Haitong: How to find the leading industry in the A-share market in the spring?

The market has been noticeably active after the Spring Festival, and the stock market welcomed the Year of the Snake with a good start this week led by the concept of AI. Market sentiment has also improved, with the total turnover of the entire A-share market reaching nearly 2 trillion on Friday, signaling the beginning of the anticipated spring market. So what are the historical patterns of industry performance in spring markets? Which industries are worth paying attention to in this year's spring market? This article analyzes these questions. The spring market happens every year, with greater gains in bull markets. The spring market is a classic "calendar effect" in the A-share market. Investors are always looking forward to the spring market at the end of the year and the beginning of the new year. Although 2025 started weak in the A-share market, some investors are doubtful about whether there will be a spring market this year. In fact, historically, there has been a spring market every year, with even greater gains during bull markets. Looking at the performance of the A-share market since 2005, spring markets have occurred every year, but the timing and magnitude of the gains vary. In terms of timing, the start of the market is related to the performance of the market in the last three or four quarters of the previous year: if the market was weak in the last three quarters, the spring market tends to start early, as early as mid-November of the previous year, as seen in 2006, 2008, 2013, 2020, and 2023; if the market was strong in the last three quarters, the spring market tends to start later, in mid to late January or even early February, as seen in 2005, 2007, 2010, 2011, 2014, 2015, 2016, 2017; in other years, the market tends to start around New Year's Day. In terms of gains, the spring market during bull markets has higher returns. If we look at the performance of the Shanghai Composite Index, the spring markets in the last eight years of bull markets, from 2006-2007, 2009, 2014-2015, and 2019-2021 had an average duration of 52 trading days, with an average maximum gain of 29.8%; while in the other years, the spring market had an average duration of 36 trading days, with an average maximum gain of 11.7%. It is evident that during bull markets, the spring market lasts longer and the upward potential is significantly higher than during non-bull market periods. Policy catalysts, loose liquidity, and fundamental improvements are the driving factors of the spring market. The initiation of the spring market in history has been the result of multiple catalysts, specifically: 1) Policy catalysis boosts market sentiment and promotes the spring market. As important conferences are held at the end of the year and the beginning of the new year, positive policies often boost market risk appetite. For example, in 2008, the "four trillion" plan, the reform of the Third Plenary Session of the 18th Central Committee in 2013, the "mass entrepreneurship and innovation" in 2014, the supply-side reform in 2016, and the stock market policies in 2019 all significantly boosted market sentiment and initiated the spring market. 2) Loose liquidity often directly triggers the start of the spring market. At the beginning of the year, there is a peak in credit issuance and a decrease in funding rates, leading to relatively loose macro liquidity. For example, in 2006, 2009, 2012, 2015, 2016, 2019, and 2020-2024, liquidity was relatively loose. In 2012 and 2015, despite fundamental data declining in two rounds of rallies, improved liquidity was crucial for market initiation. 3) Improvement in macroeconomic fundamentals is an important condition for the spring market. During the spring season, when there is a vacuum in earnings, high-frequency macro data plays an important role in guiding the A-share market. At this time, the improvement in macroeconomic fundamentals often helps initiate the market. For example, at the beginning of 2009, 2016, 2019, and 2023, under the force of countercyclical policies, the macroeconomic fundamentals stabilized and improved, while in early 2007, 2010, 2017, and 2021, the macroeconomic fundamentals continued to improve, providing support for the spring market. There is no universal pattern for leading industries in the spring market, but they benefit from policy or industry factors at the time. Looking back at the spring markets from 2005 to the present, there is no consistent pattern in leading industries. First, there is no clear industry pattern in terms of frequency of industries with the highest gains in the spring market. Second, there is no significant relationship between the performance of industries in the spring market and their performance in the previous year. In the past 20 years, among the top three industries in terms of gains in the spring market, about four-fifths were industries ranking in the top half of gains or losses in the previous year, while the remaining were industries ranking in the lower half. Industries that lead in gains in the spring market often benefit from positive catalysts at the policy, fundamental, or industry levels. Firstly, each year the National People's Congress and the Chinese People's Political Consultative Conference are held in March, so sectors that benefit