CMSCA March view: The market will see a "change in offense and defense" and focus on whether consumer policies will exceed expectations.

CMSC released a research report stating that in March, the market is experiencing a "defensive to offensive shift". The classic spring offensive in mid to late March is expected to continue, with risk appetite likely to be maintained in early to mid-March during the two sessions period, focusing on policy initiatives and investments related to the ShenZhen New Industries Biomedical Engineering trend. However, towards the end of March, attention should be paid to the adjustment of sectors lacking performance support due to the impact of the earnings disclosure period. After mid to late March, attention should shift to trading based on economic fundamentals and expectations for annual and first-quarter earnings, focusing on sectors and entities with stable or marginally improving performance and continuous improvement in free cash flow. Of particular importance is whether consumer policies will exceed expectations, as well as the trend of improving free cash flow in the consumer sector. Consumer sectors may be a relatively good choice during the earnings disclosure period from mid to late March to April. CMSC's main points are as follows: Market outlook and core logic: Defensive to offensive shift, rise of consumer sector. Looking ahead to March, the market may experience a classic defensive to offensive shift during the months of March and April. The classic spring offensive in mid to late March is expected to continue, with the policies set during the March sessions affecting economic data targets and subsequent policies likely to be accelerated. The economy is expected to remain stable or weakly recover. Government financing growth remained high in January and February, indicating further fiscal expenditure efforts. Total demand is expected to remain stable. Looking at industrial land usage and corporate mid to long-term social financing in January and February, overall corporate capital expenditure remains weak, signaling a continuous improvement in supply-demand relationships and improved corporate free cash flow. After reaching a key penetration rate in the AI+ sector, with increased capital expenditures from major companies, AI+ is transitioning from a thematic concept to an accelerated trend phase, gradually generating revenue and profits. In March, new products related to AI+ consumer electronics are expected to continue to be released, leading to market activity. However, towards the end of March, attention should be paid to adjustments in the AI+ sector due to lack of performance support during the earnings disclosure period. Currently, individual investors remain active, and financing balances continue to rise, becoming the main incremental fund in the market. After mid to late March, attention should also be given to adjustments caused by a temporary decline in financing balances during the adjustment period. Therefore, March presents a situation of defensive to offensive shift, focus on thematic directions in early to mid-March, especially in AI applications. After mid to late March, focus should shift to sectors and entities with stable or marginally improving performance and continuous improvement in free cash flow. Particularly important is tracking whether consumer policies exceed expectations, as well as the trend of improving free cash flow in the consumer sector. During the earnings disclosure period from mid to late March to April, the consumer sector may be a relatively better choice during this period. Investment Style and Industry Allocation Strategy: In terms of investment style, considering factors such as the convening of the two sessions, earnings disclosure, external tariff risk, changes in the expected rate cut by the Fed, and changes in the funding environment, the market style in March is expected to temporarily return to equilibrium, with a possible focus on small cap growth before value dividends, corresponding to indices such as the CSI 1000 and the SSE 300 dividends. At the industry selection level, looking ahead to March, the market is still in a relative vacuum period in terms of performance and mid-term fundamentals, and the evolution process of the spring market and clues to the recovery of specific industries will be important factors affecting industry allocation in March. Taking into account previous performance, valuation, trading activity, changes in sentiment, policy, and event catalysts, the recommendation is to focus on areas with sustained growth in the AI+ sector and marginal improvement in undervalued consumer sectors, particularly in industries such as electronics (consumer electronics, semiconductors), machinery (construction machinery, automation equipment), automotive (automotive parts, passenger cars), pharmaceuticals and biotechnology (medical services), food and beverages, and home appliances. In terms of race selection, the focus in March shall be on five main areas with marginal improvement: AI chips, AI+ applications, solid state batteries, humanoid Siasun Robot & Automation, and optoelectronic modules. Liquidity and supply-demand dynamics: Incremental funds in March may return to ETFs. In February, the central bank was cautious in injecting liquidity, with a significant increase in interbank funding rates, leading to tight liquidity in the money market. Overseas factors indicate a slowdown in the US economy, with the service sector PMI shrinking in January, unexpected cooling in the job market, and a slowdown in real estate sales. However, the PCE data for January met expectations, easing market inflation concerns, and raising expectations for a Fed