Industrial: What are the potential triggering signals for the current bullish market in A shares?

Industrial released a research report stating that from December to January, the A-share market style is usually relatively balanced, with the overall market, low valuation, and pro-cyclical styles being relatively advantageous. Behind this, on the one hand, it is related to the expectation of the stabilization policy for growth reinforcement at the end of the year; on the other hand, investment funds such as insurance funds tend to prefer large-cap and dividend styles at the end of the year and the beginning of the year. As the Spring Festival approaches, until the two sessions, it is a typical volatile window driven by liquidity and risk preferences, with small-cap and technology growth sectors clearly having an advantage. In terms of direction, continue to focus on speculative trends anchored in economic expectations. According to consensus forecasts, next year's high-prosperity industries (with forecasted net profit growth rate >30% in 2026) can be summarized into four trendlines: AI industry trends, advantage manufacturing, "anti-inward cycle", and structural recovery of domestic demand: AI industry trends: hardware (communication equipment, components, semiconductor industry chain, consumer electronics), software applications (IT services, software development, games, advertising marketing). Advantage manufacturing: 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), medicine (innovative drugs). "Anti-inward cycle": steel, building materials (cement, glass fiber, decorative building materials, plastics), chemicals (chemical raw materials, chemical fibers, rubber), new energy (photovoltaics, silicon materials and wafers), aviation airports. Structural recovery of domestic demand: service consumption (film and television theaters, education, retail, e-commerce, hotel catering, tourist attractions, hospitals), new consumption (leisure food, entertainment products), clothing and textiles. Industrial main viewpoints are as follows: I. The verification window for domestic and foreign policies comes to an end, providing a good foundation for market volatility Since December, market fluctuations have increased, reflecting the verification of a series of important events affecting liquidity and fundamental expectations both domestically and internationally. The market sentiment has been cautious and speculative. With the Federal Reserve meeting, the Central Economic Work Conference, the release of U.S. employment and inflation data this week, and the Bank of Japan's rate hike, the window for verifying domestic and foreign policies has come to a close, with the overall tone better than expected, laying a good foundation for potential volatile trends. On one hand, the recent U.S. employment and inflation data did not trigger more pessimism, but instead provided more room for the Federal Reserve to further ease monetary policy. After the Fed announced a rate cut last week, the market is still waiting for guidance on future easing from the unemployment and inflation data. However, the released U.S. November unemployment rate slightly increased, and the CPI data was significantly lower than expected, supporting the view of a soft landing. Additionally, with Trump suggesting that the next Fed chairman should support a significant rate cut, there is room for further easing. Looking ahead, after the key data verification period, a long-term narrative of easing may dominate asset pricing. On the other hand, with Japan's rate hike and the less hawkish stance, concerns about the liquidity impact of the yen carry trade have eased. Japan's interest rate hike of 25bp took place as expected, and since the market expectations were already fully priced in, and the misalignment of the U.S. dollar since the beginning of the year has significantly narrowed, concerns about the impact of the yen carry trade have not materialized. Furthermore, because Kuroda did not provide a clear path for further rate hikes, the hawkish tone was less than expected, causing the yen to depreciate after the rate hike. Looking ahead, Kuroda suggested that inflation may be weak in the first half of next year, so it may still take a few more data releases after this rate hike. It is expected that the next rate hike by the Bank of Japan will be in the first half or second half of next year. Therefore, with a series of overseas events that affect liquidity expectations coming to fruition, coupled with the continued positive and supportive policy environment following the domestic economic work conference, investor behavior is expected to transition from cautious speculation to actively seeking new opportunities, with a consensus forming to prepare for volatile trends. Looking ahead, the focus should be on exploring the potential triggers for the start of speculative trends and identifying the potential signals for the start of this round of speculative trends. II. What potential triggers could start this round of speculative trends? Based on historical experience, most speculative trends are often catalyzed by a significant event. Looking at the timing and triggering factors, they can