Huatai Securities: Recommend focusing on stable high-dividend stocks with defensive attributes and some potential high-dividend stocks.

Huatai Securities pointed out that in January, the market risk appetite continued to decline, with the high-dividend sector performing better overall than in December of last year, particularly in cyclical high-dividend industries such as oil and petrochemicals, coal, and steel. Looking ahead to February, Huatai Securities believes that as market volatility begins to increase, the long-term yields on U.S. Treasuries and the U.S. dollar index have rebounded, marginally restoring the allocation value of high-dividend sectors compared to last month. It is recommended to focus on stable high-dividend stocks with defensive attributes and some potential high-dividend stocks.

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Huatai | Monthly High-Dividend Series: Defensive Allocation Value Emerges

In January, the market risk appetite continued to decline, with the current All A ERP falling below the five-year rolling average by one standard deviation. The overall performance of the high-dividend sector was better than in December of last year, especially in cyclical high-dividend industries such as oil and petrochemicals, steel, and coal. Looking ahead to February, we believe that as market volatility begins to increase, the long-term yields on U.S. Treasuries and the U.S. dollar index have rebounded, marginally restoring the allocation value of high-dividend sectors compared to last month. It is recommended to focus on stable high-dividend stocks with defensive attributes and some potential high-dividend stocks.

Core Viewpoints

1. The performance of high-dividend sectors in January has shown some recovery, possibly due to: 1) Strong start for insurance funds, with new capital needing allocation, and OCI accounts favoring dividend assets; 2) Cyclical high-dividend stocks benefiting from rising prices, with oil and petrochemicals, steel, and coal sectors performing relatively better within the high-dividend category.

Currently, the difficulty of further repairing market risk premiums has increased, and sharp fluctuations in cyclical stocks impact market profitability. Investors’ risk appetite may enter a “small platform period,” and market volatility is expected to decline. The cost-effectiveness of high-dividend strategies further improves, with a focus on stable dividend-paying stocks with defensive attributes and some potential dividend stocks in consumer sectors. In the short term, from multiple perspectives, the allocation of high-dividend assets has rebounded compared to December 2025: 1) The difficulty of further repairing market risk premiums remains high, and high-dividend assets have defensive allocation value. Currently, the All A ERP is below the five-year average by one standard deviation; historically, breaking through this level requires fundamental recovery or strong capital support, both of which are not highly visible now. Investors’ risk appetite may enter a volatile phase, increasing the defensive value of high-dividend strategies; 2) From a quantitative perspective, the high-dividend signal system based on the sector’s own trend (flat), interbank market turnover (bullish), and term spread (flat) has shifted from neutral to bullish; 3) With the announcement of the new Federal Reserve Chair candidate, the recent dollar index and U.S. bond yields have rebounded. Looking forward, the insurance dividend strategy 2.0 era needs to balance high dividend yields and cost-effectiveness. Considering current trading congestion, chip levels, and profit expectations, focus on stable high-dividend stocks with defensive attributes (utilities, insurance, publishing, etc.) and some potential dividend stocks (railways, environmental protection, Hong Kong stocks, real estate, etc.).

The strong growth of the insurance “door-opening red” (premium growth) and good sales of dividend insurance, along with increased incremental investment funds, support the sector. In terms of allocation, extending asset durations remains important for most insurance companies, though some insurers may increase long-term bond investments based on timing considerations. Dividend stocks are the main line of equity investment. The pressure on cash investment returns will intensify further in 2026. For most companies, dividend strategies can only be strengthened, not weakened. The recent correction in dividend sectors provides a rare opportunity for insurers to increase holdings.

Industry Investment Opportunities

Insurance: Market bullish sentiment remains strong, and the spring rally may continue. The overall beta trading of the insurance sector can still be expected.

Petrochemicals: Since 2026, geopolitical tensions have reignited concerns over global oil supply risks, leading to a geopolitical premium that has caused off-season oil prices to bottom out and rebound. With demand recovering and global reserves accumulating, oil prices are expected to bottom out and rise in Q2-Q3 2026. Coupled with the Fed’s rate cuts boosting demand, refined oil demand in Asia, Africa, and Latin America may improve, raising the Brent crude price forecast to $65 per barrel for 2026. Continue to favor high-dividend energy leaders with cost reduction, increased production capacity, and natural gas business growth; as oil prices stabilize and inventory losses decrease, refining profitability is expected to improve.

