CITIC SEC: Grasp the A-share market recovery trend and pay attention to the right signals.

, CITIC SEC released a research report stating that as we enter March, the economy remains stable but slightly weak, with the real estate sector still in need of incremental policy support. It is expected that the Two Sessions will adjust overall in line with expectations, and the focus on new quality productivity is expected to become clearer. In March, it is expected that the A-share market will not experience liquidity shocks caused by quantitative factors, and will continue to exhibit the characteristics of active fund pricing. The barbell structure of the dividend plus theme market may continue, with a recommendation to actively participate in the first half of the month and patiently wait for confirmation signals in the second half. Firstly, looking at the economic environment, the data for the first two months of the year show a stable trend with weak domestic demand persisting. The Purchasing Managers' Index (PMI) for manufacturing in February decreased slightly by 0.1 percentage points to 49.1%, lower than the average for February in the last ten years by 0.8 percentage points, and lower than the average for January in the last ten years with similar seasonal characteristics by 1.0 percentage point. High-tech manufacturing continued to expand, while the outlook for equipment manufacturing and consumer goods manufacturing declined. The service industry, remaining stable compared to the previous month, is still a highlight. Large enterprises' PMI continued to be above the critical point, while small enterprises were more affected by the Spring Festival holiday. Considering the data for social financing in January, consumer data during the Spring Festival, and the PMI data for the first two months, we believe that the overall economy is running smoothly, but with a persistently weak domestic demand. Secondly, in terms of marginal policy changes, it is expected that the overall policy goals of the Two Sessions will align with market expectations. GDP growth is expected to be set at around 5%, with a fiscal deficit rate of around 3%. Credit allocation will focus more on "high-quality allocation," with an emphasis on revitalizing existing resources. Additionally, considering the possible issuance of around 1 trillion special government bonds, with 800 billion from last year's issuance of 1 trillion bonds being used this year, along with a small increase in the existing PSL (Private Sector Lending) scheme and around 4 trillion special bonds, the general fiscal deficit rate may reach around 7.3%. After the policy direction set in this week's Political Bureau meeting, market investors' expectations for the Two Sessions' target setting are generally consistent. Lastly, looking at the market ecology, the liquidity shocks caused by quantified rebalancing have ended, with active funds as the main driver of the current rebound. Themes related to new quality productivity, such as AI, are expected to remain active. Amid the context of asset scarcity, dividend assets are still the main direction for long-term fund allocation. As we enter March, the economy remains stable but slightly weak, with the real estate sector still in need of incremental policy support. In the first two months, economic data remained stable with a continuation of the weak domestic demand trend. 1) Economic data for the first two months remained stable, with ongoing weak domestic demand. The manufacturing PMI for February decreased by 0.1 percentage points to 49.1%, showing a slight decline compared to the average spring festival month over the past ten years by 0.8 percentage points. The structure of the manufacturing industry showed that high-tech manufacturing continued to expand, while the equipment manufacturing and consumer goods manufacturing sectors saw a decline in business sentiment. The service industry, remaining stable compared to the previous month, continued to be a highlight. PMI for large enterprises remained above the critical point, while small enterprises were more affected by the Spring Festival holiday. Combining the data from January social financing, consumption data during the Spring Festival, and the PMI data for the first two months, we believe that the overall economy is running smoothly, with a persistently weak domestic demand. 2) Developers are expected to pass through the short-term peak of repayments smoothly, but stability in the real estate sector still requires further policy support. Real estate sales have yet to show signs of improvement. According to Wind data, the cumulative year-on-year decline in new home signings in 42 sample cities for January to February was 34.8%, while the decline in the number of second-hand home signings in 14 sample cities was 13.5%. According to statistics from Yihan, total sales amount and sales area for 15 key real estate companies in January-February saw a year-on-year decline of 50.7% and 54.7% respectively. However, we believe that there is currently no need to worry about the short-term credit risk for developers. Even with a significant decrease in sales, companies can achieve operational cash flow balance by controlling their investments. In addition, according to Xinhua News, as of February 28, 276 cities nationwide have established urban real estate financing coordination mechanisms, proposing around 6,000 real estate projects, with commercial banks approving over 200 billion yuan in loans. We believe that real estate companies can easily achieve cash flow balance in the short term and are likely to receive policy support for short-term debt repayments. However, in the medium to long term, improving credit conditions for developers still requires stability in the real estate industry, which will necessitate further policy support. There is still room for mortgage rate cuts, and core city purchase restrictions may also see significant relaxations. With further policy support, we believe that the real estate sector has the potential to gradually stabilize in the second quarter. The Two Sessions are expected to adjust overall in line with expectations, with the focus on new quality productivity becoming clearer. 