rate cut, with a probability of a rate cut in June rising to 80%. In terms of stock market supply and demand, stock market tracking funds saw a net inflow, with a significant net inflow of financing funds becoming the main incremental fund after the improvement in risk appetite, while ETFs turned to net redemptions. Looking ahead to March 2025, the net inflow of financing is expected to decrease, and ETFs may be purchased on dips, transitioning to net purchases, overall balance of incremental funds may be relatively balanced. Medium-term economic and industry recommendations: Focus on the evolution and recovery of the spring market. In terms of profit, analysts have revised upward earnings expectations for 2024 over the past month, while the earnings growth rate for the entire A sector in 2025 has been slightly reduced to 12.2%. Comparing profit expectations for 2024 and 2025, the electronics, commerce and retail, automotive, and home appliances sectors are expected to continue to see higher earnings growth rates, while the computer, power equipment, building materials, media, and defense industries are expected to see a turnaround in fortunes. In terms of economic conditions, high economic areas in February were mainly concentrated in the consumer services, information technology, and financial and real estate sectors, with most industrial metal prices in the resources sector rising, and prices in the midstream manufacturing sector of some new energy and photovoltaic industries showing an upward trend. Looking ahead to March, the market is still in a relative vacuum period in terms of performance and mid-term fundamentals, and the evolution process of the spring market and clues to the recovery in specific industries will be important factors affecting industry allocation in March. On one hand, compared to the evolution of the spring market over the past 15 years, there are differences in terms of the duration and magnitude of the current market rally, taking into consideration the increase in capital expenditure by domestic cloud computing and internet giants, and the catalyzation of policies in the AI and Siasun Robot & Automation sectors. In the short term, recommendations are focused on areas that have seen a significant increase but have not yet shown significant improvements in valuation percentile.Areas with high bias. On the other hand, pay attention to the areas of economic recovery. Combining the above suggestions, focus on the AI+ areas where the economy continues to improve, as well as the marginal improvement in undervalued consumer areas. Key industries to focus on include electronics (consumer electronics, semiconductors), machinery (engineering machinery, automation equipment), automobiles (automobile parts, passenger cars), pharmaceuticals and biotechnology (medical services), food and beverages, and household appliances.Track and industry trend investment: Internet giants increase capital expenditures, AI arms race accelerates. Alibaba's increase in capital expenditures is not unique. Previously, overseas tech giants such as Microsoft, Meta, Amazon, Google, etc., have all stated in their latest financial report conference calls that they will increase capital expenditures in AI sectors by the fiscal year 2025. Microsoft is expected to invest around $80 billion in the fiscal year 2025 to build artificial intelligence data centers; Amazon expects to have a total capital support of $75 billion in 2024, and will increase funding in 2025, mainly for the construction of the AWS cloud platform; Meta stated that capital expenditure investment in 2025 will exceed the $38-40 billion capital expenditure in 2024, primarily for server investments. Building data centers and network infrastructure. Focusing on domestic tech giants, Alibaba stated in its latest financial report conference call that its capital expenditure is clear, including AI cloud computing infrastructure, domestic computing chip purchases, data center expansion, etc. Domestic top internet companies such as ByteDance and Tencent have significantly increased their AI-related budgets, starting a new round of "AI and computing power arms race". Tencent is expected to increase its capital expenditure to around 50 billion RMB in 2024, doubling compared to the previous year. ByteDance expects its annual capital expenditure to be between 80-90 billion RMB. February important policy summary: According to incomplete statistics, there are around 123 important policies in February. Specifically, 1) In terms of total policies, the total policies in February mainly revolve around promoting consumption, with policies promoting consumption being intensively released in Shanghai, Shenzhen, Anhui, and other places. 2) In terms of the business environment, the main focus is on stabilizing foreign investment, with the State Council issuing a plan to stabilize foreign investment, and the Financial Regulatory Bureau clarifying that Hong Kong and Macao banks can begin bank card operations on the mainland. 3) In terms of the capital market, policies mainly focus on insurance fund investments in gold and financial regulatory reforms. 4) In terms of industrial policies, policies related to rectifying the internal market, new quality productivity, and data elements are worth paying attention to, with rectifying the internal market policies mainly focusing on the photovoltaic industry and corporate anti-monopoly efforts, and new quality productivity policies mainly focusing on artificial intelligence, low-altitude economy, and brain-machine interfaces. Risk warning: Incomplete understanding of policies, economic data falling short of expectations, overseas policies tightening beyond expectations.