from policies are often the focus of the market, and industries that benefit from policy initiatives tend to perform well in the spring market. For example, in early 2006, the State-owned Assets Supervision and Administration Commission announced that it would accelerate the reform of large state-owned enterprises, boosting the banking (33.6%) and non-banking (29.9%) sectors in the spring market. Similarly, the approval in early 2009 of restructuring and revitalization plans for the automotive and steel industries, combined with the gradual implementation of the "four trillion" investment plan from 2008, led to strong gains in the upstream non-ferrous metals (63%) and automotive manufacturing (47%) industries. Secondly, stock price movements are determined by fundamentals, and sectors with stronger fundamental trends in previous years tend to perform better in the spring market. For example, in early 2007, China's exports continued to grow rapidly, with year-on-year growth rates of 33.4% and 51.8% in January and February, respectively, in USD terms; the textile industry's export index also rose by 12% and 56.7%, respectively. A favorable fundamental environment, driven by strong export performance, led to strong gains in the textile and apparel sector in the spring market of 2007. Also, in early 2021, rapid growth in sales of new energy vehicles and a sharp increase in the penetration rate of new energy vehicles led to year-on-year growth rates of 51.8% and 286.4% in December 2020 and January 2021, respectively. During the spring market at that time, the electrical and new energy sectors saw gains of 30.5%. Thirdly, industries that are catalyzed at the industry level also perform well in the spring market. For example, at the beginning of 2024, the trend in the technology industry continued to rise, with OpenAI releasing the Sora video generation model, signaling the vigorous development of generative AI technology. With favorable industry conditions, the computer (31.7%), communication (30.6%), and media (29.5%) sectors were among the top gainers in the spring market of early 2024. The spring market in the A-share market in 2025 is likely underway. As we have analyzed earlier, the spring market in the A-share market occurs every year, mainly driven by three factors: policy catalysts, loose liquidity, and fundamental improvements. Looking at the current market environment, the driving factors for the launch of the spring market are gradually coming into place: in terms of policy, the Central Economic Work Conference in 2024 clearly stated the goals for 2025.In the coming year, a "more proactive macro policy" will be implemented. The State Council meeting on February 5 proposed to "dare to break the routine and introduce policies and measures that are tangible and timely to respond to concerns and strengthen the interaction between policy and market". The policy is expected to be further enhanced. In terms of liquidity, the Implementation Plan for promoting the entry of medium and long-term funds into the market released at the end of January is another major measure to implement the policy of "stabilizing the real estate and stock markets". We believe that the trend of medium and long-term funds entering the market will be further consolidated. In terms of fundamentals, with the continued effectiveness of a package of incremental policies, corporate profits have improved significantly. In December, the year-on-year growth rate of industrial enterprise profits increased for the third consecutive month, from -7.3% in November to a substantial increase to 11.0%. In addition, consumer spending during the Spring Festival period has shown stable growth. According to the Ministry of Culture and Tourism, total domestic spending on domestic travel during the Spring Festival holiday reached 677.02 billion yuan, a year-on-year increase of 7.0%. Looking ahead to the year 2025, we believe that with the implementation of incremental policies, the macro and micro fundamental conditions are expected to accelerate repair, and the A-share net profit growth rate is expected to reach 5%-10%.In addition, from the perspective of the overall market background, we judge that since September 24th last year, this round of market trends is a reversal rather than a rebound, combining the shift in policy direction, the bull-bear cycle law, and the bottoming out of market sentiment. The adjustments since October 8th have been the retracement after the first wave of bull market rise, and compared with history, the timing of the adjustment is significant. With the implementation of countercyclical policies improving the fundamentals and the improvement in funding due to the allocation of funds by residents and long-term institutional investors, A shares are expected to usher in a new round of uptrend. In conclusion, we believe that this market trend since September 24th last year is the first wave of bottoming out driven by policies rather than a rebound, marking an important turning point in the market bull-bear transition, under which the gains in the spring market may be more considerable. In the spring market, focus on the technology sector with industry trends trending upwards under the AI wave. As mentioned earlier, current policy catalyzation, improved liquidity, and fundamental recovery have provided strong support for