Hua Jin Strategy: Post-holiday spring market may continue, with technology and cyclical sectors outperforming

The risk factors that worried the market before the holiday essentially did not occur during the holiday period. (1) Travel and consumption preferences during the Spring Festival showed no signs of concern for the economy and profits. First, travel data during the Spring Festival increased significantly year-on-year. Second, consumption data during the festival also showed positive trends. (2) Concerns about easing U.S. inflation and tightening liquidity did not materialize. First, the U.S. January CPI year-on-year growth slowed from 2.7% in December 2024 to 2.4%, while January non-farm wage growth continued to decline to 3.71%. Inflation and the job market continued to cool, making it highly likely that the Federal Reserve will continue to cut interest rates this year. Second, the continued cooling of U.S. inflation and employment kept the dollar index mostly stable and oscillating at low levels during the holiday. (3) Geopolitical risks such as U.S.-Iran conflicts that were concerns before the holiday did not occur. First, during the holiday, Sanae Hase, the high-ranking official, was re-elected as Japan’s Prime Minister, but global capital markets were unaffected during the holiday. Second, there was no outbreak of U.S.-Iran conflict.

Reviewing history, the A-shares market is highly likely to rise after the holiday, mainly influenced by policies, external events, liquidity, and overseas stock market performance during the holiday period. (1) The A-shares market is highly likely to rise after the holiday, especially in years when the Spring Festival started later. Since 2010, in 12 out of 16 years, the Shanghai Composite Index rose within five trading days after the festival, and in 13 out of 16 years, it rose within twenty trading days. Second, in 2010, 2015, and 2018, when the Spring Festival started later, the Shanghai Composite Index increased within five and twenty trading days after the festival. (2) Policies, external events, liquidity, and overseas stock market performance during the holiday are the main factors affecting the post-holiday trend of A-shares. First, policies and external events are core factors influencing the trend. Second, liquidity is also a key factor. Third, during the Spring Festival, the direction of U.S. or Hong Kong stocks’ rise or fall often differs from that of the Shanghai Composite Index after the holiday.

The spring market after the holiday may continue, and A-shares could fluctuate mildly stronger. (1) Positive policy expectations after the holiday may rise, with limited external risks. First, optimistic policy expectations may increase after the holiday. Second, short-term external risks are relatively limited: firstly, the U.S. Supreme Court ruled that Trump’s tariffs under the IEEPA were invalid, but Trump imposed new global tariffs of 10% using other tools, leading to an overall decrease in tariffs and a positive response from U.S. stocks; secondly, risks such as U.S.-Iran conflicts and tense China-Japan relations may still exist after the holiday. (2) Short-term liquidity may remain loose. First, macro liquidity could stay ample after the holiday. Second, stock market funds may accelerate their return. (3) Overseas stock markets performed steadily during the Spring Festival this year, having little impact on the post-holiday trend of A-shares. (4) The economy and profits may continue a weak recovery trend after the holiday.

Technology growth and cyclical industries may perform relatively better after the holiday. (1) Reviewing history, technology growth industries tend to outperform within five or ten trading days after the festival. Second, the short-term outperformance of certain industries is mainly driven by policies, industry catalysts, and reflections of U.S. and Hong Kong stock markets. (2) Currently, after the Spring Festival, technology growth and cyclical industries are likely to perform relatively well in the short term. First, related policies and industry catalysts for these sectors may persist. Second, industries that led gains in U.S. and Hong Kong markets during the festival are mainly concentrated in technology growth and cyclical sectors.

Industry allocation: continue to buy on dips in technology growth and cyclical industries after the holiday. (1) Within a month after this year’s Spring Festival, sectors related to the “Two Sessions” policies, such as technology growth and consumption, may outperform. (2) Valuations in growth sectors like pharmaceuticals, automobiles, and computers are currently low. (3) Post-holiday, it is advisable to buy on dips in: first, machinery (robots), media (AI applications, gaming), computers (AI applications), electronics (semiconductors, AI hardware), military industry (commercial aerospace), communications (AI hardware), non-ferrous metals, chemicals, new energy, pharmaceuticals (innovative drugs); second, sectors with potential for catch-up and marginal improvement in fundamentals, such as non-bank financials and consumer sectors.

Risk warnings: past experience may not apply in the future, policy surprises, and economic recovery falling short of expectations.

(Source: Huajin Securities)