Zhongjia Fund: Strong catalysts appear in the pro-cyclical direction, and market styles may change in the short term

According to Zhitong Finance APP, the China-Canada Fund stated that the Two Sessions have successfully concluded, and the government work report highlights two major development focuses: consumption and new quality productivity. In terms of domestic demand, a recent significant catalyst has been introduced that can be linearly extrapolated to some extent (Hohhot's fertility and education subsidies). With the earnings season approaching and under the narrative of the East rising and the West falling, some foreign capital has begun to increase its allocation to Chinese targets led by Hong Kong stocks, increasing the likelihood of short-term low-position cyclical and some dividend styles prevailing. From a medium-term perspective, the industrial trends and narratives in technology still cannot be falsified. Currently, the catalysts in the cyclical direction have limited impact on the economic fundamentals, more so on sentiment, and need to be validated over time and with more catalysts for an improvement in economic fundamentals; thus, it is still impossible to make a smoothly extrapolated assumption. As technology's valuation levels and trading congestion recede amid fluctuations, the medium-term view maintains that the technology sector will continue to outperform.

1. Market Review and Analysis

Main Index Situation

Last week, the major A-share indices showed mixed performance, maintaining strong fluctuations.

Industry Situation

Among the 31 first-level industries of Shenwan, beauty care, food and beverage, and coal performed relatively well.

1. Strategy View

Macroeconomic Events and Data

February U.S. CPI

In February, the U.S. CPI year-on-year was 2.8%, expected 2.9%, previous value 3%. Core CPI year-on-year was 3.1%, expected 3.2%, previous value 3.3%. The data fell short of expectations. In terms of components, transportation had a significant drag. Airfare prices fell 4% month-on-month, and the growth rate of motor vehicle insurance also slowed. Core service inflation is also on a slow downward trend, with the year-on-year growth rate of housing rent falling to 4.3%, a significant decrease compared to around 6% at the beginning of 2024. This indirectly indicates that the strength of U.S. employment may also decline. After the data was released, expectations for a Federal Reserve interest rate cut increased, and U.S. stocks rebounded in the short term, but the main concern in the current market remains the inflationary impact of Trump's tariff policies on goods. Although recent economic data has opened up space for the Federal Reserve to cut rates, in the context of high policy uncertainty, it is expected that the Federal Reserve will remain cautious and observant in the short term. The possibility of the U.S. economy heading towards stagflation still exists.

February Social Financing Data

February social financing data: new loan scale was 1.0 trillion yuan, a year-on-year decrease of about 400 billion; new social financing scale was 2.2 trillion yuan, a year-on-year increase of 0.7 trillion. In February, the year-on-year growth rates of M0 and M1 fell to 9.7% and 0.1%, respectively, while the year-on-year growth rate of M2 remained stable at 7.0% The data generally meets expectations. Looking at the sub-items, structural issues still exist, and medium- to long-term loans for enterprises and residents remain under pressure, indicating that insufficient domestic demand continues to affect the data. Additionally, the incremental share of bill discounting and non-bank deposits accounts for about 40% of credit, which may indicate a surge situation. The growth rates of M0 and M1 continue to decline, and the gap between M2 growth rates continues to widen, reflecting insufficient credit demand and capital accumulation issues. Recently, the narrowing of the interest rate differential between China and the U.S., along with the decline of the U.S. dollar index under the influence of Trump’s policies, has eased the pressure on stabilizing the exchange rate, opening a window for reserve requirement ratio cuts and interest rate reductions. However, the current impact of these measures is also limited, and from a liquidity perspective, there is no urgent need. Observing the Federal Reserve's movements before taking further actions may be a better choice.

Outlook

Policy Direction After the Two Sessions

The Two Sessions have successfully concluded, and from the government work report, two major development focuses can be distilled: consumption and new productive forces. Although the technology sector maintained new catalysts last week, momentum has clearly weakened at high levels, and incremental funds are insufficient to push the market upward unilaterally, leading to significant fluctuations. In terms of domestic demand, a recent major catalyst has been introduced that can be linearly extrapolated to some extent (birth and education subsidies in Hohhot). Coupled with the approaching earnings season and the narrative of the East rising and the West falling, some foreign capital has begun to increase allocations to Chinese targets led by Hong Kong stocks. The likelihood of short-term low-position cyclical and some dividend styles prevailing has increased (there are many targets with low valuation positions and good performance).

Mid-term Dimension Analysis

From a mid-term perspective, the industrial trends and narratives in technology still cannot be falsified, and the current international political and economic situation remains highly uncertain. The catalysts in the pro-cyclical direction currently have limited impact on the economic fundamentals, more so on sentiment, and need to be verified with time and more catalysts for improvement in economic fundamentals. Currently, it is still impossible to make smoothly extrapolated assumptions. As technology experiences a decline in valuation positions and trading congestion during fluctuations, the view of maintaining the technology sector's continued superiority remains in the mid-term dimension.

Key Industry Focus

Pro-cyclical Industries

For industries with high elasticity in policy and fundamental expectations, the current market structure is relatively favorable. Based on risk preference and catalyst allocation, targets led by consumption should be prioritized.

A-share Technology

In the short term, it has entered a wide fluctuation at high levels, with the highest certainty of catalysts, relatively less affected by economic policies, and new narratives and catalysts still emerging. The mid-term outlook remains optimistic. Focus on domestic AI upstream and downstream, Hong Kong stock internet, self-controllable, robotics, low-altitude, and other directions.

Supportive Industries

With the earnings season approaching, manufacturing sectors with performance support and sustained expectations have the advantage of relatively small fluctuations, such as high-quality targets in power equipment, consumer electronics, home appliances, or those benefiting from supply clearing in pharmaceuticals, new energy, and upstream cyclical-related targets.

Dividend Industries

For defensive dividend industries, the allocation ratio can be moderately reduced in the short term, with decisions on whether to replenish based on market fluctuations and the performance of mainline sectors. The low-interest-rate environment provides medium- to long-term liquidity support for dividend styles, which still have high stability and are an important direction for capital support once mainline sectors experience adjustments. Focus on dividend targets with catalysts (debt reduction, market value management, and related catalysts for the two new and two heavy sectors are relatively dense, along with small themes like Ukraine reconstruction, which can be configured for more short-term returns from undervalued central enterprises), as well as weak cyclical and stable cash flow public utilities, finance, precious metals, and other value dividends