Shenwan Hongyuan Group Co., Ltd. has released a research report stating that the brokerage sector is currently experiencing a divergence between trading volume and price, highlighting its attractive valuation for investment. The year 2026 marks the beginning of the 15th Five-Year Plan period. As core intermediaries in the capital markets, brokerages are expected to experience a Davis double play in 2026, driven by a combination of supportive policies, capital flows, and active market trading. In the first half of the year, attention should focus on the stimulus from the disclosure of Q1 2026 results and the implementation of policy reforms. The firm recommends two primary investment strategies: 1) leading institutions that are currently undervalued, benefit from an optimized competitive landscape, and possess strong comprehensive capabilities; and 2) specialized brokerages with high valuation appeal and a clear logic for Return on Equity (ROE) improvement. Additionally, brokerages with strong international business competitiveness are also worth monitoring.
Shenwan Hongyuan's key views are as follows:
Why has the brokerage sector underperformed the broader market since 2025? Firstly, it is important to note that brokerages led the market rebound during the "September 24" rally in 2024, achieving excess returns over the Shanghai Composite Index. A review of brokerage stock performance from September 24, 2024, shows that the A-share brokerage index significantly outperformed the market, driven by policy catalysts. During the "924" rally, the Securities II (Shenwan) index reached a peak excess return of 35.1% over the Shanghai Composite. Hong Kong-listed brokerages showed even more pronounced outperformance, stimulated by factors such as holiday trading and innovative businesses. However, after entering 2025, the excess returns of brokerage stocks gradually diminished following November 2025, influenced by changes in the external macroeconomic environment, capital flow pressures (including selling pressure on individual stocks and redemptions in broad-based ETFs), and follow-on financing by listed brokerages.
Factor 1: Disagreement exists regarding the sustainability of the high-growth consensus earnings, and the earnings elasticity has fallen short of expectations. The strong performance of brokerages primarily stemmed from 1) brokerage and margin financing businesses highly correlated with trading activity, and 2) proprietary trading operations. The market has simplistically linked brokerage performance to trading volumes and the performance of stock and bond assets, allowing for forward-looking earnings estimates. However, a further observation reveals that commission rates for traditional brokerage services are declining at an accelerating pace. Simultaneously, as proprietary trading shifts towards being "non-directional and low-volatility," its sensitivity to stock market movements is decreasing.
Factor 2: The marginal easing of restrictions on follow-on financing has somewhat impacted valuations. Historical experience shows that after some brokerages conduct follow-on financing, while the capital base expands (increasing the denominator), the profitability (the numerator) often fails to keep pace, leading to a decline in the central ROE level and subsequently affecting the Price-to-Book (PB) ratio. With brokerages like Zhongtai Securities, GF Securities (H), and Huatai Securities (H) undertaking follow-on financing from late 2025 to early 2026, market expectations for a downward shift in the sector's valuation center have intensified.
Factor 3: Impact of capital flows. As significant components of broad-based indices, brokerages inevitably faced pressure during substantial net redemptions of broad-based index ETFs in January 2026.
Result: Brokerages have entered an absolute return quadrant characterized by "high ROE percentile - low PB percentile." However, new capital inflows remain divided on the prospects for a sector-wide valuation recovery.
The certainty of a brokerage valuation recovery in 2026 is strong, emphasizing the importance of identifying left-side accumulation opportunities. Brokerage earnings in 2026 are projected to achieve double-digit growth even against the high base of 2025. This growth will be driven by high-ROE businesses like investment banking and public fund asset management taking over from proprietary trading as the core growth drivers. Attention should be paid to the trend of rebalancing between capital-light and capital-heavy businesses, which is expected to boost ROE.
Policy reforms are anticipated to be implemented intensively: Top-level design focuses on building a financial powerhouse (corresponding to M&A and restructuring) and increasing the proportion of direct financing (corresponding to investment banking and Sci-Tech Innovation Board co-investments). At the meso level, key areas include the development of standardized derivatives (succeeding fixed income and equity assets as a new avenue for proprietary balance sheet expansion and a primary lever for increasing leverage) and the easing of follow-on financing restrictions (benefiting brokerage investment banking and their own balance sheet expansion). Developing comprehensive finance will strengthen the non-cyclical attributes of brokerage businesses.
From a 2026 and medium-to-long-term perspective, the drivers of brokerage performance are shifting from "brokerage volume + proprietary trading scale" to wealth management (collaborating with public funds to develop investment advisory), major investment banking (normalized IPOs + opportunities from Sci-Tech Innovation Board co-investments), and capital intermediation (expanding from margin financing to multi-product market making and client-driven businesses like derivatives).
Risk warnings: Adjustments in the bond market environment could erode proprietary bond trading profits; progress in mergers and acquisitions among brokerages may fall short of expectations; some brokerages face risks of goodwill or other asset impairment charges resulting from M&A activities; a significant decline in stock and fund trading volumes.