CITIC SEC: It is expected that the sentiment in the A-share market will gradually cool down before the Spring Festival, and layout the spring offensive after the Spring Festival.

CITIC SEC released a research report stating that looking ahead to January, policies are in a window period. It is expected that the market will remain active in the first half of the month, but external disturbances will gradually increase in the second half of the month, causing market sentiment to cool down. In terms of the pace of the first quarter, it is expected that policy expectations will heat up again after the Spring Festival, leading to a spring offensive in the market. In terms of sector allocation, it is recommended to continue using a barbell strategy of dividends and themes, leaning more towards dividends, while closely monitoring policy catalysts in the pharmaceutical sector. In terms of industry allocation, stable high dividend stocks in the dividend sector and high dividend consumer stocks are preferred, while weakening the energy-type dividend industry. It is suggested to focus on active funds shifting towards end-side AI, new retail, and Siasun Robot & Automation within the thematic sector. However, caution should be exercised towards the end of January regarding thematic trading fading out. Looking ahead to January, policy is in a window period, with noticeable increase in external disturbances In the past years, the period before the two sessions was a policy window period. However, after the political bureau meeting and the Central Economic Work Conference in December this year, CITIC SEC believes that policies have clarified three major trends: a more significant external pressure leads to stronger domestic policy hedging, real estate is stabilizing after a decline, and consumption is being stimulated comprehensively. Due to the lack of reference value in the data of the real estate off-season, CITIC SEC believes that the policies that can still be expected in January are mainly monetary policy and the continuation of the policy to stimulate consumption by replacing old with new. External disturbances in January may become more noticeable: first, there is a high probability that the Fed's interest rate meeting at the end of January will pause the rate cut, which coincides with the beginning of the Chinese New Year holiday. Any unexpectedly hawkish statements may have a certain impact on the global markets during the Chinese New Year holiday. Second, after the US presidential inauguration on January 20, geopolitical risks events may increase significantly. From the perspective of dealing with external pressure, it is expected that policies will continue to utilize special national debt funds that have not been fully utilized for the replacement of consumer goods to stabilize the economy and market expectations, and to timely adjust reserve requirements and interest rates. Considering the pace of the first quarter, it is expected that market sentiment will gradually cool down before the Spring Festival, and a spring offensive will begin after the festival During the policy window period, CITIC SEC expects market sentiment to gradually cool down before the Spring Festival. Firstly, the consumption sector is still weak, and a crowding out effect has been observed in other consumer categories due to the replacement of large consumer durable goods. The total retail sales of consumer goods above the quota excluding appliances, furniture, and automobiles in November increased by only 2.6% compared to the previous month. This is significantly weaker compared to the previous four years, which had growth rates of 21.5%, 16.9%, 15.2%, and 15.3%, showing an unusual weakness in comparison. Secondly, on the investment side, although there have been recent policy relaxations in the management of special bond investments, allowing some provinces and cities to pilot self-examination and self-reporting of special bond projects, most local governments are still focused on debt reduction, which to some extent limits the space for rapidly expanding large-scale physical work at the beginning of the year. If government debt financing is excluded, the year-over-year growth rate in the financing of "new RMB credit+non-standard+corporate bonds" in the past 12 months dropped to -21% in November, the lowest level since 2008. In the absence of a rapid expansion of government-driven physical work, the recovery of various investment data at the beginning of 2025 may also be weak. Lastly, real estate sales will enter the traditional off-season, and property viewings and transactions may experience a certain degree of decline. Before the small spring in March-April next year or during the festive season, it may be difficult to provide sufficient strong signals in terms of quantity and price to the market. However, after the Spring Festival, as external disturbances settle down and corresponding policy measures are implemented, the market may gradually prepare for a spring offensive. Incremental funds can only be expected from insurance, and active funds focusing on themes will be more concentrated Looking at the potential structure of incremental funds, it is difficult for active, passive, and foreign funds to generate significant increments in the short term. In terms of domestic funds, the redemption rate of domestic active funds has increased since December, and the issuance size of passive products has rapidly decreased from 103.7 billion in November to 17.8 billion in December, while the net inflow speed of existing ETFs has significantly slowed down in the past two weeks. In terms of foreign funds, overseas active funds tracking China have experienced net outflows for ten consecutive weeks. Considering the current policy window period before the two sessions and the inauguration of the new US president in late January, the likelihood of a shift to inflows in the short term seems low. The only source of incremental funds that can be expected is the increasing allocation of equity assets by insurance funds amid the growing background of asset shortages, especially in dividend-generating assets. Looking at existing funds, as the daily turnover in the market remains above 1.2 trillion yuan, active funds will continue to actively pursue hot topics. According to CITIC SEC's channel survey, as of the week ending on December 20th, the average position of active private equity samples reached 77.2%, exceeding the historical median level (75.1%) for five consecutive weeks. Additionally, the margin balance remains at a high level of 1.87 trillion yuan. However, the overall profit effect in the market is weakening, and the center of transactions is gradually shifting downwards. CITIC SEC predicts that in the future, existing active funds will be more focused on thematic areas that have formed clear industry trends, have a high probability of long-term realization, and can resonate with some institutional funds, such as end-side AI, Siasun Robot & Automation and offline new retail represented by supermarket adjustments before the Spring Festival. The continuous increase in trading losses makes it difficult for pure small-cap styles to continue, and it is expected that large-cap value styles will perform better CITIC SEC's trading loss index shows that from the end of September to the beginning of November, the active trading in the entire market generated significant profit effects, supporting the purely liquidity-driven "valuation pull-up" trend, which was crucial for the continuation of small-cap stock styles. However, this index has