Huaxi: What necessary conditions are needed to initiate the "spring excitement" market trend?

Huaxi released a research report stating that, in reviewing history, the start of the "spring frenzy" market rally in A-shares typically requires the following conditions to be met: a reasonable valuation level, a loose liquidity environment, and catalysts that effectively boost risk appetite, such as domestic policies, industrial events, or external risk mitigation. Currently, the overseas Federal Reserve rate cut and the Bank of Japan rate hike have both been implemented, easing concerns about arbitrage trading reversal, and the market can also look forward to increased foreign investment driven by the appreciation of the renminbi and incremental insurance funds entering the market due to the strong premium income at the beginning of the year. Recently, stock ETFs have seen large-scale net inflows, with several broad-based ETFs experiencing high trading volumes, indicating a tendency for incremental funds to take advantage of buying opportunities. The main points of Huaxi are as follows: Market Review: This week, global stock indices mostly fell, with the Korea Composite Index, Hang Seng Tech, and Nikkei 225 leading the decline. A-share trading volume once again decreased, with the daily average turnover of the entire A-share market falling to around 1.76 trillion yuan, indicating a cautious market sentiment. The ChiNext 50 and ChiNext indexes led the declines among major indices, with capital rotating into dividend-paying sectors. In terms of style, the financial and consumer sectors rose, while growth stocks declined, with the electronics and electrical equipment indexes falling by over 3%. In terms of commodities, COMEX silver surged by 8.7%, while copper and aluminum prices fluctuated upwards, with coke bottoming out. In the foreign exchange market, after the Bank of Japan's rate hike, the yen depreciated against the dollar, while the renminbi continued its appreciation trend against the dollar. I. Reviewing history, except for 2021 and 2022, the A-share market has often experienced a "spring frenzy" calendar effect in the past decade. Towards the end of the year and the beginning of a new year, A-shares are in a "vacuum period" in terms of economic data and the financial reports of listed companies, making the market prone to thematic investments based on policy expectations and industry trends. In the past decade since 2016, there have been 8 instances of "spring frenzy" market rallies in A-shares. Generally, these rallies start in December to January and last for 20-60 trading days. II. The experiences of 2021 and 2022 show that the "spring frenzy" in A-shares is not a certainty, as high valuations combined with external shocks can lead to the absence of a spring rally. For example, at the beginning of 2021, the A-share market was at historically high valuation levels, and the post-pandemic inflation cloud prompted central banks around the world to start hiking interest rates, with the rising US bond yields triggering adjustments in core assets; at the beginning of 2022, A-share market valuations were historically high again, with increasing expectations of a rate hike by the overseas Federal Reserve, a jump in US bond yields causing liquidity concerns, and the outbreak of the Russia-Ukraine conflict impacting global risk appetite, leading to a simultaneous decline in US and A-shares. III. Looking back, what are the necessary conditions for the start of a "spring frenzy" rally? 1) Reasonable market valuation range, as the elasticity of a rally is highly related to the market valuation level. In the years with the largest index gains during the spring frenzy in the past decade, the market had undergone sufficient adjustments before the rally. For example, at the beginning of 2016, the circuit breaker triggered a liquidity shock, leading to a sharp drop in major A-share indexes; at the beginning of 2019, after a previous decline, the Shanghai and Shenzhen 300 indexes had a price-to-earnings ratio of only 10 times; in early February 2024, products like Snowball and Quantitative caused a liquidity shock in the market, bringing the Shanghai and Shenzhen 300 index's price-to-earnings ratio back to around 10 times. 2) Maintaining loose liquidity environment with inflow of incremental funds. For example, the targeted reserve requirement reduction by the central bank at the beginning of 2018, the comprehensive reserve requirement reduction by the central bank at the beginning of 2019 and 2020 maintaining macro liquidity abundance. In early 2023, there was a significant influx of foreign capital, while in early 2025, regulatory efforts aimed to bring long-term funds into the market. 3) Catalysts from domestic policies, industrial events, or external risk mitigation to drive up risk appetite. For example, at the beginning of 2016, reforms on the supply side, at the beginning of 2019, phased progress in US-China trade negotiations, in January 2020, the signing of the first phase economic and trade agreement between China and the US, at the end of 2022, optimization of epidemic prevention policies and the "three arrows" in the real estate sector, in February 2024, LPR cutting rates beyond expectations, and at the beginning of 2025, domestic trends in DeepSeek, Siasun Robot&Automation and other industries acted as catalysts. IV. Positive conditions for a "spring frenzy" are accumulating, suggesting a low position as the main strategy. 1) From the perspective of overseas liquidity, the dovish rate hike by the Bank of Japan has been implemented, weakening the yen against the dollar, relieving pressure from the reversal of arbitrage trades; the Fed's dovish rate cut in December, with the subsequent rate cut path highly tied to the change in Fed leadership, market expectations are still leaning towards loose monetary policy by the Fed; 2) From the perspective of domestic liquidity, the Central Economic Work Conference set the tone for "continuing to implement moderately loose monetary policy," signifying that there is still room for domestic cuts in reserve requirements and interest rates; 3) In terms of micro-liquidity, stock ETFs saw significant net inflows again this week, with several broad-based ETFs experiencing high trading volumes, boosting market sentiment. Expectations for increased foreign investment due to the appreciation of the renminbi and incremental insurance funds entering the market driven by strong premium income at the beginning of the year; 4) Valuation-wise, the Shanghai and Shenzhen 300 price-to-earnings ratio is at 14 times, which is at the 76th percentile since 2010 and lower than the historical median +1 standard deviation; 5) From a policy perspective, the Central Economic Work Conference has laid a positive tone, and as 2026 marks the start of the "14th Five-Year Plan", incremental policies in areas such as technology innovation, anti-industrial hollowing, and expanding domestic demand are expected to continue. In terms of industry allocation, it is recommended to focus on: 1) growth directions supported by industrial policies, such as domestic substitution, Siasun Robot&Automation, aerospace, innovative drugs, energy storage, etc.; 2) cyclical directions benefiting from the "anti-industrial hollowing" policy, such as chemicals, energy metals, and resource products; 3) opportunities for consumer sectors brought about by the deepening of consumption policies. Risk Warning: Unexpected fluctuations in the global economy, policies not meeting expectations, risks in overseas liquidity, geopolitical risks, etc.