1) It is expected that the overall policy goals of the Two Sessions will align with market expectations. In the upcoming Two Sessions next week, we expect that the GDP growth target will be set at around 5%, the narrow fiscal deficit rate at around 3%, and credit allocation will focus on high-quality investment, with an emphasis on revitalizing existing resources. Additionally, considering the possible continued issuance of around 1 trillion special government bonds, with approximately 800 billion from last year's issuance of 1 trillion bonds being used this year, along with a potential slight increase in the existing PSL scheme and around 4 trillion special bonds, the general fiscal deficit rate may reach around 7.3%. Following the policy direction set during this week's Political Bureau meeting, market investors' expectations for the Two Sessions in terms of target setting are generally consistent. 2) New quality productivity is expected to become the focus of future development. As the central government has recently emphasized the development of new quality productivity, and the central financial commission has mentioned the promotion of large-scale equipment updates, discussions during the Two Sessions on new quality productivity and equipment updates, as well as the potential direction of the approximately 1 trillion special government bonds that may be introduced, are likely to become focal points for the market as well as catalytic themes. We believe that the planning for new quality productivity will likely focus on two dimensions: upstream infrastructure construction and downstream strategic emerging industries. Upstream infrastructure construction is more certain and better suited for government planning, leadership, coordination, and funding, with a focus on the construction of new elements (data, computing power) and support (energy, materials, basic software, basic equipment, etc.). Downstream consists of innovative, market-driven emerging industries, with the government implementing mechanism reforms in various areas such as production, academia, and research. These emerging fields include large-scale applications, humanoid Siasun Robot & Automation, autonomous driving, new materials, satellite internet, low-altitude economy, biotechnology, and more. In March, the A-share market is expected to continue exhibiting the characteristics of active fund pricing, with the barbell structure of dividend plus themes likely to continue. 1) The liquidity shocks caused by quantified rebalancing have ended. According to our channel research, there was a significant easing of the redemption pressure on quantified private equity products after the Spring Festival compared to before the holiday. More importantly, as the most one-sided bullish and largest proportion of the quantified product category, the quantified index-increasing products had basically completed their rebalancing before the holiday, significantly reducing their positions in small and microcap stocks and returning to benchmark index constituent stocks. Representative quantified index-increasing products tracked by us, such as Shanghai-Shenzhen 300, CSI 500, and CSI 1000, had average excess returns compared to the benchmark of -5.5%, -10.3%, and -11.9%, respectively, in the week before the Spring Festival, whereas in the first week after the holiday, the average excess returns were only 1.5%, -0.8%, and 2.8%, respectively, staying in line with the benchmark. If you require further assistance with translation or clarification, please do not hesitate to ask.The relative excess returns of the CSI 2000 Index compared to the three broad-based indexes mentioned above were 19.3%, 21.9%, and 14.7% respectively. It can be seen that the majority of private quant funds were significantly impacted by the small and medium-sized stock market sell-off before the holiday, but did not benefit from the large rebound in the small and medium-sized stock market after the holiday. This is likely because they had already completed their rebalancing before the holiday and even if they face some redemptions in the future, the outflow of funds is likely to be mainly focused on the more liquid medium and large-cap broad-based component stocks. In addition, according to information released by the China Securities Regulatory Commission on February 28th, the average daily trading volume of DMA after the holiday accounted for only around 3% of the total market turnover, so its overall impact on the market is very limited. We believe that the liquidity shock triggered by quant strategies has already ended, and the game between size and style should gradually fade away.2) Active funds are the main incremental factor in this round of rebound, with themes related to new productivity such as AI continuing to be active. According to research data from CITIC SEC channel samples, active private equity positions increased slightly in the week after the holiday, but still remain near