The unfolding of the year-end stock market rallies in China's A-share market essentially reflects the market’s active search for future growth cues. Based on the expected prosperity for the coming year, this process involves re-pricing various industries.
According to Zhitong Finance App, Xingye Securities released a research report stating that the unfolding of each year-end rally in the A-share market essentially reflects the market's active search for future growth clues. This process involves repricing various industries based on next year’s growth expectations. Therefore, the concept of 'high and low' does not lie in 'stock price levels,' but rather in the 'alignment between stock prices and growth expectations.' By reviewing the structure of year-end rallies across seven comparable historical periods (where the first ten months all experienced gains), the following conclusions can be drawn: If the market expects the growth advantage of the main theme to persist or even accelerate into next year, the main theme will maintain its momentum during the year-end rally and is likely to deepen its diffusion into lower-positioned sectors within the main theme, as seen in typical years such as 2006, 2014, 2016-2017, and 2019-2020. However, if certain factors invalidate the growth expectations of the main theme or drive positive growth expectations for lower-positioned sectors, the market may systematically shift toward these lower-positioned sectors, triggering a year-end 'reversal' rally, as exemplified by 2007 and 2014.
The main viewpoints of Industrial Securities are as follows:
The essence of the year-end 'high-to-low' rotation lies in valuation restructuring driven by investors shifting their focus to growth perspectives. Following the conclusion of third-quarter earnings reports in October and after the market has largely priced in the current year’s growth, a data vacuum period ensues. As a result, the market typically shifts its focus to the next year, adjusting valuations based on growth expectations, thereby triggering a year-end valuation restructuring rally.
As the year-end market begins pricing in next year’s growth prospects in advance, growth expectations become increasingly crucial, while the impact of current growth on stock prices diminishes. Reviewing year-end rallies (November-December) since 2016 from a hindsight perspective reveals a strong positive correlation between sector performance rankings and their earnings growth in the following year, while showing weaker or even negative correlations with current earnings growth. From this perspective, investors often seek to position themselves in sectors expected to outperform in terms of growth in the next year, focusing primarily on identifying areas where strength will persist or where there will be a turnaround from difficulties.
Thus, the unfolding of each year-end rally essentially reflects the market's active search for future growth clues, followed by a process of repricing various industries based on next year’s growth expectations. Consequently, the notion of 'high and low' does not pertain to 'stock price levels' but rather to the 'alignment between stock prices and growth expectations.' By reviewing the structure of year-end rallies across seven historically comparable periods (where the first ten months all experienced gains), the following conclusions can be drawn: If the market expects the growth advantage of the main theme to persist or even accelerate into next year, the main theme will maintain its momentum during the year-end rally and is likely to deepen its diffusion into lower-positioned sectors within the main theme, as seen in typical years such as 2006, 2014, 2016-2017, and 2019-2020. However, if certain factors invalidate the growth expectations of the main theme or drive positive growth expectations for lower-positioned sectors, the market may systematically shift toward these lower-positioned sectors, triggering a year-end 'reversal' rally, as exemplified by 2007 and 2014.
If the market expects the growth advantage of the main theme to persist or even accelerate into next year, the main theme will maintain its momentum during the year-end rally and is likely to deepen its diffusion into lower-positioned sectors within the main theme:
In 2006, amid an accelerating economy and a golden development cycle for real estate, the market’s pricing of economic optimism spread from manufacturing to cyclical sectors, continuing the pro-cyclical trend.
From 2016 to 2017, driven by the recovery of ROE among listed companies and the shift in valuation systems alongside supply-side structural reforms, low-valuation value stocks and blue-chip leaders were the main themes throughout the year. The dominance of traditional pro-cyclical industries did not undergo a significant shift by year-end.
By the end of 2019, the TMT sector’s growth momentum continued, with the rise of the new energy industry trend, supported by favorable liquidity conditions and improved risk appetite, driving the outperformance of growth-oriented sectors. The new energy industrial chain replaced consumer stocks as the dominant theme for that period.
The cross-year rally in 2020 continued to focus on the high-end manufacturing and consumer-driven growth trends, while some upstream resource commodities benefited from domestic and international monetary easing policies as well as positive economic expectations, resulting in rotational gains.
If factors emerge that invalidate the main growth expectations or drive an improvement in the outlook for undervalued sectors, the market may systematically shift towards these lower-positioned sectors, triggering a year-end 'reversal' rally.
In the fourth quarter of 2007, policy shifts aimed at curbing high inflation and overheating economic conditions led to contractionary measures that dampened economic expectations. By year-end, the market structure shifted from the earlier 'manufacturing + cyclical' theme to the lower-valued 'TMT + consumption' sectors.
In November 2014, the central bank's unexpected interest rate cut ignited bullish sentiment in pro-cyclical sectors, leading to a comprehensive rotation in market structure from 'manufacturing + TMT' to 'financial real estate + cyclical' industries.
