Societe Generale Securities: What are the potential starting signs of a volatile A-share market?
The Zhitong Finance App learned that Societe Generale Securities released a research report saying that from December to January, the A-share market style is generally more balanced, with large markets, undervaluation, and procyclical styles being relatively dominant. Behind this, on the one hand, it is related to the steady growth policy strengthening expectations for the major year-end conference; on the other hand, the preference for holding positions in major allocations such as insurance capital at the end of the year and the beginning of the year is also more biased towards the general market and dividend style. However, as the Spring Festival approaches, until two sessions, it was a typical restless window driven by liquidity and risk appetite. The market style also changed to a clear dominance of highly flexible sectors such as small markets and technological growth.
In terms of direction, it continues to be anchored in economic expectations and the layout is volatile. According to the unanimous forecast, next year's booming industry (predicted net profit growth rate of > 30% in '26) can be summarized as four clues: AI industry trends, dominant manufacturing, “anti-internal volume”, and structural recovery in domestic demand:
AI industry trends: hardware (communication equipment, components, semiconductor industry chain, consumer electronics), software applications (IT services, software development, games, advertising and marketing).
Advantageous manufacturing industries: New energy industry chain (lithium batteries, lithium mines, wind power equipment, new energy vehicles), military industry (ground weapons, aerospace equipment, military electronics), machinery (robots, machine tools), medicine (innovative drugs).
“Reverse internal roll”: steel, building materials (cement, glass fiber, decoration building materials, plastics), chemicals (chemical raw materials, chemical fibers, rubber), new energy (photovoltaics, silicon wafers), aviation and airports.
Structural recovery of domestic demand: service consumption (cinema, education, retail, e-commerce, hotels and restaurants, tourist attractions, hospitals), new consumption (snack food, entertainment products), clothing and home textiles.
Societe Generale Securities's main views are as follows:
1. The domestic and foreign policy verification window has come to an end, and market agitation has a good foundation
Market fluctuations have increased since December. The reflection behind this is that a series of important events at home and abroad affecting liquidity and fundamental expectations have been tested one after another, and capital wait-and-see and game sentiment is heavy. Meanwhile, with the Federal Reserve's interest rate meeting and the domestic central economic work conference being held one after another, the US employment and price data was released this week, and the Bank of Japan's interest rate hike this week, the domestic and foreign policy verification window has basically come to an end. The overall tone is better than market expectations, which is expected to lay a good foundation for the start of a restless market.
On the one hand, the employment and price data released by the US this week did not trigger more pessimism; on the contrary, it provided more room for imagination for the Federal Reserve to further ease. After the implementation of the Federal Reserve's interest rate cut last week, the market is still waiting for employment and price data to verify further guidance on the Fed's future easing. However, the US unemployment rate for November, which was released this week, rebounded slightly, the CPI data fell far short of expectations, and the market continued to land softly. Combined with Trump's statement that the next chairman of the Federal Reserve “needs to support a drastic reduction in interest rates,” this opens up room for imagination for the Federal Reserve to further ease. Looking back, after the key data verification period, medium- to long-term easing narratives are expected to dominate asset pricing.
On the other hand, Japan's interest rate hike came to fruition and was not hawkish. Previously, market concerns about the impact of arbitrage trading on liquidity were mitigated. Japan raised interest rates by 25 bps as scheduled this week. Since previous market expectations were sufficient, combined with the significant reduction in exposure to the US dollar mismatch since this year, the risk of closing an arbitrage trade position that the market had previously feared has not appeared. Furthermore, since Kazuo Ueda did not give a path to raise interest rates, the level of hawks fell short of expectations, causing the yen to depreciate after the interest rate hike was implemented. Looking back, Ueda and Kazuo hinted that prices will be weak in the first half of next year, so after the current round of interest rate hikes, it may still take several data periods to be reviewed. It is estimated that the time point for the Bank of Japan's next rate hike will be from the middle to the second half of next year.
As a result, as a series of overseas events affecting liquidity expectations come to fruition one after another, and the policy environment continues to be positive and protective after the domestic economic work conference, capital behavior is expected to shift from watching and playing games until now to a new stage of actively seeking opportunities, and consensus to prepare for the volatile market is being forged. Looking back, exploring the possibility of the start of the restless market and looking for potential starting signals for the current round of restless markets should be the focus of follow-up attention.