the spring market. Correspondingly, sectors that show positive catalysts in terms of policy, fundamentals, or industry trends are likely to perform better. Looking at the present, the recent deployment of the DeepSeek large model may accelerate the application of AI, garnering widespread market attention. Therefore, we believe that as the spring market unfolds, it is important to focus on sectors where AI and other industry trends receive positive catalysts. With the double boost of policy and technology coupled with the industry trend moving upwards, the technology sector is expected to have an advantage. Currently, China is in a period of transition between old and new sources of growth, and leading industrial restructuring through technological innovation is crucial. We expect the technology industry to continue to be a focus of policy support. Meanwhile, the technology industry is in a new upward cycle, with new generation information technologies like AI rapidly being deployed in various fields. On January 20th, DeepSeek officially released the inference large model DeepSeek-R1, with performance on tasks like mathematics, coding, and natural language inference comparable to OpenAI's official version o1. With policy and technological double catalysts, the fundamentals of the technology sector are expected to improve. According to Hai Tong industry analysts, the net profit growth of the electronics sector is expected to be 30%/35% in the years 2024 and 2025, communications sector 20%/30%, and computers -5%/15%. In technology, it may be beneficial to focus on areas like consumer electronics, autonomous driving, and humanoid robots like Siasun Robot&Automation. According to data cited by the Mid-market Industry Research Institute from Markets and Markets, the compound annual growth rate of the global humanoid robot and automation market from 2024-2028 is 50%. Additionally, with fiscal measures expected to be active in 2025, areas like digital infrastructure, creative technology, and semiconductors may receive significant support, benefiting these sectors. Mid- to high-end manufacturing has support from both domestic and foreign demand, with clear supply advantages and a promising outlook. Currently, China's high-end manufacturing sector benefits from industry clusters, skilled engineers, and technical expertise, with support coming from both domestic and global demand. On the external demand front, emerging countries have strong demand and high reliance on China, potentially increasing the export volume of high-end manufacturing goods. On the domestic demand side, the policy of replacing old consumption with new in 2025 is expected to expand and benefit sectors like durable consumer goods including household appliances. Pay attention to real estate and consumption pharmaceuticals that may have significant expectations under intensified policies. Since the peak in April 2019, real estate has experienced the largest decline of 65.5%, with nearly 5 years of continuous adjustment; the consumption sector has been adjusting for nearly 4 years since February 2021, with the food and beverage sector experiencing a maximum decline of 58.8%, and pharmaceuticals 55.3%. Currently, the valuations and fund allocations of industries like real estate and food and pharmaceutical consumption are at historically low levels. Recently, consumption and real estate have been the focus of policy attention, and under policy support, the fundamentals of real estate and consumption pharmaceuticals are expected to see more positive changes or have significant expectations. Pharmaceutical consumption: With balance sheet repair and fiscal policy promotion, pharmaceutical consumption is expected to see improved fundamentals. The Central Economic Work Conference prioritizes boosting consumption and expanding domestic demand for 2025, proposing to "enhance and expand the implementation of the 'two new' policy." According to Hai Tong's macro calculations, if the 2025 consumption "old-for-new" subsidy is expanded to 300 billion RMB, it could increase the growth rate of social zero sales by 0.9-1.2 percentage points. In addition, efforts to increase incomes and reduce the burden on low- and middle-income groups are also expected to be a policy priority, with income growth expected to rebound under policy support, potentially unleashing greater consumption potential. Real estate: Under intensified policies, the real estate market is expected to "stabilize after stopping the decline." Since September 24, 2024, there have been frequent real estate policy measures, with the September 24, 2024 Political Bureau meeting calling for efforts to "stabilize the real estate market after stopping the decline," and the December Central Economic Work Conference proposing to "stabilize the real estate and stock markets." With a combination of policy measures on both the demand and supply sides in real estate, positive signals have already appeared in the sector's fundamentals: in December 2024, among 70 large and medium-sized cities, first-tier cities saw a month-on-month increase in sales prices of residential properties, while overall price declines in second- and third-tier cities narrowed both month-on-month and year-on-year. This article is reproduced from the "Haitong Research Strategies" WeChat public account; GMTEight editor: Huang Xiaodong.