been weakening since late November, and it shows that the loss effect of small-cap stock sectors has been accumulating and rapidly expanding since December. At the same time, CITIC SEC found that the turnover ratio of the A-share TMT sector once again exceeded 40%, approaching the historical peak in 2023. However, the TMT sector shows a clear trend of "shrinking circles" in terms of themes, and except for some extreme themes, trading losses are continuously increasing.In addition, the relatively intense emotional disturbances in January are likely to exacerbate the emotional fluctuations of small and micro-cap sectors: first, the intensive disclosure of performance forecasts, second, the full implementation of the "delisting new regulations," and third, concerns about the significant increase in regulatory penalties. Of course, CITIC SEC believes that these disturbing factors are just triggering factors for the adjustment of small and micro-cap stocks. In essence, it is still due to the lack of fundamental and valuation support. Trading costs are constantly increasing, the profitability effect is weakening, and the small and micro-cap style is unlikely to continue the rising trend of October and November "left foot stepping on right foot," or may face significant downside pressure. relatively speaking, CITIC SEC believes that the value style of the overall market will gradually become dominant.The recommended sector allocation strategy is to adopt a barbell strategy of dividends and themes, leaning more towards dividends, while closely monitoring the policy catalysis of the pharmaceutical sector. According to CITIC SEC's sector rotation framework, for the consumer sector, the marginal improvement brought about by the policy of replacing old with new is weak, with no new catalysts during the policy hiatus, and opportunities in the sector are more represented by active themes such as offline new retail and online social e-commerce. For the outbound sector, January needs to digest the event-related disturbance brought about by Trump's official inauguration; for the dividend sector, the difference between the China Dividend yield and the 10-year government bond yield currently remains above the 85th percentile since 2023, and the "attractiveness" of dividends relative to government bonds still exists; for the technology sector, due to the large increase in overall prices and high valuations, early-stage theme-based varieties such as terminal AI+ infrastructure, and Siasun Robot & Automation are favored due to their insensitivity to valuation. Therefore, the barbell strategy of dividends and themes is still the preferred strategy at present. In addition, the pharmaceutical sector has low expectations and high divergence, but the contradiction between concerns about long-term payment ability and increasing demand is intensifying, which will inevitably accelerate policy reforms. Positive changes represented by promoting commercial health insurance are worth continuous attention, and the first quarter may see intensive catalysis. However, considering that January is in a policy hiatus, external disturbances are significantly increasing, and theme sector catalysis is concentrated in mid to late January, emotional volatility may significantly increase. Therefore, within the dividend+theme barbell structure, CITIC SEC suggests leaning towards dividends in terms of allocation, while also closely monitoring policy catalysis in the pharmaceutical sector. Within the dividend sector, stable high dividend stocks and consumer dividends are preferred, and it is recommended to weaken the energy-based dividend industry. CITIC SEC calculates that the average expected dividend yield of the CSI Low Volatility Dividend 100 sample stocks is currently 4.27%, down by 121bps compared to the end of last year. However, the spread relative to the 10-year government bond yield has only decreased by 35bps, indicating that the relative attractiveness remains. However, as market awareness of the dividend sector has significantly increased, and the trend of increasing allocations to dividends in insurance is expected to be consistent, CITIC SEC believes that the dividend sector's return realization speed will be faster than the past year and recommends increasing allocations early. Within the dividend sector, CITIC SEC favors monopolistic dividend industries represented by hydropower, nuclear power, shipping ports, state-owned banks, and operators, and consumer dividend industries represented by jewelry chains, department store chains, white goods, and dairy products. However, unlike the dividend structure of the past year, some energy and resource-based dividends, such as coal, copper, oil, etc., are believed by CITIC SEC to face greater EPS volatility risks in the future, and stock performance may be relatively mediocre, requiring a bottoming out rebound in commodity prices. Therefore, CITIC SEC recommends downplaying allocations to energy and resource-based dividend industries. Among these types of dividend industries, aluminum is the best choice for the whole year, but a better buying point may not be available until late in the first quarter. Within the theme sector, it is favorable for active funds to focus on terminal AI, new retail, and Siasun Robot & Automation. Firstly, the smart wearable industry represented by AI glasses has a clear trend and is currently in the "tail" stage of the second wave of theme market, with CES in January 2025 possibly being the emotional peak, and it may gradually upgrade to the main theme market following the release of key products by important manufacturers after April. CITIC SEC suggests focusing on core chip control, OEMs, and important customer component supply chains, as well as domestic AI headphone brands. Different from the first wave market of AI intelligent wearables this year, after the end of this round of theme market, the core positions may mainly experience fluctuations, making it harder to see significant declines. Secondly, the new retail sector is expected to usher in traditional peak season and policy catalysis before the Spring Festival, with recommendations to focus on supermarket reform, snack volume, and IP operation in offline new retail. For online new retail, attention can be paid to social e-commerce new developments represented by WeChat boutique stores. However, due to its early stage and immature industry chain, the theme characteristics are more obvious compared to offline retail. In terms of subdivided industries, focus can be placed on agency operations, snacks, and packaging. Finally, in the Siasun Robot & Automation field, special attention should be given to whether there will be a major version update for the Tesla Optimus around the time of the new US president's election and the important catalysis of the CES exhibition in early January. Overall, for these three major themes, CITIC SEC believes that terminal AI and Siasun Robot & Automation belong to the tail end of the second wave of theme market. There is a greater opportunity in early January, and the CES exhibition is likely to be an emotional peak, intensifying the game. For the new retail sector, due to the long downturn of related industry sectors in recent years and thorough institutional holdings clearing, CITIC SEC's trading loss indicator also shows that since October 8th, the retail sector is the only industry that has not generated trading losses. In addition, some sub-industries in the new retail sector also have features of high cash reserves and high dividends, which may have a longer duration.