Zhike | Has the Market Trend Taken a Sudden Downward Turn?

Author | Fan Liang

Editor | Zheng Huaizhou

On the last trading day of February, the previously strong Chinese equity market suffered the biggest decline after the Spring Festival.

Specifically, in the A-share market, the Shanghai Composite Index dropped by 1.98% in a single day, with its annual return turning negative, and the ChiNext Index fell by 3.82%; in the Hong Kong stock market, the Hang Seng Index dropped by 3.28%, and the Hang Seng Technology Index fell by 5.32%. In terms of sectors, the recently popular AI and robot sectors also experienced a significant correction, while the dividend and consumer sectors were relatively stable.

So, why did the market experience a significant correction? Will this round of market rally end here?

Overheated trading is the main cause

In terms of news, the most significant impact on the market on February 28 was undoubtedly that Trump stated that on the basis of the additional 10% tariff that had come into effect on February 1, he would continue to impose an additional 10% tariff on Chinese imported goods on March 4, totaling 20%. Although this tariff increase is relatively close to Goldman Sachs' neutral forecast of 20% and Morgan Stanley's approximately 15%, the pace of the increase is faster than the expectations of foreign institutions. Therefore, funds, out of risk-aversion needs, have triggered a market correction.

In addition, since February, the AI and robot-related sectors in the A-share market have seen significant gains. For example, the Wind Artificial Intelligence and Robot Index have seen the highest increase of more than 20%, and funds also have the need to realize profits. From the perspective of the valuation percentile, the price-earnings ratio levels of artificial intelligence and robots have reached more than 90% of the percentile in the past three years, and the turnover rate is also at a historical high. Therefore, under the catalysis of negative news, it is expected that the overheated sentiment will return to calm.

From the perspective of sector rotation, in the market situation in February, there was no obvious seesaw effect. The two indices, Wind All-A Shares and Wind All-A Shares (excluding finance and petrochemicals), both increased by about 5%, showing an overall upward trend in the market. For example, in the dividend sector at the other end of the dumbbell strategy, the large financial sector hardly declined, and although the energy and public utility sectors experienced a correction, the magnitude was very low. This indicates that this round of market rally is mainly driven by incremental funds. The average daily trading volume of A-shares in February was 1.84 trillion yuan, higher than 1.2 trillion yuan in January, slightly lower than the average daily trading volume of 2 trillion yuan in October and November 2024. In terms of the source of incremental funds, it is mainly the inflow of retail funds. From the perspective of public funds, as of February 28, the cumulative share of equity and hybrid public funds was 6.27 trillion shares, slightly lower than 6.31 trillion shares on February 1. Whether the future market rally can continue depends crucially on whether there are incremental benefits that can retain retail funds.

Looking at the Hang Seng Technology Index, from the valuation perspective, the rolling price-earnings ratio has increased from 21 times to a maximum of 25 times, and the valuation percentile in the past three years has risen from 20% at the beginning of February to 45%. When the valuation level jumps to the median level, the market attitude will also tend to be cautious. However, considering that the valuation of the Hang Seng Technology is still not high, the possibility of a significant correction in the future is low, and it is expected to be in a state of shock waiting for the next wave of opportunities.

How to make advance arrangements for the Two Sessions market?

The Two Sessions in early March will determine the economic development tone and the main orientation of macro policies for 2025, and announce this year's economic growth target, fiscal deficit and other quantitative indicators, which have important reference significance for the annual investment. It is expected that the trading in the first week of March will mainly focus on the Two Sessions market. At present, major sell-side institutions have successively released the Two Sessions outlook reports, and investors can judge the changes in market expectations based on these reports.

First, from the calendar effect of the historical Two Sessions, according to KAIYUAN Securities, since 2000, with the opening of the Two Sessions as the dividing point for the broad-based indices, the closer to the opening date, the weaker the market performance, but the probability of the market rising significantly increases outside of the 10 trading days. In terms of style, whether before or after the Two Sessions, the small-cap related indices are significantly better than the large-cap indices; in terms of the positive return effect, whether before or after the Two Sessions, the dividend varieties have the most significant positive return effect.

In addition, from the perspective of the probability of positive returns, the industries that have a continuous positive return ability both before and after the Two Sessions mainly include public utilities, social services, and beauty care; the industries with the best positive return ability before the Two Sessions are public utilities, mechanical equipment, basic chemicals, and computers; the industries with the best positive return ability after the Two Sessions are beauty care, social services, real estate, food and beverages, public utilities, etc.

Ping An Securities also pointed out that during the meeting, the cautious wait-and-see sentiment in the equity market has risen, and the market faces certain short-term pressure. Most of the major indices have adjusted, and the consumer and stable styles have shown relatively resilient performance. The average daily increase and decrease of the Shanghai Composite Index, CSI 300, ChiNext Index, and CSI 1000 Index during the Two Sessions are -0.17%, -0.23%, -0.07%, and -0.10%, respectively. The decline of the CITIC Stable and Consumer Style Index is smaller than that of the Financial, Cyclical, and Growth Style Indexes.

From the perspective of industrial policies, Huatai Securities pointed out that the Two Sessions-related policies are expected to focus on both the supply and demand sides.

The demand side will focus on promoting consumption, continuing to provide support in multiple aspects such as the "old for new" subsidy and increasing the "promoting people's livelihood" efforts. The long-term special treasury bonds are expected to continue to support the "two important" projects and the "two new" policies. Among them, the policy support for the "old for new" of consumer goods is expected to expand from 150 billion yuan last year, and the scope has also been expanded to digital products. It is not excluded that it will be further expanded to service industries such as cultural and entertainment, and catering.

On the supply side, the policies, on the one hand, promote the liquidation of some "old economy" industries with mismatched production capacity, and on the other hand, support the accelerated development of the "emerging industries" led by AI+. Technological innovation is still the main focus of promoting high-quality development deployed at the 2024 Central Economic Work Conference, and the local Two Sessions in various provinces and cities also continue this work focus, with most of them mentioning the active implementation of the "Artificial Intelligence +" action.

For the asset allocation in March, CITIC Construction Investment gives two directions. One is the direction where the Two Sessions policies are expected to be further promoted, including pro-cyclical and consumption, and the other suggests continuously paying attention to the pan-tech sector where the high prosperity trend has been clearly and gradually implemented. Low-position manufacturing industries such as photovoltaics and military industry are also expected to rebound, but the medium and long-term growth rate of the industry is still uncertain.

Ping An Securities also holds a similar view, suggesting to focus on two main lines: One is the technological innovation main line led by the AI industry (AI computing power/AI application/AI terminal side), and the other is the domestic demand consumption and some pro-cyclical sectors with high valuation cost performance for the "Two Sessions" policy speculation.

*Disclaimer:

The content of this article only represents the author's views.

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