Guotai Junan: It is expected that the stock market will gradually stabilize before the Chinese Lunar New Year. There is hope for a rebound and defensive counterattack during the Spring Festival and the Two Sessions.

Guotai Junan's cyclical team published a research report looking forward to the spring market, stating that in terms of expectations, the policy outlook in the spring phase is "relatively stable". However, uncertainties are expected to increase due to Trump's actual actions, the level of spring season start-up, and the recovery of corporate profits, coupled with trading regulations. The spring market volatility range is expected to move lower than the previous period. With the release of risks, opportunities for defensive counterattacks will also appear. The team expects the stock index to stabilize before the Chinese New Year, and with the replenishment of liquidity after the holiday, local industry expectations, and national policy expectations during the two sessions, the stock market is expected to rebound during the Chinese New Year and two sessions period. Overall judgment: Risk appetite declines, stock index range moves lower; expected to stabilize before the Chinese New Year. In the recent market rapid adjustment, Guotai Junan's stock strategy in the previous weekly report judged the stock index volatility after the rebound and the "convergence of expectations to reality". The team also pointed out in the annual report "Embracing the Transitioning Bull" that the stock index in the spring of 2025 is expected to face a period of headwinds and swings. As there is currently a lack of growth expectations, the valuation and levels of the stock index primarily depend on liquidity (optimistic numbers) and risk appetite (optimistic levels). Due to the overall decline in risk appetite in recent times, the team predicts that the volatility range of the stock index in the next phase will move lower. In the past three months, economic performance, profit growth, and geopolitical frictions, although important for the stock market, are not critical. The core driver comes from policy expectations pushing overall risk appetite and optimism. How to deal with Trump's impact on investment: Initial markets will factor in uncertainty; but when the greatest risks are visible, opportunities for contrarian investments will arise. On January 3, the new US Congress began operations; on January 20, Trump will enter the White House and begin the 2.0 era. The Republican Party platform in 2024 is centered on "America First", emphasizing a return to conservative logic. For China, the Trump administration will engage in strategic competition with China through measures such as tariffs and restrictions on technology transfer. On one hand, in order to balance the trade deficit, Trump has proposed imposing a 10% global tariff and a 60% tariff on China; on the other hand, in the industrial sector, the US may continue to implement export controls on China and promote the return of high-end manufacturing. From an investment perspective, one should strategize underestimation and tactically focus. The US-China game has been prolonged without significant surprises. Meanwhile, domestically, there is a wealth of policy/industry response experience and a focus on economic policy attitudes, so there is no need to be flustered. However, from a tactical perspective, the market still needs to evaluate the actual impact of Trump's presidency and new policies toward China, as well as any "expectation omissions". There may be uncertainty in the initial stages of the stock market, but when the maximum risks of Trump's new policies are visible, timing for positioning will also emerge. Industry comparison: Headwinds favor large-cap values, Hong Kong stocks are an important supplement; defense counterattack during the Chinese New Year and two sessions, layout of small-cap growth at low levels. Recommendations: 1) With a decline in risk appetite, coupled with a decrease in risk-free interest rates, good relative performance in stable assets is expected: power/highways/state-owned enterprises/operators. Hong Kong stocks have released risks earlier, and the implied cash value has increased; recommending Hong Kong Internet stocks. 2) New initiatives in state-owned capital technology investments, mergers and acquisitions, and the US-China technology race, technology growth is a powerful weapon for defense counterattacks, but it is still waiting for the market to stabilize; recommendations: AI applications and terminals/semiconductors/mechanicals/cars, etc. 3) Incremental policy focus on the issuance of convertible bonds and reissues of replacement, as well as the upcoming local conferences with clear industry directions, attention on construction/computers/consumer electronics, etc. Theme recommendations: 1) Consumer electronics: "Two new" subsidies expanding combined with CES 2025, optimistic about the 3C industry chain and AI terminal products. 2) AI new infrastructure: Acceleration of the construction of the national smart computing center, optimistic about servers/power supplies/UPS/liquid cooling systems. 3) State-owned mergers and acquisitions: State-owned patient capital participates in equity investment assessments continuously optimizing, good outlook for state-owned enterprises in the technology chain for mergers and acquisitions. 4) Self-satisfying consumption: optimistic about the emotional value of snacks/pet products. Risk alert: Overseas economic recession beyond expectations, global geopolitical uncertainties.