Following a recent sharp market adjustment, a window for strategic allocation has opened. Within the bull market context, the impact of micro-liquidity shocks has been largely absorbed, shifting focus towards the potential rebound in cyclical and property-related sectors. According to a strategy weekly report released by Huachuang Securities on February 8th, the current round of market decline may have bottomed out. Data shows that on February 2nd, the number of companies hitting the daily downside limit reached a new high of 130, while leveraged funds recorded a net outflow of 582 billion yuan over five days, pushing market sentiment back to levels last seen in November of the previous year. More importantly, a profound shift in investment style is underway: growth stocks are expected to outperform value stocks, but growth opportunities are no longer confined to the technology innovation sector. The potential rebound in cyclical industries and the property chain also warrants significant attention. Amid a slowdown in excess liquidity, large-cap stocks are poised to outperform small-caps. From a full-year perspective, technology combined with cyclical sectors remains the core allocation theme. Investors should seize medium-to-long-term allocation opportunities at this juncture and reconsider the broader definition of "growth." Signals indicate the adjustment phase is complete, with micro-liquidity shocks being rapidly cleared. The market has undergone a sharp but brief correction. Huachuang data indicates that broad-based ETFs have seen a cumulative net outflow of 1.02 trillion yuan year-to-date, while leveraged funds recorded a net outflow of 582 billion yuan over the past five trading days, the highest since April of the previous year. A sharp decline in precious metals prices led to profit-taking in the non-ferrous metals sector, compounded by regulatory moves to increase margin requirements, which notably suppressed market risk appetite. However, multiple indicators suggest the adjustment has been sufficient. Investor sentiment, as reflected by market temperature around the 4000-point level for the Shanghai Composite Index, is now close to the levels seen at 3800 points last November. The 130 companies hitting the daily limit down on February 2nd exceeded the 107 recorded on November 21st of the previous year. Huachuang's analysis notes that bull market corrections triggered by micro-liquidity issues or sudden events are typically short-lived. The current pullback from the high of 4190 points to around 4000 points, in terms of both magnitude and sentiment indicators, suggests the adjustment is largely complete. Huachuang maintains that the three fundamental pillars supporting the bull market remain intact: A-shares have seen shareholder returns exceed financing scale for four consecutive years, reversing the investment-financing dynamic; the free cash flow ratio for the entire A-share market excluding financials remains stable at 20-25%; and ROE has completed its transition between old and new growth drivers, with the drag from the property sector nearing its end. In the short term, evidence for earnings recovery in 2025-2026 is clear. The proportion of companies issuing positive earnings pre-announcements rose from 33.5% in 2024 to 37% in 2025, while the share of companies receiving upward revisions to their 2026 earnings forecasts from analysts increased from 65% last November to 96% currently. Growth style expands: Extending from tech innovation to cyclical and property chains. The most significant style call in the report is that quality growth will outperform pure high-dividend value, and growth opportunities exist beyond the tech innovation board. By analyzing the two-year net profit compound annual growth rate and expected 2026 net profit growth for primary industries, Huachuang categorizes growth stocks into two types: The first type represents the continuation of high-growth sectors. These industries have maintained strong earnings growth over the past two years and are expected to sustain high net profit growth into 2026. They are primarily concentrated in the tech innovation sector, including electronics, media, and commerce & retail. These represent traditional growth stocks. The second type involves earnings elasticity from a low base. Industries in this category have seen declining profitability over the past two years but are expected to reach an inflection point and rebound in 2026. These are mainly found in cyclical sectors and the property chain, including steel, building materials, light industrial manufacturing, as well as advanced manufacturing sectors like power equipment, defense, and computers. The logic behind this view is the return of tangible reflation. As expectations for PPI turning positive strengthen, EPS pricing power will gradually increase, enhancing the advantages of factors like growth, profitability, and quality. The macro backdrop favoring the dividend-yield style from 2022-2024 featured falling prices and a strong currency. However, with the return of inflation and earnings recovery, high-quality growth styles are expected to demonstrate greater earnings elasticity. Excess liquidity inflection point: Large-caps outperforming small-caps emerges as a new trend. Huachuang believes a significant shift in market capitalization style is occurring. Over the past year, the significant widening of the M2-total social financing stock gap favored small-cap styles like the CNI 2000 and micro-cap stocks, reminiscent of the 2013-2015 bull market pattern. However, this trend is reversing. Since August 2025, excess liquidity has been consistently declining, dropping from a high of 2.8% to 1.9% last November, with a slight rebound to 2.3% in December. During this period, large-cap stocks significantly outperformed: the CSI 500 index gained 31% cumulatively since August 2025, compared to a 22% gain for the CNI 2000. Examining the recent "Spring Rally," since November 24th of last year, the CSI 500 has risen 19.5%, also outperforming the CNI 2000's gain of 16.5%. Drawing parallels to the 2016-2018 market environment, as total social financing recovers and inflation returns, excess liquidity is expected to gradually decline, potentially putting valuation pressure on small and mid-cap stocks. The influence of the valuation factor is likely to weaken over the coming year, with some high-valuation small-cap stocks lacking growth support potentially having reached their valuation limits. The return of inflation will further boost listed company profits, and historically, large-cap styles have tended to outperform small-caps during earnings upcycles. Annual allocation theme: Dual drivers of technology and cyclical sectors. Huachuang Securities points out that from an annual perspective, technology combined with cyclical sectors remains the primary allocation theme, recommending investors capitalize on the current allocation window. Within the technology direction, focus is on the continued expansion of valuation ceilings driven by Kondratiev cycle dynamics, emphasizing steady growth on the device side and the commercialization of ToB applications. Specific areas to watch include computing hardware, energy storage, AI applications, and intelligent driving. For the cyclical direction, optimism centers on the tight supply advantages in key sectors ("five golden flowers"), which could amplify price and valuation elasticity during the PPI recovery phase. From a gross-to-sales margin perspective, reduced internal competition is expected to drive earnings improvement. Key sectors include non-ferrous metals, chemicals, machinery, steel, and building materials. On the liquidity front, new issuance of public equity fund units has risen steadily from 22.1 billion yuan in May 2025 to 69.6 billion yuan in January 2026. Private fund filing scale expanded from 50.1 billion yuan in June 2025 to 98.9 billion yuan in December 2025, indicating continued inflows of incremental capital. Policy-wise, the State Council executive meeting on February 6th discussed measures to promote effective investment, and the General Office of the State Council issued a plan to accelerate the cultivation of new growth drivers in service consumption. Expectations for domestic demand stimulus policies could provide upward catalysts, with the National People's Congress session following the Spring Festival being a key event to watch. For investors, the current strategy should be to redefine the boundaries of "growth," looking beyond just the tech innovation board to identify earnings rebound potential in cyclical and property chain sectors. Simultaneously, attention should be paid to the shift in market cap style, favoring large-cap growth stocks with solid earnings support.
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