Huatai Securities: The core drivers of the spring market initiation have not undergone fundamental changes; focus on high-quality and low-position sectors

Huatai Securities points out that last week, A-shares oscillated at high levels, with market value favoring the large caps. Looking ahead, there are many constraints on the rise in risk appetite before the holiday: externally, Kevin Woorh may succeed as Federal Reserve Chair, as he was previously considered a hawk on inflation, leading to a rise in the dollar and U.S. Treasury yields, putting pressure on risk assets; internally, as the market expands into low-valuation sectors like liquor, the rotation accelerates, making it harder to capture excess returns, with technical adjustment pressures and holiday effects increasing the willingness of funds to take profits. However, the core driver of this spring market rally has not fundamentally changed. The win rate improves after the Spring Festival until the Two Sessions, providing a potential new window for deployment if the market corrects. In terms of allocation, focus on high-probability areas, such as high-quality, low-position sectors like power equipment, storage and semiconductor equipment, chemicals, engineering machinery, agriculture, and beauty care. Consumer and travel chains benefiting from the long holiday can also be opportunistically bought on dips.

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Huatai | A-Share Strategy: Shift to Win Rate Focus

Last week, A-shares oscillated at high levels, with market value favoring the large caps. Looking ahead, there are many constraints on the rise in risk appetite before the holiday: externally, Kevin Woorh may succeed as Federal Reserve Chair, as he was previously considered a hawk on inflation, leading to a rise in the dollar and U.S. Treasury yields, putting pressure on risk assets; internally, as the market expands into low-valuation sectors like liquor, the rotation accelerates, making it harder to capture excess returns, with technical adjustment pressures and holiday effects increasing the willingness of funds to take profits. However, the core driver of this spring market rally has not fundamentally changed. The win rate improves after the Spring Festival until the Two Sessions, providing a potential new window for deployment if the market corrects. In terms of allocation, focus on high-probability areas, such as high-quality, low-position sectors like power equipment, storage and semiconductor equipment, chemicals, engineering machinery, agriculture, and beauty care. Consumer and travel chains benefiting from the long holiday can also be opportunistically bought on dips.

Key Points

How did the spring market perform after consolidations historically?

Historically, reasons for adjustments during spring rallies typically include: 1) Profit-taking pressure: the larger the gains earlier in the spring rally, the greater the short-term technical correction pressure, and funds also seek to lock in profits before the holiday; 2) Policy and fundamentals validation: as the policy window of the Two Sessions closes and earnings season approaches, the market shifts from “expectation” to “reality.” If policies or earnings fall short of expectations, adjustments may occur; 3) External shocks: overseas liquidity and geopolitical disturbances, such as the repeated expectations of U.S.-China trade friction in 2019. In typical spring rally years, if the correction is mainly driven by capital behavior, it can actually create space for subsequent gains, as seen in January 2015 and March 2019. Considering the core drivers of this round of rally—namely, the slow bull expectation plus ongoing policy and industry catalysts—the market is expected to continue after a short consolidation, from after the Spring Festival until before the Two Sessions.

Market Trend: Technology and Cyclical sectors remain the main themes, with a bottom-up recovery in consumer sectors

As of now, over 50% of full A-share annual report forecasts have been disclosed, showing improvement compared to the same period last year. Industries with high positive forecast accuracy include non-bank financials, non-ferrous metals, beauty care, automobiles, utilities, and steel. Industries with the highest projected net profit growth include military, machinery, beauty care, communications, textiles, and non-ferrous metals. Based on our macroeconomic cycle model, the overall industry prosperity index has risen for the second consecutive month in January. Signs of improvement include: 1) Price increase chains: non-ferrous metals, petrochemicals, some chemical products, building materials, and shipping; 2) AI chain: rising prosperity in computing components and semiconductors, with application sectors like gaming and software also improving; 3) Capital goods and intermediate goods: power equipment, optical and optoelectronics, engineering machinery; 4) Consumer goods: agriculture, beauty care; 5) Independent prosperity cycles in military electronics, pharmaceuticals, etc.

Valuation and Crowding Analysis: Consumer, export chains, and AI application sectors have relatively low crowding

Assessing current valuation and crowding: 1) Valuation and holdings: based on valuation percentiles since 2016 and Q4 2023 public fund allocation percentiles, sectors like computing and non-ferrous metals are highly crowded, while consumer, export chains, and TMT sectors like semiconductors and gaming are less crowded. Some chemical products are also at relatively low levels; 2) Trading crowding: based on turnover rate, trading volume ratio, and MA20 deviation, sectors like non-ferrous metals, chemicals, semiconductors, aerospace equipment, and power grid equipment are highly crowded. Among these, semiconductor, aerospace, and power grid equipment show signs of easing. Consumer staples (agriculture, beer, condiments), large financials (securities, banks), gaming, film and television, and shipping ports have low crowding but are rebounding. Overall, consumer, export chains, and AI application sectors are less crowded.

Investment Recommendations: Continue shifting towards high-quality, low-position sectors

The short-term market is likely to remain volatile, with the spring rally expected to continue after the holiday. It is advisable to lower growth expectations and adopt a win rate-focused approach, shifting towards high-quality, low-position sectors: 1) Fundamentals: sectors with high and sustainable prosperity, signs of bottoming or improvement, such as power equipment, storage and semiconductor equipment, chemicals, engineering machinery, agriculture, and beauty care; 2) Themes: focus on AI applications and humanoid robots with potential catalysts from early February to the Spring Festival; 3) Style rotation: moderately increase allocations in non-bank financials and cyclical dividend sectors. Consumer and travel chains benefiting from the long holiday can also be bought on dips.

Risk Warning: Market liquidity may underperform expectations; downside risks in domestic and external fundamentals may exceed expectations.

(Source: People’s Financial News)