pricing deviation factor with the stock momentum factor (1, 3, 6 months) - Select CBs based on combined scores[36] - **Evaluation**: This strategy has shown strong elasticity and significant absolute and excess returns since 2018[36] 5. **Low-Valuation + High Turnover Strategy**: - **Construction Idea**: Combine low valuation with high turnover for higher liquidity - **Construction Process**: - Select the lowest 50% valuation CBs - Within this pool, select CBs with the highest turnover rates (5, 21 days) and the highest CB to stock turnover ratios (5, 21 days)[40] - **Evaluation**: This strategy has shown stable excess returns and significant absolute returns since 2018[40] 6. **Balanced Debt-Enhanced Strategy**: - **Construction Idea**: Enhance returns by combining low valuation with turnover and momentum factors - **Construction Process**: - Select the lowest 50% valuation CBs, excluding equity-biased CBs - Use turnover and momentum factors for debt-biased CBs and turnover factors for balanced CBs[44] - **Evaluation**: This strategy has shown significant absolute returns with low volatility and drawdown since 2018[44] 7. **Credit Bond Replacement Strategy**: - **Construction Idea**: Replace credit bonds with CBs for higher returns - **Construction Process**: - Select CBs with YTM + 1% greater than 3-year AA credit bond YTM - Ensure selected CBs have a balance of over 300 million and a rating of AA- or above - Select the top 20 CBs based on 1-month stock momentum, with a maximum weight of 2% per CB - Use volatility control to reduce short-term drawdown, allocate remaining weight to credit bonds[48] - **Evaluation**: This strategy has shown stable returns with low volatility and drawdown since 2018[48] 8. **Volatility Control Strategy**: - **Construction Idea**: Control portfolio volatility while enhancing returns - **Construction Process**: - Select the top 15 CBs in each of the debt, balanced, and equity-biased categories based on low valuation and strong momentum scores - Use volatility control to maintain portfolio volatility at 4% - Allocate remaining weight to credit bonds[52] - **Evaluation**: This strategy has shown stable returns with controlled volatility and drawdown since 2018[52] Model and Factor Backtest Results 1. **Low-Valuation Strategy**: - **Annualized Return**: 23.0% - **Annualized Volatility**: 13.5% - **Maximum Drawdown**: 15.6% - **Excess Return**: 11.9% - **IR**: 2.08[36] 2. **Low-Valuation + Strong Momentum Strategy**: - **Annualized Return**: 25.4% - **Annualized Volatility**: 14.2% - **Maximum Drawdown**: 11.9% - **Excess Return**: 14.0% - **IR**: 2.32[40] 3. **Low-Valuation + High Turnover Strategy**: - **Annualized Return**: 25.2% - **Annualized Volatility**: 15.2% - **Maximum Drawdown**: 15.9% - **Excess Return**: 13.9% - **IR**: 2.20[44] 4. **Balanced Debt-Enhanced Strategy**: - **Annualized Return**: 23.2% - **Annualized Volatility**: 12.2% - **Maximum Drawdown**: 13.4% - **IR**: Not provided[48] 5. **Credit Bond Replacement Strategy**: - **Annualized Return**: 7.5% - **Annualized Volatility**: 2.1% - **Maximum Drawdown**: 2.8% - **IR**: Not provided[52] 6. **Volatility Control Strategy**: - **Annualized Return**: 10.2% - **Annualized Volatility**: 4.4% - **Maximum Drawdown**: 4.2% - **IR**: Not provided[56]

Index Performance - The CSI A500 Index increased by 1.41% this week, marking four consecutive weeks of gains, closing at 4773.24 points as of July 18 [6] - The average daily trading volume for the week was 4454.05 billion yuan, with a week-on-week increase of 9.49% [6] Component Stocks - The top ten gainers in the CSI A500 this week included: 1. Xinyi Technology (300502.SZ) with a gain of 39.01% 2. Pengding Holdings (002938.SZ) with a gain of 25.56% 3. Zhongji Xuchuang (300308.SZ) with a gain of 24.33% 4. Dongshan Precision (002384.SZ) with a gain of 22.04% 5. Xinlitai (002294.SZ) with a gain of 20.86% 6. Ecovacs Robotics (603486.SH) with a gain of 20.86% 7. Jianghuai Automobile (600418.SH) with