generally be categorized into three types: Launch in November (highlighted in yellow): Requires a clear shift in macroeconomic policy, typical years include 2008, 2014, 2022; Launch in December (highlighted in red): The market has performed relatively well since the beginning of the year, but disturbances have occurred toward the end of the year, and after these disturbances subside, the speculative trend begins, typical years include 2017, 2019, 2020; Launch in January-February (highlighted in blue): Historical speculative trends often start at this time. This round of speculative trends seems to fit into the second category, where the market has performed relatively well since the beginning of the year, with speculative activity picking up after disturbances near the end of the year subside. Examining the factors that led to the start of speculative trends in 2017, 2019, and 2020: 2017: The speculative trend started with the "limited edition reserve cut" before the Chinese New Year. In November and December, new regulations on asset management, liquidity management by banks, and deleveraging policies, as well as factors like the synchronized rate hikes by China and the U.S., continued to disrupt the market. On December 29th, the central bank established a "temporary reserve release arrangement", interpreted by the market as a "limited edition reserve cut for the Chinese New Year", serving as the signal to start the speculative trend. In the next year, as PMI and GDP data confirmed stable fundamentals domestically and the Fed kept the policy unchanged, the renminbi appreciated with support from the stable fundamentals, and the "temporary reserve release arrangement" combined with the targeted reserve cut at the end of January resulted in ample liquidity, leading to an "11-day bull run" in the A-share market. 2019: The speculative trend was initiated by easing tensions in the U.S.-China trade war. In November, consecutive drops in overseas PMI escalated global recession fears, while rising CPI domestically constrained monetary easing. The announcement of the allocation of a trillion yuan in additional special bond quotas by the Ministry of Finance on November 27th, along with the manufacturing PMI rising back above 50% in November, alleviated concerns about the deteriorating fundamentals, stabilizing the market and causing a rebound. On December 13th, China and the U.S. reached an agreement on the text of the "phase one economic and trade agreement", officially kickstarting the speculative trend. With the release of positive policy signals from important meetings in December, the revised draft of the new securities law at the end of December, and the reserve cut at the beginning of 2020, the speculative trend continued. 2020: The uncertainty abroad was laid to rest, setting the stage for the speculative trend, with record issuance of public funds driving the market to a climax. In October, the country emphasized "managing the total gate of monetary supply", another round of the international epidemic, and the U.S. election entering the final sprint phase, all restraining market risk appetite. Since November, with Biden's confirmation victory, progress in vaccine development, and other positive news, uncertainty abroad subsided, boosting market risk appetite; domestic economic recovery continued, policies remained unchanged, and monetary policy gradually shifted towards easing. In January of the following year, with a "baseline" set for economic, policy, and risk appetite, the massive issuance of public funds provided ample liquidity in the market, fueling the speculative trend to a climax. Firstly, why do years that show relatively strong performance at the beginning of the year typically precede the start of speculative trends? In addition to "sentiment among the people," we summarize three important factors: 1) year-end meetings with a proactive policy stance support risk appetite; 2) stable and improving economic fundamentals, with no significant disruptions in economic data or corporate profit forecasts; 3) ample liquidity from loose monetary policies, supporting market gains. Looking at the current situation, the favorable conditions mentioned above are already evident: 1) the economic work conference has continued the positive tone of expansion from last year; 2) data is expected to continue confirming the improvement in domestic fundamentals: on a macro level, the end of the year and beginning of the year are key periods for confirming the upward trend in PPI; at the micro level, Beijing's earnings expectations are still being revised upward, and after a weak fourth quarter last year, the pressure to verify this year's annual report performance forecasts is not significant; 3) domestic macro liquidity is ample, allowing for the possibility of reserve cuts and interest rate cuts, and at the micro level, the return of margin financing, the opening of the insurance capital "curtain," and the acceleration of household "deposits moving" all support market liquidity. Secondly, what key events could serve as the signal to start the speculative trend? Summarizing, there are three main types: 1) the resolution of previous uncertainties that have