historical lows. Looking at the performance fluctuations of some representative subjective long positions in private equity, many private equity firms reduced their positions before the holiday, but the progress of increasing positions after the holiday has been slow and cautious. Taking subjective long positions with a January return rate below -10% as a sample, the median return rate in January was -15.9%, compared to an excess of -8.0% for the CSI 800 Index; in the week before the holiday, the median return rate for this group of private equity was 1.2%, with an excess of -6.4% relative to the CSI 800 Index; in the week after the holiday, growth stocks and small caps saw a significant rebound, but the median return rate for this sample was only 3.9%, with a 3.0% excess return relative to the CSI 800 Index. We speculate that some active private equity firms with significant exposure to growth stocks and small caps made significant reductions in positions before the holiday due to risk control pressure, but after the holiday, with the market rebounding quickly and concerns about the second round of quantitative tightening, they did not significantly increase their positions, and even if they did, they may have chosen dividend assets such as coal and power to fill positions to prevent going short. Therefore, the rebound in the portfolio has been limited. It wasn't until this week that active private equity funds started actively increasing their positions in thematic sectors to capture elasticity, with A-share trading volume significantly increasing, with the TMT sector's trading volume accounting for 38% (reaching a peak of 54% in March last year). The weekly net purchases of the five major broad-based index ETFs this week decreased by 94% compared to the week before the holiday, and it is highly probable that the State Administration of Foreign Exchange will no longer participate in the market after the holiday. It is clear that the current market has once again entered a state of pricing by active funds. 3) In the background of asset shortage, dividend assets are still the main direction for long-term allocation of funds. Recently, trading in ultra-long-term treasury bonds represented by 30-year bonds has been active, with the spread between 30-year and 10-year bonds at 12.4 bps, the lowest since 2006. The spread was 28.2 bps at the beginning of the year, rapidly declining by 15.8 bps in two months. In addition, the level of long-term bond yields and the dividend yield of the Shanghai and Shenzhen 300 Index have inverted, and the degree of inversion is increasing. The FICC team of CITIC SEC Research Department believes that the strong performance of the bond market recently is mainly due to strong buying sentiment among speculative funds and overall loose liquidity. The continuous decrease in long-term bond yields in the short term includes trading and sentiment factors, but also reflects that the current capital market is not lacking funds, but rather assets that provide low risk, low volatility, and stable cash returns. In this "asset shortage" context, if there is no systemic improvement in economic growth expectations, we believe that state-owned enterprise dividend stocks are still the main addition for high net worth individuals and long-term funds such as insurance. Especially for high net worth individuals, in a situation where various equity-linked products and even quantitative products are performing poorly and fixed-income products have low expected returns, dividend assets are currently one of the few sustainable asset categories for domestic investment. Active participation in the first half of the month, patience to wait for confirmation signals on the right side as the first quarter reports approach The overall market liquidity has broken free from the dilemma, trading volume is gradually increasing, investor sentiment is significantly improving, and there are more thematic catalysts. Active funds still have low positions, and under the attraction of rallies that continue to exceed expectations, they are expected to replenish positions. In the background of asset shortage, long-term funds will still seek to allocate to dividend assets on dips. We expect that the subsequent market trend will likely continue to show a barbell structure, and we recommend active participation. However, with further increases in private equity positions and the approach of the first quarter reports, we recommend patience post the Two Sessions, and waiting for confirmation signals on the right side may be the best timing for positioning for the whole year. In terms of allocation, firstly, in the context of asset shortage, state-owned enterprise dividend low volatility and high dividend yield sectors are still the preferred core allocation direction for large-scale incremental funds, forming one end of the barbell structure. Secondly, the growth sector can focus on themes related to new productivity, including new factor construction (data, computing power) and supporting elements (energy, materials, basic software, basic equipment, etc.), as well as large-scale applications entering the growth period from the introduction period, humanoid Siasun Robot & Automation, autonomous driving, new materials, satellite internet, low airspace economy, biotechnology, etc., forming the other end of the barbell structure. Finally, Hong Kong stocks in the consumption, internet, and other blue-chip categories have strong long-term allocation value and comparative price advantage in emerging market portfolios, and can actively participate in layout.