Huaxi Securities: What are the necessary conditions for the launch of the “spring agitation” market?

The Zhitong Finance App learned that Huaxi Securities released a research report saying that in retrading history, the launch of the A-share “spring agitation” market usually requires meeting the following conditions: a reasonable valuation level, a relaxed liquidity environment, and a catalyst that effectively boosts risk appetite, such as domestic policies, catalysing industrial events, or mitigating external risks. At present, interest rate cuts by the overseas Federal Reserve and interest rate hikes by the Bank of Japan have all been implemented, and the market's concerns about the reversal of arbitrage transactions have been alleviated. Subsequent increases in foreign capital allocation driven by the appreciation of the RMB exchange rate and the entry of incremental insurance funds brought about by the “good start” of premium income at the beginning of the year can also be expected. Recently, equity ETFs have once again been purchased on a large scale, with many broad-based ETFs trading volume, which indicates that incremental capital tends to depreciate.

Huaxi Securities's main views are as follows:

Market review: Most global stock indexes fell this week, with the Korea Composite Index, Hang Seng Technology, and Nikkei 225 leading the decline. A-share transactions have shrunk again, and the average daily turnover of Wandequan A fell back to around 1.76 trillion yuan. Market sentiment was cautious. Among the major indices, Science and Innovation 50 and GEM led the decline, and capital rotated to the dividend sector. Stylistically, the financial and consumer sectors rose. In the Tier 1 industry, commercial and retail, non-bank finance, beauty care, and social services led the way; the growth style declined, and the electronics and power equipment index fell by more than 3%. In terms of commodities, COMEX silver surged 8.7%, copper and aluminum prices fluctuated upward, and bifocal rebounded at the bottom. In terms of foreign exchange, after the Bank of Japan's interest rate hike was implemented, the exchange rate of the yen against the US dollar weakened, while the RMB continued to appreciate against the US dollar.

1. Review history. With the exception of 2021 and 2022, the A-share market has often had a “spring agitation” calendar effect in the past ten years. At the end of the year and the beginning of the New Year, A-shares are in a “vacuum period” of economic data and financial reports of listed companies, and the market can easily make thematic investments based on policy expectations and industry trends. In the ten years since 2016, A-shares have experienced 8 “spring agitation” markets. In terms of time, the market usually starts from December to January, and the duration ranges from 20-60 trading days.

2. The experience of 2021 and 2022 shows that the spring turbulence of A-shares is not inevitable; high valuations combined with the impact of external events will cause the spring market to disappear. For example, at the beginning of 2021, the valuation of the A-share market was at a historically high level. The haze of inflation after the pandemic prompted overseas central banks to start raising interest rates, and the continued rise in US bond yields triggered core asset adjustments; in early 2022, A-share market valuations were historically high, expectations of interest rate hikes from overseas Feds heated up, and the rise in US bond yields raised concerns about liquidity contraction, compounded by the outbreak of the Russian-Ukrainian conflict impacting global risk appetite.

3. Looking at the review, what are the necessary conditions for the “spring agitation” market to start?

1) Market valuation is within a reasonable range. Market flexibility is highly correlated with the market valuation level. In the past decade of the spring turbulent market, the index rose the most. Most of the markets had already gone through sufficient adjustments before the launch. For example, at the beginning of 2016, the “meltdown” triggered negative feedback on liquidity, and the main A-share indices experienced a sharp decline; at the beginning of 2019, the price-earnings ratio of the Shanghai and Shenzhen 300 Index was only 10 times; in early February 2024, products such as snowballs and quantitative products caused market liquidity shocks, and the price-earnings ratio of the Shanghai and Shenzhen 300 Index returned to about 10 times;

2) The liquidity environment remains relaxed, and capital inflows are increasing. For example, the central bank's targeted downgrades in early 2018 and the central bank's overall downgrades in 2019 and early 2020 maintained abundant macro-liquidity. Large inflows of foreign capital in early 2023, supervisory authorities promoted medium- to long-term capital entry into the market in early 2025, etc.;

3) Domestic policies, catalytic industrial events, or mitigation of external risks drive upward risk appetite. Examples include supply-side reforms in early 2016, gradual progress in Sino-US economic and trade negotiations in early 2019, the signing of the first phase of the economic and trade agreement between China and the US in January 2020, the optimization of epidemic prevention policies and the “three arrows” of real estate at the end of 2022, the reduction in LPR exceeding expectations in February 2024, and catalysing domestic industry trends such as DeepSeek and robotics in early 2025.

4. The positive conditions for “spring restlessness” are being accumulated, and the layout is dominated by dips.

1) In terms of overseas liquidity, the Bank of Japan implemented a dovish interest rate hike, and the exchange rate of yen against the US dollar weakened, and the pressure to reverse arbitrage trading eased; the Fed “dovish interest rate cut” in December, and the path of subsequent interest rate cuts is highly tied to the change of the Federal Reserve Chairman. The market expects the overall direction of the Fed's policy to remain relaxed;

2) In terms of domestic liquidity, the Central Economic Work Conference set the monetary policy of “continuing to implement a moderately loose monetary policy”, indicating that there is still room for domestic interest rate cuts;

3) In terms of micro liquidity, equity ETFs were once again purchased on a large scale this week, and the volume of many broad-based ETF transactions boosted market sentiment. Subsequent increases in foreign capital allocation driven by the appreciation of the RMB exchange rate and the “good start” of premium income at the beginning of the year can be expected to enter the market;

4) In terms of valuation, the current price-earnings ratio of the Shanghai and Shenzhen 300 is 14 times, which is at the 76% fraction since 2010, which is lower than the historical median +1 times standard deviation;

5) At the policy level, the Central Economic Work Conference has set a positive tone. As 2026 is the beginning of the “15th Five-Year Plan”, it is expected that incremental policies in the fields of scientific and technological innovation, anti-domestic demand, and expansion of domestic demand will continue to be introduced.

In terms of industry allocation, it is recommended to focus on: 1) growth directions that benefit from industrial policy support, such as domestic substitution, robotics, aerospace, innovative drugs, energy storage, etc.; 2) benefit from the cyclical direction of “anti-internal circulation” policies, such as chemicals, energy metals, resource products, etc.; 3) Deepening consumer promotion policies or bringing phased catalytic opportunities for the consumer sector.

Risk warning: Global economy fluctuates beyond expectations, policy implementation falls short of expectations, overseas liquidity risk, geopolitical risk, etc.