Huajin Strategy: Continued moderate strength in February, with the main themes remaining in technology and cyclical sectors

Investment Highlights

Reviewing history, the A-shares are highly likely to rise in February, mainly influenced by policies, external events, liquidity, and other factors. (1) The A-shares are likely to rise in February. First, since 2010, the Shanghai Composite Index has mostly increased in February, with 12 gains out of 16 years, averaging a 2.2% rise. Second, there have been 3 years when the Spring Festival started in mid to late February, with two of those years seeing gains and one a decline. (2) Policies, external events, and liquidity are the main factors affecting February’s trend in A-shares. First, policies and external events are core determinants: if policies are easing and external events are positive, February may see a volatile but generally strong trend, such as easing US-China relations in 2019, the People’s Bank of China relaxing property policies in 2023, or increased ETF holdings by central funds in February 2024; conversely, tightening policies or negative external events may weaken the market. Second, loose liquidity can lead to strength. Third, fundamentals have a relatively limited impact on February’s trend.

Currently, A-shares in February may continue to fluctuate mildly upward, with the spring rally not yet over. (1) Positive policy expectations for February may persist, but external geopolitical risks could cause some disturbances. First, policies promoting growth, such as accelerating consumption support before the Spring Festival, may continue: for example, pilot programs for reward-based invoices in 50 cities, local government policies to boost consumption, and ongoing support for infrastructure and innovation. Second, external geopolitical risks in February may cause some turbulence: US-China relations might remain stable, but US tariffs could be uncertain; tensions between the US and Iran, Russia-Ukraine conflicts, and other geopolitical issues may intensify, impacting global risk appetite. (2) Liquidity in February may stay loose. Macroeconomic liquidity is expected to remain ample, with ongoing foreign capital inflows, and the economy and profits may see a modest weak recovery.

Growth and cyclical styles may outperform in February, with a bias toward small and mid-cap stocks. (1) Historically, growth and cyclical sectors often lead in February, driven by policy support and industry trends. Over the past 15 years, these styles have outperformed the broader market in February, with growth leading 11 years and cyclical 15 years, and both ranking first in gains in 9 and 3 years respectively. The outperformance is mainly driven by rising industry trends, supportive policies, and liquidity conditions—such as 2013’s mobile internet and smartphones, 2015’s internet finance, 2020’s 5G, or commodity booms in 2014, 2016, and 2022. (2) This February, growth and cyclical styles may also perform well: local two sessions will focus on developing new productive forces and supporting emerging industries like AI and new energy, with liquidity remaining loose. Anti-inflation policies and rising PPI expectations may also favor cyclical sectors.

Small and mid-cap stocks may have an advantage in February. (1) Historically, small and micro caps outperform in February: over the past 15 years, CSI 1000 and Wind Micro Cap indices have had 13 and 14 years of excess returns in February, with 5 and 10 years ranking first in monthly gains. (2) This February, small and mid-cap stocks may continue to outperform: economic recovery may remain weak but improving, liquidity is expected to stay loose, policies supporting innovation and consumption may benefit small caps, and overseas risks could boost commodities like precious metals and oil, favoring mid-cap cyclical stocks.

Industry allocation: continue focusing on technology and cyclical themes in February. (1) Thematic catalysts and high-performing sectors may outperform. Historically, sectors with themes or strong earnings in the first quarter tend to do well in February, driven by supportive policies and industry events—such as the 2018 “323” action for industrial internet, 2019’s foldable phones and 5G, 2020’s 5G development meetings, 2023’s digital economy policies, and 2024’s infrastructure plans. (2) Currently, sectors like healthcare, automotive, computing, electronics, metals, and chemicals may perform well, supported by ongoing policies and industry trends. (3) Valuations in growth sectors like healthcare, automobiles, and tech are relatively low, making them attractive for bottom-fishing.

Risk warning: past experience may not predict future performance; policy surprises or changes; economic recovery may fall short of expectations.

Main Text

1. February may continue to be volatile but generally upward, with the spring rally ongoing

(A) The trend of A-shares in February is mainly influenced by policies, external events, liquidity, and other factors

Reviewing history, the A-shares are highly likely to rise in February, mainly influenced by policies, external events, liquidity, and other factors. (1) Since 2010, the Shanghai Composite Index has mostly risen in February, with 12 gains out of 16 years, averaging a 2.2% increase. Notably, in 3 years when the Spring Festival started in mid to late February (2010/2/14, 2015/2/19, 2018/2/16), two saw gains and one a decline. (2) Policies, external events, and liquidity are key factors: First, policies and external events are core determinants—if policies are easing and external conditions positive, February may see a strong or volatile market, e.g., easing US-China relations in 2019, property policy relaxations in 2023, or increased ETF holdings in 2024. Conversely, tightening policies or negative external events can weaken the market, such as the 2013 real estate regulation, RMB depreciation in early 2016, or the COVID-19 outbreak in February 2020. Second, loose liquidity can support gains, with examples including RRR cuts, rate cuts, and liquidity injections in recent years. Third, fundamentals have limited influence; for example, some years saw weaker macro data but still market gains, like 2014, 2015, and 2020.