suppressed the market is the foundation for starting a speculative trend; 2) catalytic events like reserve cuts and interest rate cuts can effectively trigger speculative trends; 3) validation through key data of the positive fundamentals, driving increased willingness to invest, is crucial for the continuity of the speculative trend. Looking at the current situation, with a series of overseas uncertainties that have restrained the market now being resolved, the focus shifts to identifying the next signal that could effectively start the speculative trend, including: 1) the possibility of reserve cuts and interest rate cuts at the end of the year, with the first observation window next week and the second in January; 2) the improvement in basic economic expectations validated by key data, including PPI, PMI, M1, social financing loans, and earnings forecasts by listed companies. III. How to grasp the pace of allocation? What directions should be focused on? In terms of allocation pacing, as we have previously summarized, the style at the end of the year and the beginning of the year typically shows a prominent "value sets the stage, growth steals the show" characteristic. From December to January, the market style is usually relatively balanced, with large-cap, low valuation, and pro-cyclical styles being relatively advantageous. This is related to the expectation of additional growth stabilization policies at the end of the year, as stability policies may also be activated at the beginning of the year to create an early boost for the economy. Additionally, main funds like insurance assets favor large-cap and dividend styles at the end of the year and the beginning of the year. As the Spring Festival approaches, until the two sessions, it is a typical volatile window driven by liquidity and risk preferences, with small-cap and technology growth sectors having a clear advantage. In terms of direction, continue to focus on speculative trends anchored in economic expectations. According to consensus forecasts, next year's high-prosperity industries (with forecasted net profit growth rate >30% in 2026) can be summarized into four trendlines: AI industry trends, advantage manufacturing, "anti-inward cycle", and structural recovery of domestic demand: AI industry trends: hardware (communication equipment, components, semiconductor industry chain, consumer electronics), software applications (IT services, software development, games, advertising marketing). Advantage manufacturing: 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), medicine (innovative drugs). "Anti-inward cycle": steel, building materials (cement, glass fiber, decorative building materials, plastics), chemicals (chemical raw materials, chemical fibers, rubber), new energy (photovoltaics, silicon materials and wafers), aviation airports. Structural recovery of domestic demand: service consumption (film and television theaters, education, retail, e-commerce, hotel catering, tourist attractions, hospitals), new consumption (leisure food, entertainment products), clothing and textiles. On one hand, the economic work conference's deployment of key tasks such as "anti-inward cycle", service consumption, and investment stabilization provides a positive valuation recovery environment for pro-cyclical sectors. Focus on the "anti-inward cycle" & rising commodity sector (chemicals, steel, non-ferrous metals) that benefit from overseas easing and the expected rise in domestic PPI; consumption sectors with strong potential for demand recovery, policy support, and expectations of turnaround, such as new consumption& service consumption (retail, leisure food, education, travel, etc.), agricultural, and the resilience of non-banking sectors during speculative trends. On the other hand, technology growth is expected to be the winner in this round of speculative trends. The gradual return of a conducive environment for technology growth sectors, supported by improved overseas liquidity expectations and increased risk appetite domestically, is conducive to the allocation in this sector. If speculative signals become clearer, the upward potential of this sector is expected to further open up. Following the previous surge in optical communication, the focus is now on the domestic semiconductor industry chain (leading domestic chip manufacturers benefiting from domestic substitution, upstream equipment material industry chain benefiting from expansion and the listing of Changxin, and domestic memory chip manufacturers catalyzed by overseas storage performance exceeding expectations), AI edge and software applications (robotics companies, games, Hong Kong-listed internet companies, software); in the favorable environment of overseas easing, the time is ripe for innovative pharmaceuticals; the trend of commercial aerospace continues to provide flexibility for military industries to rise. In summary, the favorable conditions mentioned above provide a good foundation for the allocation of speculative trends. With the expected signals and directions for speculative trends becoming clearer, investors should pay close attention to opportunities arising from these trends and adjust their strategies accordingly.