Construction and Building Materials: Due to the later Chinese New Year, January’s PMI for the construction industry weakened month-on-month, but fiber glass, waterproofing, and gypsum board prices have begun to rise, expecting physical construction volume to improve after the holiday. The State-owned Assets Supervision and Administration Commission (SASAC) will focus on “three集中” (centralized control), using restructuring and integration as a lever to promote the optimization and restructuring of the state-owned economy, accelerate the building of more world-class enterprises, and possibly speed up the restructuring of low-valuation construction central enterprises. High profitability from overseas expansion of building materials is expected to boost capital expenditure, benefiting overseas international projects. In the medium to long term, the outlook remains optimistic for overseas markets and domestic stock renewal.

Public Utilities: Power: Starting in 2026, China’s power supply growth will slow, with demand rebounding; the most challenging phase has passed. As long as coal prices stabilize, electricity prices and valuations of power stocks are expected to bottom out. Gas: Cost reductions are expected in 2026, with profits and dividends likely to stabilize or increase, supported by low valuations and medium-high dividend yields. Environmental protection: Water and waste volume are expected to stabilize in 2026, with accelerated debt repayment and capital expenditure reduction, leading to improved free cash flow. The dividend ratio and dividend yield are expected to rise.

Transportation: Roads: Recent strong growth in freight volume, combined with the peak travel season of the Spring Festival, has slightly improved sector sentiment. Railways: The Hong Kong property market is experiencing an “early spring” boom. Supply chain: December PPI decline narrowed year-on-year, and industrial enterprise profits turned positive, suggesting further supply-side improvements in 2026 amid a commodity bull market, maintaining a neutral to optimistic outlook.

Banks: Banks actively lent at the start of the year, with a significant narrowing of interest rate spreads, and profits are expected to improve. The impact of the real estate sector is relatively controllable. Ten banks, including Nanjing, Ningbo, and Qingdao, disclosed their 2025 annual performance reports, with 7 showing revenue growth and 7 profit improvement. We expect strong performance in 2026 under stable interest spreads and contribution from wealth management. Since December, the CITIC Bank index has fallen 7.2%, mainly due to real estate sentiment, rate cut expectations, and capital style shifts. The index valuation has dropped to 0.65x PB, near the 65th percentile over the past five years, with some quality stocks’ 2025E dividend yields approaching 6%. Insurance funds’ “door-opening red” (premium growth) remains high year-on-year, and future new premiums are expected to continue favoring high-dividend, low-volatility bank stocks.

Real Estate: In 2025, Hong Kong’s private residential transaction volume increased by 20% year-on-year, with new homes up 21%, reaching a twenty-year high; second-hand homes increased by 19%, a four-year high. Home prices turned positive for the first time since 2022, up 3.3% year-on-year. The Centaline Leading Index showed a 1.0% increase in the first three weeks of January. Although office and retail property rents have not yet stabilized, front-end indicators like net absorption and retail sales continue to improve, with Central’s office buildings and high-end retail leading structural recovery. We remain optimistic about Hong Kong’s local real estate stocks.

Mandatory Consumption: Leading companies in essential consumption are gradually reaching a mature development stage, with small capital expenditure needs, stable cash flows, and ongoing implementation of long-term and medium-term dividend plans. Looking ahead, the domestic structural upgrade and overseas expansion of essential consumption companies remain broad. In recent years, leading dividend payout ratios have increased, providing advantages such as dividend yield support in a low-interest-rate environment, high long-term growth potential, and low valuation elasticity. We maintain the view that the milk raw material market in 2026 will move toward supply-demand balance. Currently, raw milk prices are stabilizing month-on-month, and dairy product stockpiling for the Spring Festival is worth期待. Focus on leading companies with stable operations, robust performance, and healthy cash flows.

Risk Tips: Risks of dividend payout policies not meeting expectations, and domestic policy strength being less than expected.

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Risk Warning

1. Risks of dividend payout policies falling short of expectations: The dividend payout policy of listed companies has always been an important component of investor return expectations. If the pace of policy implementation is slow or the final results do not meet expectations, investor returns may fall short.

2. Risks of domestic policy strength being less than expected: External shocks such as sudden changes in the global economy, intensified trade frictions, and large fluctuations in exchange rates may disrupt the established domestic policy pace. If domestic policy effects are weaker than expected, it could impact investor sentiment.

(Source: People’s Financial News)