Hua Jin Strategy: Return to Fundamentals in April, Technology and Cycles Resume as Main Themes

Reviewing history, the core factors affecting A-shares’ performance in April are fundamentals, policies, and external events. (1) Since 2010, the Shanghai Composite Index has only risen in April 6 times over the past 15 years. (2) The core factors affecting A-shares’ performance in April are fundamentals, policies, and external events. Firstly, the economic and profit fundamentals are the main factors driving A-shares in April: First, a rebound in year-on-year growth rates for real estate sales, retail sales, and exports may lead to an increase in the Shanghai Composite Index in April; otherwise, it may decline. Secondly, the growth rate of industrial enterprise profits and the growth rate of A-shares’ first-quarter earnings have a limited impact on whether the Shanghai Composite Index rises. Secondly, policies and external events also have important effects on A-shares’ performance in April.

Reviewing history, if A-shares adjust due to external events in February-March, April may see a relatively strong fluctuation. (1) If significant external events in February-March lead to adjustments in A-shares, then April may be relatively strong: After five significant external events in February-March, A-shares have rebounded from low points in early April four times, and the average decline in April for A-shares is 0.5% (the average decline in March is 2.2%). (2) After significant external events in February-March, A-shares perform relatively strongly in April, mainly driven by a significant decline in sentiment and foreign capital inflow. Firstly, sentiment has notably declined: the average maximum decline in trading volume is 58%, and the average historical percentile for the lowest turnover rate is 21.6%. Secondly, foreign capital has seen inflows: in March 2020 and 2022, the average net outflow of foreign capital was 56.48 billion yuan, while the average net inflow in April was 29.78 billion yuan.

This April, A-shares may see a relatively strong fluctuation, with the slow bull trend unchanged. (1) This April, the economy and profits may continue to rebound. Firstly, economic recovery may continue in April: first, consumption growth may stabilize; secondly, the growth rates of infrastructure and manufacturing investment may further rebound; finally, exports may continue to maintain a high growth rate. Secondly, corporate profits may remain in a rebound trend in April: the year-on-year growth rate of PPI and the growth rate of A-shares’ first-quarter earnings may continue to rise. (2) Policies may still be proactive in April, and external risks may ease. Firstly, policies may still be relatively proactive in April. Secondly, external risks may marginally ease, and A-shares’ concerns regarding risks such as the U.S.-Iran conflict may have been adequately addressed. (3) Domestic liquidity may remain loose in April, and funds in the stock market may see some inflows.

This April, technology and cyclical styles may outperform, with a balanced approach to large-cap and small-cap styles. (1) Technology and cyclical styles may outperform in April. Firstly, reviewing history, stable and financial styles have often led in performance in April, mainly driven by policies and external events. Secondly, this April, technology and cyclical styles may outperform: first, financial and stable styles may struggle to lead in April; secondly, policies supporting technological innovation and reducing involution may be further implemented in April; finally, cyclical industries and technology hardware may continue to improve in April. (2) The large-cap and small-cap styles may be balanced in April. Firstly, reviewing history, large-cap stocks usually outperform in April. Secondly, this April, large-cap and small-cap styles may be balanced: first, cyclical and technology sectors may have relatively high profitability, which benefits small-cap styles; secondly, expectations for overseas liquidity may not significantly ease, which may benefit large-cap styles; finally, domestic policies favor small-cap styles.

Industry configuration: In April, consider investing in high-performing technology and certain cyclical industries on dips. (1) After previous negative impacts led to adjustments in A-shares, high-performing technology and certain cyclical industries may still outperform in April. Firstly, reviewing history, after previous negative impacts led to adjustments in A-shares, some technology and cyclical sectors with high performance rankings may still outperform in April. Secondly, as of now, industries such as electronics, telecommunications, non-ferrous metals, and power equipment may outperform in April. (2) Currently, growing sectors like power equipment, media, and automobiles have low PEG ratios, while non-bank financials and food and beverage sectors with dividends have relatively low historical valuation percentiles. (3) In April, it is recommended to invest on dips: firstly, in sectors with upward policies and industrial trends such as new energy (AI power, energy storage), telecommunications (AI hardware), electronics (semiconductors, AI hardware), non-ferrous metals, chemicals, military industry (commercial aerospace), and innovative pharmaceuticals; secondly, in undervalued sectors with dividends like coal, power, and banking.

Risk warning: Historical experience may not apply to the future, policies may change unexpectedly, and economic recovery may not meet expectations.

(Source: Huajin Securities)