Shenwan Hongyuan Group: How do you view the sustainability of the small and micro disk style?

1. Methodology for the dominance of small and micro-caps: Looking at the probability of small business growth from a fundamental perspective, liquidity looks at the difference between M1 and M2 and interest rates, and during investment timing, investing in small caps is advantageous during overheated periods. From the perspective of investor structure, private placements and quantitative strategies have a relative advantage, favoring small-cap styles. In 2024, the denominator supports the dominance of small-cap styles, but the fundamentals still lack effective support. The small-cap style will have recurring trends, but it is necessary to avoid the fundamental verification period and pay attention to the impact of policy changes after the odds decrease. In the short term, after the oversold rebound trend reaches its full potential, the spring market frenzy continues. The sustainability of the small-cap growth style, how should we view it? We discuss this from the perspective of style research methodology. We mainly focus on three aspects when discussing style issues: 1. Fundamentals (relative performance trends), 2. Liquidity environment, 3. Investor structure. For the small-cap style: 1. The key fundamental indicator is the "speed of small business growth" (the marginal change in the revenue share of small-cap stocks), which corresponds to large movements in small-cap stocks outperforming the market. From the perspective of asset allocation, investing during overheated periods is a window for small-cap stocks to outperform. Since 2020, the overall speed of small business growth has been around 0, and the overall revenue growth of small and micro-enterprises has not shown an advantage relative to large enterprises. The speed of small business growth in the TMT industry is all below zero. At the current stage, the fundamental support for the small-cap style is not strong, especially for small-cap growth styles and thematic opportunities, the fundamental support is weak. 2. In terms of liquidity, the relative returns of the small and micro-caps are generally negatively correlated with the yield of Chinese 10-year government bonds. In the context of an asset shortage in 2024, the downward trend in risk-free rates is beneficial for the revaluation of high-dividend assets and for the small and micro-cap styles to interpret the market rally through thematic catalysts. 3. Changes in the relative strength of investors affect styles, for small and micro-caps, the key pricing funds are trading funds and quantitative funds. Here, we measure the influence of such funds by the ratio of the outstanding balance of financing to the market value of tradable A-shares. Since 2022, the market influence of trading funds has increased, generally corresponding to small and micro-caps outperforming relative returns. However, at the current stage, quantitative funds are under close regulatory scrutiny. Overall, the denominator environment in 2024 is favorable for the small-cap style, but the fundamental support remains weak, the speed of small business growth may still be relatively low, and there may be multiple policy changes on the supply and demand side. The investment opportunities in small and micro-caps in 2024 will continue to ferment, but the importance of timing and fundamental verification is weak, entering a stage where new thematic clues are fermenting. The possibility of policy changes is objective, and when the profit effect has already manifested and the odds are declining, it is necessary to consider more risk factors. 2. The oversold rebound of simultaneous rise has ended, with the small-cap growth leading the continued frenzy of the spring market. The market has reached this stage of interpretation, and attention should be paid to two calendar effects: 1. It is a consensus that there is insufficient upward elasticity in the policy effects, and the trading policy catalyzes the model of "buying expectations, selling realization" is likely to remain unchanged. 2. February is the window where the spring market is most likely to ferment, while April is the most valuable window for A-shares. The spring market frenzy will eventually come to a verification period. In our weekly review and outlook report "The Combination of Short-term Market is the Oversold Rebound and the Spring Market Frenzy" released on February 24, we discussed that the simultaneous rise of the oversold rebound is coming to an end, and the focus is now on the interpretation of the spring market frenzy. This week, with the small-cap growth style leading the way, the spring market frenzy continues. At this stage of the market, we emphasize that there are two calendar effects worth noting in the short term: 1. In a situation where the market has a general perception of insufficient upward elasticity in the Chinese economy, market expectations for trading policies may still be "buying expectations, selling realization," and after the key policy catalyzes landing, if the market wants the rally to continue, it may need to see effective verification of policy effects. 2. February is historically the time window where the spring market is most likely to ferment. Various thematic trends, active small-cap stocks, and unverifiable optimistic economic expectations are all likely to ferment in February. While April is the most valuable window for A-shares, based on the annual reports of A-shares and the verification of economic data in March, identifying structural main lines that can be extrapolated from the prosperity will be the main contradiction in the market. 3. During the spring market frenzy window, the small-cap growth theme is active, with new directions such as AI computing power, AI applications, Siasun Robot&Automation, etc., have already realized significant profit effects. In the medium term, we continue to emphasize that high dividends as part of the core portfolio allocation are forming a consensus, focusing on stable high dividends + exploring dynamic high dividends. The follow-up trend of small-cap growth will depend on further catalysts, especially after April, there may need to be coordination between domestic policies and industry verification for the market rally to continue. During the spring market frenzy window, overseas strong catalysts in the AI and Siasun Robot&Automation industrial chain, domestic development of new quality productivity, large-scale equipment upgrades, and the optimistic expectations of policy for consumer goods replacement. In the short term, focusing on AI computing power, AI applications, Siasun Robot&Automation, equipment upgrades and renovations, thematic investments are active, and small-cap growth is active. From the perspective of the spread of profit effects, the short-term market activity may still have a certain degree of sustainability. The profit effect diffusion of small and micro-caps itself still has room for growth. Discussing the structural main lines of the mid-term market, favorable conditions for the interpretation of the small and micro-cap markets are favorable, as well as for high dividends. We continue to emphasize that corporate governance and shareholder returns are becoming a trend, which may become the direction for investors to make core portfolio allocations in an environment of relatively lackluster economic trends. We still emphasize that stable high dividends (electricity, coal, railways, highways, operators; among consumer goods, there are stable high dividends in textiles, food processing, beverages, and dairy products) and dynamic high dividends (advanced manufacturing) are better directions. This article is reprinted from the WeChat public account "Shenwan Hongyuan Group Research"; GMTEight Editor: Xu Wenqiang.