Guosen Securities Strategy: Will there be a year-end market trend?

1. Will there be a New Year market trend? Various factors that have disturbed the market earlier are gradually easing. In our article "Chinese assets expected to recover" on November 23, we pointed out that under the impact of overseas factors, Chinese assets have adjusted their cost-effectiveness, and key factors such as the Fed's interest rate cut expectations, and the "AI bubble" suppressing global risk appetite have eased. Chinese assets are expected to recover based on their own logic. This view has been gradually verified recently: Firstly, overseas disturbances continue to ease. On one hand, the Fed's stance and economic data jointly pushed up expectations of a rate cut. Following last week's dovish statement by the local Fed chairman Williams, this week, Fed governors Waller and Milan successively supported a rate cut in December. At the same time, US retail sales in September fell below expectations, and the PPI met expectations, and the economic data released one after another also supported the rate cut. Currently, the market expects an 86% probability of a 25bp rate cut by the Fed in December, driving a resonance recovery of global risk assets. On the other hand, the impressive progress in the global AI industry continues to ease concerns about the "AI bubble". Google's full-stack layout from big models to hardware to ecosystem is leading a new round of global AI narrative and has become a core clue in the pricing of the global technology sector recently. At the same time, the domestic environment continues to provide a tailwind for the recovery of Chinese assets. Especially recently, the RMB exchange rate has accelerated to break through the 7.08 mark, hitting a new high since October 14 last year. The strengthening exchange rate and the recovery of the capital market resonate with each other. Looking ahead, as the earlier disturbances gradually pass, the market is expected to enter a new stage. Subsequently, from the perspective of calendar effects, the focus is on whether the New Year market trend can start as scheduled. The end of the year and the beginning of the year are important windows for nurturing a bullish market. The market is in a fundamental vacuum period, and factors such as important meeting windows approaching policy expectations, some years starting with reserve rate cuts and interest rate cuts at the beginning of the year, abundant liquidity, and increasing risk appetite are important factors driving the bullish market at the end of the year and the beginning of the year. Referring to historical experience, since 2008, A-shares have experienced a wave of ups and downs of varying lengths at the end of the year and the beginning of the year, looking at the starting point and catalytic factors: In terms of starting points, they mostly ranged from November to January of the following year, with the most common being just before the Spring Festival. The earliest was in 2009, which started to rise from the end of September, while the latest was in 2023, up until early February 2024. In terms of catalytic factors, they can generally be divided into three categories, and the triggering factors for the bullish market are different, leading to differences in dominant styles: 1) If the bullish market is catalyzed by improving economic fundamentals and further strengthening end-of-year growth expectations, then the pro-cyclical style often dominates (blue). This was typical in 2010-2011, 2016, and 2020; 2) If the bullish market is catalyzed by macro policies exceeding expectations or even reversed, then sectors benefiting from policies or benefiting from improved risk appetite tend to perform better (yellow). This was typical in 2008-2009, 2012, 2014, 2018, and 2022; 3) If the bullish market is catalyzed by the easing of earlier risk disturbances, ample liquidity, and other factors, then the dominant style tends to be sectors with economic advantages or industrial trends (gray). This was typical in 2013, 2017, 2019, 2021, and 2023-2024. For this round, we believe that, after the easing of previous overseas disturbances, the New Year market trend has a good foundation, so we should maintain a bullish mindset and continue to layout the recovery of Chinese assets. With the easing of previous overseas disturbances, the expectation of loose global liquidity, and the boost in risk appetite, the current New Year market trend has a solid foundation. After experiencing earlier fluctuations and digestion, as year-end meetings make a clearer deployment and orientation for the economic and industrial development of the coming year, they are expected to further consolidate market consensus and guide the main direction. Keeping a bullish mindset and continuing to layout the recovery of Chinese assets. 2. Which directions should we focus on? From a style perspective, the end of the year and the beginning of the year market trends exhibit a clear "value sets the stage, growth takes the lead" characteristic. Towards the end of the year, the market style is relatively balanced, with the main board, low valuations, and pro-cyclical styles relatively dominant, largely due to expectations of stable growth policies. As the Spring Festival approaches, until the two sessions, with ample liquidity and a fundamental vacuum period, risk appetite in the market increases, and the market style shifts towards small-cap and technology growth sectors. In terms of directions, continue to focus on the outlook for economic prosperity and layout for the New Year market trend. According to consensus forecasts, industries with high prosperity next year (predicted net profit growth rate of more than 30% in 2026) can be summarized in four trends: the AI industry trend, advantaged manufacturing industry trends, the "anti-inner-circulation" trend, and the structural recovery of domestic demand: AI industry trend: Hardware (communication equipment, components, semiconductor industry chain, consumer electronics), software applications (IT services, software development, games, advertising and marketing). Advantageous manufacturing industry: New energy industry chain (lithium batteries, lithium mines, wind power equipment, new energy vehicles), military industry (ground armaments, aerospace equipment, military electronics), machinery (Siasun Robot&Automation, machine tools), pharmaceuticals (innovative drugs). "Anti-inner-circulation" trend: Steel, building materials (cement, glass, decoration building materials, plastics), chemicals (chemical raw materials, chemical fibers, rubber), new energy (photovoltaics, silicon materials, silicon wafers), aviation airports. Structural recovery of domestic demand: Service consumption (film and television chains, education, retail, e-commerce, hotel and restaurant, tourist attractions, hospitals), new consumption (leisure food, entertainment goods), clothing and textile. With the opening window of heavy-weight year-end meetings, the pro-cyclical sector is expected to benefit more from expectations of stable growth and policy moves in the market contest. The year-end meetings are worth looking forward to for deployments such as "anti-inner-circulation", developing service consumption, increasing the residential consumption rate, and "investing in people". Emphasize directions where policies are tilted, next year's economic prospects improve, current valuations are reasonable, and valuation repair is sustainable, including "anti-inner-circulation" & rising resource prices (chemicals, building materials, steel, energy and metals, precious metals), agriculture, new consumption & service consumption (leisure food, education, travel chains, etc.). Developing technological self-reliance and new quality production capabilities are still the focus of high-quality transformation under the background of great power competition. Industry and technology are expected to continue to be the top priority in the policy orientation at the end of the year. Combined with the future Fed interest rate cuts/loose guidance, and the risk appetite boosted by the fundamental vacuum period, technology growth is still the decisive factor that will lead to a breakthrough in the current bullish trend. The AI sector values narrative changes internally and benefits from "high cuts and low positions" on the AI terminal side and software applications (media, computers, humanoid Siasun Robot&Automation, Hong Kong-listed internet companies), as well as benefits from developing sectors with upward trends next year, showing cost-effectiveness after adjustments such as innovative drugs and military industries. Risk reminder Economic data fluctuations, policy easing lower than expected, Fed interest rate cuts falling short of expectations, etc. This article was reprinted from the WeChat public account "YaoWang Market Outlook", edited by GMTEight: Chen Yufeng.