a gain of 17.40% 8. Feilihua (300395.SZ) with a gain of 15.98% 9. Shenxinfeng (300454.SZ) with a gain of 15.37% 10. Zili Tianheng (688506.SH) with a gain of 14.15% [4] - The top ten losers included: 1. Guanghui Energy (600256.SH) with a loss of 10.80% 2. Sanqi Interactive Entertainment (002555.SZ) with a loss of 10.57% 3. Chunfeng Power (603129.SH) with a loss of 8.98% 4. Kaiying Network (002517.SZ) with a loss of 8.32% 5. Giant Network (002558.SZ) with a loss of 7.83% 6. Jinlang Technology (300763.SZ) with a loss of 7.36% 7. Sitaiwei (688213.SH) with a loss of 6.66% 8. Wuchan Zhongda (600704.SH) with a loss of 5.88% 9. Samsung Medical (601567.SH) with a loss of 5.41% 10. Zhangqu Technology (300315.SZ) with a loss of 5.22% [4] Fund Performance - All 38 CSI A500 funds collectively rose this week, with the top performer being ICBC Credit Suisse with a gain of 1.84% [6] - The total scale of CSI A500 funds reached 1902.74 billion yuan, with a decrease of 386.18 billion yuan over the week, marking three consecutive weeks of decline [6] - The top three funds by scale are from Huatai-PB (178.3 billion yuan), Guotai (173.54 billion yuan), and GF Fund (170.02 billion yuan) [6] Market Outlook - According to a report from China Galaxy Securities, the small-cap stocks outperformed in the first half of 2025, with the CSI 300 Total Return Index rising by 1.37% and the CSI 1000 Total Return Index rising by 7.54% [7] - The report suggests that institutional investors are likely to favor large-cap blue-chip stocks due to their stable performance and dividends, especially in the context of ongoing external uncertainties [7] - CITIC Securities indicates that signs of economic stabilization in China are becoming evident, and the potential for liquidity improvement could benefit the non-bank sector, enhancing market activity [7]

Historical Review of Size and Style Rotation - From 2008 to 2010, small-cap stocks outperformed due to significant economic stimulus and abundant liquidity, with small-cap stocks being more sensitive to funding[6] - Between 2011 and 2013, large-cap stocks gained favor as economic growth pressures increased, highlighting their defensive attributes[8] - The period from 2013 to 2015 saw a resurgence of small-cap stocks driven by the rise of new industries and increased M&A activity, with leverage funds entering the market[9] - From 2016 to 2021, large-cap stocks dominated as supply-side reforms improved profitability for leading companies, while M&A activity cooled[10] - In the 2021 to 2023 period, small-cap stocks regained strength due to changes in funding structure and the rise of new industries like AI[12] Growth vs. Value Style Rotation - From 2011 to 2014, value stocks outperformed as the economy shifted from stimulus-driven growth to self-sustained growth, with GDP growth declining[15] - In 2015, growth stocks saw a rebound due to the rise of the internet and new industries, despite ongoing economic pressures[19] - The period from July 2016 to October 2018 favored value stocks as traditional industries improved amid tightening liquidity[21] - From November 2018 to July 2021, growth stocks outperformed due to the rise of new industries and favorable liquidity conditions[23] - From August 2021 to August 2024, value stocks are expected to dominate due to tightening global liquidity and geopolitical uncertainties[25] Key Indicators and Future Outlook - The historical analysis indicates that size and style rotations are influenced by fundamental factors, liquidity, valuation, and policy[27] - The correct prediction rate for small-cap outperformance since 2005 is 69%, while for growth vs. value since 2011 is 77%[2] - In the first half of 2025, small-cap stocks outperformed with a 7.54% increase in the CSI 1000 index compared to a 1.37% increase in the CSI 300 index[2] - The outlook for the second half of 2025 suggests a potential shift towards large-cap stocks due to institutional investor preferences and external uncertainties[2]