Haitong Strategy: What are the characteristics of investment style at the end of the year and the beginning of the year?

Core Conclusion: In history, the market value was more advantageous at the end of the year and the beginning of the year, but it is not very relevant to the overall style direction of the year, and profit trend is the determining factor of style. Currently, policies are positive but the fundamental recovery still needs confirmation, the market is expected to consolidate in the short term, and dividend assets will drive the value style. Mid-term stable growth policies promote the recovery of fundamentals, the market trend is expected to be upward, and better fundamentals in technology and high-end manufacturing may drive growth. What are the characteristics of style at the end of the year and beginning of the year? Since December 24th, dividend assets such as banks and petrochemicals have performed well, leading to a return to value style in the market. At the end of the year and the beginning of the year, investors are very concerned about how the market style will evolve. So what are the characteristics of style at the end of the year and beginning of the year in history? Does the style at the beginning of the year determine the trend for the whole year? This report analyzes this. In history, the market and value style often dominate at the end of the year and the beginning of the year, driven by policy and financial catalysts. From the perspective of the A-share market's calendar effect, the period at the end of the year and the beginning of the year (from December of the previous year to January of the current year) usually sees the market and value style dominating. Specifically, in terms of growth/value style, using the Shanghai 50 as a representative of the value index and the ChiNext Index as a representative of the growth index, since 2010, the Shanghai 50 outperformed the ChiNext Index during the period at the end of the year and the beginning of the year with a probability of 70% and an excess return mean of 5.6 percentage points. In terms of large/small-cap style, using the CSI 300 as a representative of the large-cap index and the CSI 1000 as a representative of the small-cap index, it can be found that since 2005, the probability of the CSI 300 outperforming the CSI 1000 during the period at the end of the year and the beginning of the year is 70% with an excess return mean of 4 percentage points. The dominance of the market value style at the end of the year and the beginning of the year is partly due to policy catalysis. The A-share market is in a period of performance vacuum at the end of the year, and it is also a window for major meetings and macro policy announcements. Policy catalysts often drive the dominance of the market's value style. For example, in late November 2014, the central bank announced a rate cut, leading to an accelerated rise in the value sector represented by major financials. From December 2014 to January 2015, the CSI 300 outperformed the CSI 1000 by 21.2 percentage points and the Shanghai 50 outperformed the ChiNext Index by 18.7 percentage points. Similarly, at the beginning of 2019, the central bank cut the reserve requirement ratio, leading the market's value style to dominate at the end of the year and the beginning of the year. On the other hand, the capital side may also be a factor affecting the style at the end of the year and the beginning of the year. Institutional investors such as mutual funds on the A-share market usually assess their performance on an annual basis, so institutional investors' positioning behaviors at the end of the year and the beginning of the year are mostly increased. The large market value sector has a large market capitalization and good liquidity, making it easier for institutions to collect chips in a short period of time, often favored by institutions. Since December 24th, dividend assets have driven the dominance of the value style. Since September 24th last year, the macro policy tone has shifted significantly, boosting market sentiment significantly, and the main indexes have also seen the first wave of rises after hitting bottom. During the period from September 24th to November 30th, small-cap and growth sectors led the market rebound, with the ChiNext Index rising by 45% and the CSI 1000 rising by 38.5%, significantly higher than the 21.9% increase in the CSI 300 and the 17.0% increase in the Shanghai 50. However, after December, there has been a significant change in the market style, with the value index starting to dominate under the steady performance of dividend assets. Among them, the CSI Dividend Index outperformed the ChiNext Index by 10 percentage points, and the Shanghai 50 outperformed the ChiNext Index by 8 percentage points. The current dominance of value style driven by dividend assets is also influenced by factors other than the policy and capital factors mentioned above. On the one hand, the macroeconomic fundamentals are still facing challenges, leading to a new low in government bond rates, coupled with weak market fluctuations, making dividend assets more attractive in terms of cost-effectiveness and defensive attributes. On the other