2. What are the potential starting signs for this round of restless markets?
Referring to historical experience, most of the turbulent start of the market was inseparable from the catalysis of an iconic event. Judging from the startup time and catalytic factors, it can be roughly divided into the following three categories:
Launched in November (marked yellow): Strong macroeconomic policies are needed to clearly shift, such as 2008, 2014, and 2022;
Launched in December (red): Market performance has been strong since the beginning of the year, but disturbances occurred towards the end of the year. Restlessness began after the disturbances were mitigated, typically in 2017, 2019, and 2020;
January-February launch (blue): The time when most of the restless markets in history started.
This round is more in line with the second category, that is, the market performance has been strong since the beginning of the year, and restlessness begins after the disturbances have abated towards the end of the year. Further review of the factors that led to the restless market in 2017, 2019, and 2020:
2017: The “Spring Festival Limited Edition Downgrade” began a restless market. In November-December, factors such as new asset management regulations, “deleveraging” policies such as bank liquidity management, and shared interest rate hikes between China and the US continued to disrupt the market. On December 29, the central bank established a “temporary reserve utilization arrangement”, which was interpreted by the market as a “Spring Festival limited edition downgrade”, which became a starting signal for the restless market. In January of the following year, as PMI and GDP data verified that domestic fundamentals were stable, moderate and positive, the Federal Reserve's monetary policy “remains on hold” driving the RMB exchange rate appreciation, and “temporary reserve utilization arrangements” compounded by a targeted downgrade in late January and abundant liquidity, A-shares emerged from the “11 Lianyang” market.
2019: A restless market begins as trade frictions between China and the US ease. In November, overseas PMIs fell sharply, and expectations of a global recession heated up, and the continuous rise in domestic CPI became a hindrance to monetary easing, and the market fluctuated and fell. On November 27, the Ministry of Finance issued a “trillion additional special debt amount” ahead of schedule for the first time, and the manufacturing PMI once again rebounded to more than 50% in November to ease concerns about the decline in fundamentals, and the market began to rise steadily. On December 13, China and the US reached an agreement on the text of the “First Phase Economic and Trade Agreement”, which became an official start signal for the restless market. The restless market continued with factors such as the release of policy warmth at an important conference in December, improvements to the capital market system in late December, and a downgrade at the beginning of 2020.
2020: Overseas uncertainty lays the foundation for the start of a restless market, and the continuous issuance of public funds drives the market to a climax. In October, the domestic reintroduction of “managing the general floodgates of money supply”, the re-spread of the overseas epidemic, and the US election entering a sprint period all suppressed market risk appetite. Since November, as benefits such as Biden's confirmation of election and smooth progress in vaccine research and development have continued to be unleashed, overseas uncertainty has successively boosted market risk appetite; the domestic economy has continued to recover, policy setting has not taken a sharp turn, and monetary policy has shifted to marginal easing. In January of the following year, under the “bottom” of the economy, policies, and risk appetite, the daily issuance of public funds provided sufficient liquidity to the market and pushed the restless market to a climax.
First, since the beginning of the year, when the performance was strong, the restless market can usually start ahead of time? In addition to “people's thoughts,” we have summarized the following three important factors: 1) the year-end conference was positive in setting policy settings to support risk appetite; 2) economic fundamentals were stable, moderate and positive, corporate profits entered an upward channel, and there was no significant disturbance in economic data and annual report forecasts of listed companies; 3) loose monetary policy and abundant macro-micro liquidity effectively supported the market.
Looking at this round, the above favorable conditions already have a good foundation: 1) The Economic Work Conference continues the positive trend of last year's expansion; 2) The data is expected to continue to verify improvements in domestic fundamentals: at the macro level, the end of the year is expected to be an important window for verifying the upward trend in this round of PPI; at the micro level, profit expectations for all A are still improving recently. After the results “hit the pit” for the fourth quarter of last year, there is not much pressure to verify the fundamentals of this year's annual report performance forecast; 3) Domestic macro liquidity is abundant, and interest rate cuts are still policy options; at the micro level, the return of insurance capital flows and insurance is still a policy option; at the micro level, the return of insurance capital flows What about the “good start” of capital and the acceleration of residents' “deposit and migration” The support of stock market liquidity is worth looking forward to.
