In last week's report, we discussed the "2026 Spring Rally Outlook," summarizing several key conclusions based on historical patterns: What determines the strength of the spring rally? Under what circumstances does the spring rally start early? Does the spring rally indicate trends for the full year? Does earnings growth become less important during the spring rally? After earnings risks materialize, does the market interpret it as "bad news priced in"?
This week, we further explore: If an industry theme has been established (such as this year's AI industry chain), how have related sectors historically performed during the year-end transition and spring rally periods?
### I. Historical Patterns of Index and Style Performance During Year-End and Early Year 1. **November**: The most challenging month for institutions has passed. Market movements in November show the weakest correlation with fundamentals, with active themes and faster rotations. 2. **December**: Over the past 20 years, indices have risen and fallen equally in December, but fundamental pricing effectiveness improves compared to November. In terms of style, large caps outperform small caps, dividend strategies dominate, and the financial sector leads in gains. Hong Kong dividend stocks also enter their strongest seasonal period. 3. **January**: The probability of index gains in January is only 43%, while small-cap stocks have a 31% chance of rising, mainly due to suppressed risk appetite from annual earnings previews. 4. **Around Chinese New Year and February**: The period with the highest risk appetite in the year. Small caps have a win rate exceeding 90%, while growth styles and sectors like electronics, computers, and non-bank financials post the highest average gains.
### II. How Do Industries with Strong Earnings Expectations Perform During Year-End and Spring Rally? Referencing this year's AI, robotics, and biotech themes, which have shown strong performance but entered a correction in Q4, how have historically confirmed industry trends performed during year-end and spring rallies?
We examined eight years and 13 industry cases: 1. **2011**: Baijiu (liquor) amid new urbanization and consumption upgrades. 2. **2013-2015**: Media and computers during the mobile internet boom. 3. **2016**: Cyclicals under supply-side reforms. 4. **2016-2017**: Baijiu. 5. **2019-2020**: Semiconductors amid localization trends. 6. **2020-2021**: New energy. 7. **2024**: Optical modules and electronics.
Key findings: 1. These themes experienced year-end volatility and corrections, but drawdowns were limited (average: -13%). 2. From year-end to spring rally, they resumed gains with impressive returns (average: 37.9%, median: 26.7%). 3. Most led the broader market (5 out of 8 years) and ranked in the top third of sector performance in Q1 (9 out of 13 cases). 4. Earnings expectations remain critical: Themes outperformed when annual and Q1 earnings confirmed sustained high growth.
### III. Outlook for 2025-2026 Industry Theme Performance 1. Since 2018, top-performing stocks often underperform during year-end evaluations. This year's fluctuations are normal, with pressures easing in December. 2. As of late November, corrections in theme sectors have been sufficient in duration and magnitude, with rebounds emerging. 3. The 2026 spring rally is unlikely to be absent, given mild policy, liquidity, and earnings outlooks. 4. Seasonal effects favor A-share dividends, Hong Kong Connect high-dividend stocks, and non-bank financials in December-January. 5. With stable annual earnings previews and high Q1 growth expectations, tech themes could rebound swiftly upon catalysts, potentially leading the spring rally.
### Key Market Updates - **Macro**: China's November PMI edged up to 49.2%, with production at 50%. Industrial profits fell 5.5% YoY in October. - **Sectors**: Real estate sales declined 11.39% YTD, while auto retail sales dropped 7% YoY in November. New energy vehicle sales rose 7%. - **Commodities**: Steel and chemical prices showed mixed trends, while international crude oil gained. - **Valuations**: A-share P/E (TTM) rose slightly to 19.13x, with defense, computers, and electronics at premium valuations.
### Risks - Geopolitical tensions exceeding expectations. - Tighter global liquidity. - Disappointing domestic growth policies.
Next week’s key data releases include China’s November trade figures, U.S. CPI, and Japan’s Q3 GDP revision.
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