Strategy summary:

The stabilization of new energy sources may be an important prerequisite for the index to reverse in 2024.

Because from the perspective of behavioral finance, although sectors such as coal and China Special Valuation had strong performance in 2023, the sentiment and valuation impetus for other industries is relatively small. However, the performance of sectors such as new energy pharmaceuticals and semiconductors may affect the sentiment and valuation of all growing consumer sectors.

Historical experience tells us that if the bottom of the market reverses, it is necessary to gradually lead the market in a phased manner in the direction of the strongest bull market in the previous round, so that market sentiment can recover. For example, from the second half of 2015 to 2019, the three most important bottom reversal stages of the index, the strongest computers in the previous round of the bull market could all lead the market for one quarter (Q4 2015, February-April 2016, and Q1 2019). In 2008-2015, the two most important bottoms (end of 2008 and end of 2012), and the strongest financial cycle in the previous round of the bull market all performed well.

New energy, which was the strongest in the previous bull market, faced a double deterioration in supply and demand in 2023. Compared to industries with historical overcapacity, in most cases, there are two types of final outcomes.

A poor situation is the 2011-2015 cycle, where capacity loss continued for 5 consecutive years, causing the 2011-2015 cycle industry to continue to outperform the market.

Another outcome is that electronics after 2011 also faced loss of production capacity due to overcapacity, but judging from capital expenses/depreciation and amortization data, the rapid decline period was less than 2 years, so the impact on excess earnings in the electronics industry was only over 1 year. The biggest difference is that demand in the electronics industry gradually rebounded steadily after 2012, while demand in cyclical industries such as coal continued to decline after 2012. New energy in 2024 can be compared to electronics in 2012. Inventories stabilize, demand is likely to improve, relative earnings will stop falling, and a phased (or partial) market will begin, which will further increase the possibility of a steady reversal of the 2024 index.

Short-term strategic view: Liquidity improved at the beginning of the year, and a second reversal attempt is underway. There may also be new reversal forces (policy or real estate sales) in March.

Over the past quarter, stock market policies and economic policies have gradually improved, but the stock market is still weak. One is that investors are uncertain about long-term economic growth prospects, resulting in short-term profits not being profitable for the market. The second reason is that some absolute income investors (private equity and foreign capital) face greater net worth pressure. In order to control volatility, they are afraid to increase their positions, and even need to reduce their positions.

We think the present can be compared to the end of 2012. After a simple analogy, we think there are the following six similarities:

(1) The index did not rise in 3 years: fluctuated in 2010, fell across the board in 2011, and fell slightly in the first 11 months of 2012.

(2) The economic center has experienced a gradual decline. The long-term pattern of some industries has declined systematically, but short-term inventories are low, and the economy is likely to rebound slightly from year to year.

(3) Valuation fell to the lower historical limit.

(4) Both 2012 and now are tracks with strong performance in the previous round of the bull market, but they are weak. In years where a new track has not yet been established, the subsequent investment method and style may usher in a major change.

(5) Overseas in 2012, the focus was on the European debt crisis, but A-shares were weak. Overseas interest rates this year are US bond interest rates, which are also weak in A-shares.

(6) The 2012 Financial Innovation Conference and the suspension of the IPO each reversed the stock market supply and demand policies. In the end, the outcome of the 2012 bear market was optimistic, and this optimism was not based on a negative logic reversal. Because concerns about overcapacity in some of China's manufacturing industries, the population cycle, and the center of GDP growth in 2012 were all reasonable, they also affected the economic growth rate after 2011, and the stock market ROE continued to decline from 2011-2015. From the end of 2012 to 2013, the reversal benefits were “a small economic rebound plus the emergence of TMT industry opportunities”. We believe that the likely benefits for the next year are “a small economic rebound plus opportunities in industries such as cyclical and AI, and a rebound in real estate sales.”

Industry configuration recommendations:

The old circuit (such as new energy), which has surpassed the decline in the short term, may have a quarterly counterattack. The 2024 annual allocation order: upstream cycle > AI, auto parts > financial real estate > old circuit (pharmaceutical semiconductor new energy) > consumption. A major rebound or reversal near the bottom in history generally has the following characteristics:

(1) In the stage where the long-term style is small (such as 2008-2016), if the index reverses at the bottom, the small market style may retract or stagnate in stages, and the general market style will tend to be stronger.

(2) The first wave of rise after the bear market ends will be overshadowed by the previous round of the bull market, and the new energy that showed performance last week is exactly the strongest direction in the previous round of the bull market.

(3) In the 2-3 months when the bottom was just reversed, most of the sectors that saw the biggest increase were the overfalling sectors, such as the strongest NEV semiconductors after the reversal at the end of April 2022 and the strongest consumption after the reversal at the end of October. These were all weakest in the previous half year. However, the bottom reversal usually has little correlation with the strongest sector in the next year and the direction of the strongest sector in the next year.