hand, insurance funds typically have higher premium incomes at the end of the year and the beginning of the year, and insurance funds that seek absolute returns have increased demand for high dividend assets. Recently, Ping An Life has taken a stake in Industrial and Commercial Bank of China on the Hong Kong Stock Exchange, and insurance funds may be the incremental funds driving the rise of dividend sectors in recent times. The style at the beginning of the year does not necessarily determine the direction for the whole year, and the trend of the fundamental factors later is the key. How much correlation is there between the advantageous style at the end of the year and the beginning of the year and the advantageous style for the whole year in history? We judge the consistency of the style by comparing the relative changes of different style indices at the end of the year and the beginning of the year and for the whole year. In order to make the analysis more rigorous, we also remove the changes in January of each year from the annual changes in various style indices, that is, to observe whether the dominant style at the end of the year and the beginning of the year is consistent with the dominant style from February to December. Overall, in terms of large and small-cap styles, the probability of consistency between the style at the end of the year and the beginning of the year and the style for the whole year is 55%, and the probability drops to 45% after removing the contribution of January. For growth and value styles, the probability of consistency between the style at the end of the year and the beginning of the year and the style for the whole year is 64%, and the probability drops to 50% after removing the contribution of January. It can be seen that the dominant style at the end of the year and the beginning of the year does not necessarily continue for the whole year, and the correlation is even lower after removing the contribution of January. The change in the relative profit trend is the core determining factor of the style. From a longer-term perspective, stocks are a "weighing machine," and the fundamentals determine the ups and downs of stock prices in the mid to long term, with the profit trend divergence being the turning point for style shifts. Regardless of the rotation of the market cap style or the growth/value style, the core variable behind them is profit. For example, at the end of 2014 and the beginning of 2015, the value sector temporarily dominated, during which the relative excess return of the Shanghai 50 over the ChiNext Index was 18.7 percentage points. However, since the fundamental trend for the whole year is still led by growth sectors represented by technology, the growth style was more dominant in the whole year of 2015. Specifically, the cumulative year-over-year growth rate of net profits attributable to mother for the ChiNext Index and the Shanghai 50 increased from 16.7 percentage points in Q4 of 2014 to 40.7 percentage points in Q4 of 2015, with the ChiNext Index outperforming the Shanghai 50 by 90.6 percentage points in 2015. Therefore, the current trend of value dominance may not necessarily continue for the whole year, and the relative trend of various styles' fundamentals in the future will be the key to determining the dominance of the style. The market is expected to consolidate in the short term, and the performance of dividend assets may maintain the dominance of the value style. In our report "Reference 1999-519 - Thoughts on this round of market trends and the economic recovery from difficulties-20241006" and "How to select during the consolidation periodAs analyzed in "Structure-20241012", following the rhythm of the market in May 1999, after the rapid rise in the first wave, the stock market may enter a phase of consolidation with shrinking trading volume and turnover. Currently, the proactive macroeconomic policy orientation has been clarified. However, the restoration of the fundamentals still faces obstacles. In November, the year-on-year growth rate of the total social zero for the month fell by 1.8 percentage points to 3.0%, and the year-on-year growth rate of the completed fixed asset investment amount fell by 1.1 percentage points to 2.3% for the month. In addition, with the recent strength of the US dollar index and the pressure of slight depreciation of the renminbi exchange rate, the sentiment in the A-share market is weakening. Looking at the trading volume and incremental fund situation in recent times, the overall sentiment in the A-share market has cooled down, and the major broad-based indexes are currently in a consolidation phase. In the context of policy strengthening dividend regulation and a low-interest-rate environment, the value style may continue to dominate under the leadership of the short-term dividend sector. First, under the current background of weak fundamental recovery in the domestic market, the 10-year treasury bond rate has fallen to 1.6%, further highlighting the cost-effectiveness of dividend assets. Secondly, the new "Regulations on State-Owned Enterprises" issued in April 2024 emphasized the strengthening of cash dividend management of listed companies. In recent times, capital