Second, what iconic events could be a sign of the start of a restless market? In summary, there are three main categories: 1) the implementation of uncertain factors that suppressed the market in the early stages is the foundation for starting a restless market; 2) easing policy catalysts such as interest rate cuts can often effectively ignite the restless market; 3) verifying the fundamentals of key data to drive an increase in the willingness of capital to participate is the key to the continuation of the restless market.
Looking at this round, after a series of overseas uncertainties that have suppressed the market since November have come to fruition, focus on the next signs that may effectively start a restless market, including: 1) the possibility that interest rate cuts will be implemented at the end of the year and the beginning of the year. The first observation window is at the beginning of next week, and the second observation window is in January; 2) the boost from key data to improve fundamental expectations, including PPI, PMI, M1, social finance credit, and annual report forecasts of listed companies.
3. How to grasp the pace of configuration? Which directions are you focusing on?
In terms of layout rhythm, we have previously summarized that the style at the end of the year and beginning of the year showed obvious characteristics of “value building, growth and singing” characteristics. From December to January, the market style is generally balanced, with large market, undervalued, and procyclical styles being relatively dominant. Behind this, on the one hand, it is related to the expectation that the steady growth policy will be strengthened at the major year-end conference. In some years, the steady growth policy will also gain strength before the beginning of the year to try to “get off to a good start” for the economy; on the other hand, the preferences for holding positions in major allocations such as year-end and New Year insurance funds are also more biased towards the market and dividend style. However, as the Spring Festival approaches, until two sessions, it was a typical restless window driven by liquidity and risk appetite. The market style also changed to a clear dominance of highly flexible sectors such as small markets and technological growth.
In terms of direction, it continues to be anchored in economic expectations and the layout is volatile. According to the unanimous forecast, next year's booming industry (predicted net profit growth rate of > 30% in '26) can be summarized as four clues: AI industry trends, dominant manufacturing, “anti-internal volume”, and structural recovery in domestic demand:
AI industry trends: hardware (communication equipment, components, semiconductor industry chain, consumer electronics), software applications (IT services, software development, games, advertising and marketing).
Advantageous manufacturing industries: New energy industry chain (lithium batteries, lithium mines, wind power equipment, new energy vehicles), military industry (ground weapons, aerospace equipment, military electronics), machinery (robots, machine tools), medicine (innovative drugs).
“Reverse internal roll”: steel, building materials (cement, glass fiber, decoration building materials, plastics), chemicals (chemical raw materials, chemical fibers, rubber), new energy (photovoltaics, silicon wafers), aviation and airports.
Structural recovery of domestic demand: service consumption (cinema, education, retail, e-commerce, hotels and restaurants, tourist attractions, hospitals), new consumption (snack food, entertainment products), clothing and home textiles.
On the one hand, the Economic Work Conference continued to create a valuation repair environment for the procyclical sector with regard to the deployment of key tasks such as “anti-internal circulation,” service consumption, and the continued positive and caring policy environment after the conference. Emphasis is placed on “anti-domestic” & price increase resource products (chemicals, steel, non-ferrous metals) benefiting from overseas easing and rising domestic PPI expectations. The consumer sector has strong domestic demand repair momentum, policy preferences, and difficult reversal expectations for new consumption & service consumption (retail, snack food, education, travel chains, etc.), agriculture, and the upward elasticity of non-banks in the volatile market.
On the other hand, technological growth will still be the winner and loser that will eventually lead to breakthroughs in this turbulent market. Overseas liquidity expectations have warmed up, domestic risk appetite has increased, and the allocation environment suitable for the technology growth sector is gradually returning. If the signs of agitation become more clear, the upward elasticity of the sector is expected to open up further. After the early interpretation of optical communication, AI placed emphasis on the domestic semiconductor industry chain (domestic chip leaders with accelerated domestic replacement, the upstream equipment materials industry chain benefiting from the expansion+ Changxin listing, and domestic memory chip leaders catalyzed by overseas storage performance exceeding expectations), AI end side and software applications (humanoid robots, games, Hong Kong stock internet, software); in an overseas relaxed environment, innovative drugs with sensitive mobility ushered in the deployment time; commercial aerospace industry trends continued to provide flexibility for the military industry to make up for gains.