(B) This February, the A-shares may continue to fluctuate mildly upward, with the spring rally not yet over

Positive policy expectations for February may persist, but external geopolitical risks could cause some disturbances. (1) Policies supporting growth, such as boosting consumption before the Spring Festival, may accelerate: recent initiatives include pilot programs for reward-based invoices, local government policies to promote consumption, and infrastructure updates. The number of local two sessions may increase, with policy expectations rising toward the end of February. (2) External risks include US-China relations remaining stable, but US tariffs and geopolitical tensions (Iran, Russia-Ukraine) may cause volatility, impacting global risk appetite.

Liquidity in February may stay loose. (1) Macroeconomic liquidity is expected to remain ample, with continued foreign inflows and stable domestic credit conditions. (2) Stock market funds may continue to flow in, supported by historical seasonal patterns and ongoing liquidity.

Economic and profit recovery may remain weak but improve slightly. (1) February exports may benefit from low base effects, with exports stabilizing or improving, supported by rising container freight indices and resilient exports to the EU and ASEAN. (2) Manufacturing investment may continue to recover, while property investment remains weak. (3) Retail sales and services may improve, driven by holiday travel and policies supporting consumption.

2. Growth and cyclical sectors may outperform, favoring small and mid-cap stocks

Historical data shows growth and cyclical sectors often lead in February, driven by industry trends, policies, and liquidity. Over 15 years, these styles have outperformed the broader market in February, with growth leading 11 years and cyclical 15 years. The outperformance is linked to rising industry trends, policy support, and liquidity conditions—such as 2013’s mobile internet, 2015’s internet finance, 2020’s 5G, or commodity booms. This year, local two sessions will focus on developing new productive forces and supporting emerging industries like AI and new energy, with liquidity remaining loose. Anti-inflation policies and rising PPI expectations may also favor cyclical sectors.

Small and mid-cap stocks may have an advantage in February. (1) Historically, small and micro caps outperform in February: over the past 15 years, CSI 1000 and Wind Micro Cap indices have had 13 and 14 years of excess returns, with 5 and 10 years ranking first in gains. (2) This February, they may continue to outperform due to ongoing economic recovery, liquidity support, policies favoring innovation and consumption, and potential overseas commodity boosts.

(B) Thematic catalysts and high-quality sectors may outperform

In February, sectors with themes and strong earnings in the first quarter tend to outperform, driven by supportive policies and industry events. Examples include the 2018 industrial internet push, 2019’s foldable phones and 5G, 2020’s 5G development, 2023’s digital economy, and 2024’s infrastructure plans. Currently, sectors like military aerospace, media, electronics, metals, and chemicals may perform well, supported by policies and industry trends. Valuations in growth sectors like healthcare, automobiles, and tech are relatively low, making them attractive for bottom-fishing.

© Current growth sectors like healthcare, automotive, computing, and machinery have low valuation sentiment

The predicted PEG ratios for primary growth sectors such as power equipment, media, and autos are low (0.68, 1.02, 1.07). Trading volumes in healthcare, autos, computing, and machinery are also relatively low historically.

(D) Current secondary growth sectors like consumer vehicles, traditional Chinese medicine, chemical products, and biomedicine show low sentiment

PEG ratios for sectors like passenger cars, gaming, and optical electronics are low (0.32, 0.50, 0.61, 0.69). Trading volumes in these sectors are also at low levels historically.

(E) Thematic sectors like innovative drugs, robotics, and energy storage have low sentiment

Predicted PEG ratios are low (around 0.70-0.99). Trading volumes in these themes are also low.

(F) Consumer sectors such as home appliances, food & beverages, and autos have low PE ratios

Predicted PE ratios are low (16.0, 20.5, 27.5). Trading volumes in food, social services, agriculture, and retail are also at low levels historically.

(G) Continued focus on technology growth and some cyclical sectors in February

It is recommended to buy on dips in sectors supporting policies and industry trends, such as semiconductors, AI hardware, media, AI applications, military aerospace, communications, machinery, new energy, and pharmaceuticals. (1) Electronics: recent large inflows into the sector, rising NAND flash prices, and upcoming industry expos in Korea support continued growth. (2) Media: new regulations on AI anchors, international AI summits, and digital economy policies favor media and tech sectors. (3) Computing: large inflows, international conferences, and AI development support continued growth. (4) Military aerospace: upcoming expos and defense forums in Singapore and the US. (5) Communications: continued inflows, major expos in Singapore focusing on quantum tech, semiconductors, and optical electronics. (6) Machinery: international conferences on automation and robotics, US medical device expos. (7) New energy: large inflows, upcoming conferences on electrochemistry and energy storage. (8) Pharmaceuticals: summits on antibody drugs, drug design, and innovation support sector growth.