market reform policies such as market value management and dividend reduction have been continuously introduced, further encouraging listed companies to increase dividends, and the total amount of dividends in A shares has continued to grow rapidly in recent years. Thirdly, at the end of the year and the beginning of the year, the demand from insurance funds for dividend assets has also increased. In addition, in the short term, the stock market is in a phase of consolidation, where funds may favor dividend assets with obvious defensive attributes. Supported by the above factors, dividend assets still have cost-effectiveness in the short term, which may continue to drive the dominance of the value style.The mid-term stable growth policy promotes the improvement of the fundamentals, and the market trend is looking up, with technology and high-end manufacturing as the main growth drivers. The economic work conference held in December 24 clearly stated that in 25, a "more proactive and effective macroeconomic policy" will be implemented, with a shift in monetary policy towards "moderate easing". The combination of "monetary + fiscal" policy is the most proactive in history. The conference also stated the need to "stabilize the real estate and stock markets". The space for the subsequent macroeconomic policies has been opened up, as detailed in "Policy Advancement, Stock Market Upside Insights from the Central Economic Work Conference in 24". With the gradual introduction and implementation of incremental policies, the macro and micro fundamentals of China are expected to gradually improve. We estimate that the real GDP growth rate in 25 may be around 5% year-on-year, and at the same time, the year-on-year growth rate of A-share net profit attributable to the mother in 25 is expected to increase to 5-10%, thereby supporting the A-share market towards a fundamentally driven uptrend. At the industry level, technology and high-end manufacturing, which have better fundamentals, are the main growth drivers in the stock market. In terms of high-end manufacturing, China has an advantage in supply, with support from domestic and international demand, and the prosperity is expected to continue. In terms of demand, in terms of external demand, China has a high trade position in some high-end sectors, with high growth in exports of household appliances and automobiles since 24, with cumulative year-on-year growth rates in RMB terms in the months of 1-11 at 15.5% and 16.9% respectively. Coupled with strong demand from emerging countries and high dependence on China, new exports from China could increase. In terms of domestic demand, the Central Economic Work Conference also pointed out the need to "boost consumption strongly", with the household appliances and automobile sectors expected to continue to benefit. From the supply side, China's high-end manufacturing has advantages in industrial clusters, engineer advantages, and technology accumulation. Therefore, with the support of supply and demand advantages, the prosperity of China's high-end manufacturing is expected to continue, with specific focus on industries such as automobiles and household appliances. In terms of technology, the dual benefits of policies and technology are expected to support the main trend. The technology industry is currently in a new upward cycle, with better fundamentals in related sectors in 25. According to Haitong industry analysts' forecasts, the net profit growth rates of electronic companies in 24/25 are expected to be 30%/35%, communications 20%/30%, and computers -5%/15%. Technology companies that benefit from policy support and AI application areas could be key positioning areas. Recently, artificial intelligence technology has made significant breakthroughs. Toward the end of last year, ByteDance introduced the "Douba Visual Understanding Model", offering cost-effective multimodal large model capabilities to enterprises. AI technology is expected to be widely deployed in various fields, so specific focus could be on AI technology application areas such as consumer electronics, autonomous driving, and humanoid robots. From a policy perspective, the technology industry is expected to remain a focus of policy support, with a focus on areas benefiting from fiscal policy including digital infrastructure, digital creation, and semiconductors. In addition, merger and acquisition themes are also worth paying attention to. From the new "Nine Articles on Nationals" to the "Six Articles on Mergers and Acquisitions", policy support for mergers and acquisitions is clear. Taking into account the current IPO market environment in China, problems of excess economic capacity, and a new round of SOE reform, we believe that the three major investment directions for future mergers and acquisitions may focus on technology stocks, leading manufacturing companies, and state-owned enterprises, as detailed in "The Mergers and Acquisitions Curtain is Rising - 24/10/28". Risk Warning: The implementation progress of stable growth policies is slower than expected, and the domestic economic recovery may fall short of expectations. This article is sourced from a strategy report released by Haitong; GMTEight Editor: Wenwen.