Kan Gu: The cyclical nature of brokerage stocks is weakening

Brokerage firms’ overall industry performance is trending positively. Recently, the China Securities Association released operating data for securities companies for fiscal year 2025. Securities companies’ unaudited financial statements show that, among 150 securities companies, net operating revenue for FY2025 was 541.71 billion yuan, up 19.95% year over year; net profit was 219.439 billion yuan, up 31.2% year over year.

Brokerage stock performance is closely tied to market sentiment and performance, and it has long been categorized as a cyclical stock sector. However, as the A-share market ecosystem has changed, price trends have become increasingly steady. Trading volumes have continued to concentrate at elevated levels, and even during volatile periods, trading volume remains stable, providing an important foundation for steady brokerage stock earnings.

In the past, brokerage stocks had very strong cyclical attributes, driven by a relatively single business structure, with core revenues such as brokerage and proprietary trading highly dependent on market up-and-down movements and trading activity. When the market runs higher, performance surges; when the market weakens, profits decline rapidly. Stock prices then swing sharply, and investors often viewed valuations and investment opportunities for the sector through a cyclical lens. Under this earnings model, it is difficult for brokerage stocks to obtain stable valuation premium; more often, they follow the market’s band-by-band performance.

Today, both the market environment and the industry’s own characteristics have undergone key changes. The A-share market’s trading volume has continued to remain at a high level. Even if the market experiences periodic fluctuations, overall trading activity will not contract significantly, which provides ongoing support for brokerage firms’ core businesses. More importantly, the securities industry is accelerating business transformation: the share of diversified businesses—wealth management, institutional business, investment banking, and more—keeps increasing, and earnings sources have begun shifting more toward comprehensive financial services revenue.

Among them, wealth management relies on the growth in residents’ asset allocation needs, forming stable management and service fee income. Institutional business, through services such as trading, market making, and custody, has successfully reduced dependence on individual investors’ trading. The investment banking business, benefiting from expansion in the direct financing market, has become a stable engine for performance growth. These businesses are less affected by short-term market fluctuations, can effectively smooth the earnings curve, and improve earnings stability.

Judging from industry operating data, the growth in this earnings cycle is not solely due to a rebound in market conditions, but rather the combined result of business structure optimization and improvements in market fundamentals. Even if the market experiences turbulence in the future, brokerages can maintain stable performance by leveraging a diversified business layout, no longer swinging drastically up and down with market moves as in the past. This shift in the earnings model is the core support for brokerage stocks to shed cyclical attributes.

From an investor’s perspective, when researching the intrinsic value of brokerage stocks, it is necessary to re-examine the investment logic behind them. The past investment approach centered on cyclical speculation is no longer suitable; instead, investors should focus more on the pace of industry transformation, the degree of business structure optimization, and earnings stability to make assessments. As brokerages transition from channel service providers to comprehensive financial service providers, their valuation framework is also expected to move from that of cyclical stocks toward that of growth stocks, achieving a more reasonable valuation positioning.

Of course, fully eliminating the cyclical attribute of brokerage stocks will still take time. Factors such as trading volume fluctuations and changes in industry competitive landscape will continue to create period-specific impacts. But in the long-term trend, a synergy has already formed between a maturing market ecosystem and deeper industry transformation. The cyclical attribute of brokerage stocks is weakening, while growth and stability attributes are gradually strengthening. This change not only benefits the industry’s own development, but also provides the capital market with more stable core assets, worth investors’ long-term attention and rational allocation.

Beijing Business Daily commentator Zhou Kejing