As the Year of the Dragon approaches, the Chinese financial markets are poised for an interesting pre-holiday trading periodWith just four trading days left before the 2025 Lunar New Year celebrations commence, investors in the A-share market face a familiar dilemma: to hold onto their stocks or to convert their holdings into cash for the holidayThis decision is compounded by the fact that the upcoming holiday will span eight days, a consideration that previous years' trading patterns cannot be ignoredHistorical data reveals that in the past 15 years, the Shanghai Composite Index has posted gains more than 70% of the time in the period following the Lunar New YearThis performance provides a glimmer of optimism amidst an otherwise cautious market outlook, suggesting that the potential for growth remains robust despite economic headwinds.

Various financial institutions have provided insights that indicate an undercurrent of positive sentiment surrounding sectors like technology, domestic consumption, and small-cap stocks

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In categories such as TMT (Technology, Media, and Telecommunications) are attracting institutional confidence, observers suggest that areas including augmented reality (AR) glasses, humanoid robots, information technology innovations, and the low-altitude economy are particularly promising for investorsMeanwhile, high-dividend assets including electricity, highway holdings, banks, and telecommunications firms are recommended as defensive placements to hedge against unforeseen market volatility.

After a shaky start to 2025, the A-share market appears to be bouncing back, signaling a potential recoveryAccording to Fang Yi, the chief strategist from Guotai Junan Securities, the stabilization of market risk appetite and positive expectations around policy changes are significant in fostering growth in the technology sector, consumer spending, and small-cap stocksIn contrast, the Hong Kong stock market has been seen as more adequately pricing in negative factors, with premium companies’ cash holdings increasing as a percentage of their total market value, gradually revealing its investment potential.

On January 21, the three major indices in the A-share market exhibited varied performances, with the Shanghai Composite Index dipping slightly

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However, when examining the trends surrounding the post-holiday period historically, it appears that a great deal of the time, stocks have gained ground shortly after the Lunar New YearStatistics collected from sources including Wind and Guotai Junan Securities from 2010 to 2024 show that in the last 15 years, 11 of those years saw positive movement in the index during the ten trading days following the New Year celebrationsRemarkably, seven of those years experienced gains during the pre-and post-holiday period.

In the lead-up to this Lunar New Year, some funds are reportedly on the move, anticipating the trends that often accompany the holidayAccording to Qiu Xiang, the chief A-share strategist at CITIC Securities, early signs indicate that funds are opting to invest in stocks they view as undervalued, contextualizing these actions as a “running start” in preparation for the trading activity expected after the holiday

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Given that this week marks the last full trading week before the break, it's anticipated that these investors may indeed opt to hold onto their stocks over the holiday.

Continue to monitor the comments from analysts like Zhang Chi at Guojin Securities, who indicates a noticeable uptick in business fundamentals as of Q4 2024. They suggest that there is a sustained improvement in microeconomic expectationsHowever, with the M1 monetary supply's transmission to the Producer Price Index (PPI) taking an estimated nine months, this means that any signs of profitability may not be fully realized until Q3 of 2025. Despite the marginal economic improvement domestically, analysts believe that any increase in economic stability bodes well for the overall market and could lead to a re-expansion of market valuations.

As these opportunities unfold in the A-share market’s landscape, an upward trend is anticipated

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Wang Jun, chief strategy analyst at Bank of China Securities, states that as long as the existing monetary and fiscal policies remain steadfast, the microeconomic liquidity channels should provide ample support for upward movement in the A-share markets, notwithstanding some necessary adjustments regarding the pacing of this growth.

Focusing on the latest industry performance as of January 21, sectors such as electronics, communications, and real estate have shown substantial gains within the 31 primary industries tracked by ShenwanExpressively, areas such as smart speakers, ASIC chips, and MCU chips have risen to prominence, suggesting a bullish sentiment among investorsFor both pre-and post-holiday investment strategies, a consensus appears to form around the advantages offered by the technology growth sectors.

Chen Gang, chief strategist at Dongwu Securities, remains optimistic about the potential for a pre-holiday rebound, fueled by abundant liquidity and a continuation of positive industry trends

The outlook for the technology and cyclical sectors appears bright, with specific areas such as artificial intelligence, new energy sources, aerospace information technology, and data utilization anticipated to showcase growth potentialThe recommendations extend to emerging segments in AR glasses and humanoid robotics, among others.

Meanwhile, an analysis of sector performances during past post-Lunar New Year periods exhibits that the TMT sector consistently outshines, with telecommunications, computing, and electronics sectors leading in terms of excess returnsLi Meicen, chief strategy analyst at Caitong Securities, emphasizes that the ongoing positive macroeconomic factors indicate the likelihood of staging a structural market rally, recommending active interest in TMT stocks, small-cap investments, and thematic investors once the post-holiday trading emerges.

Consistent with the trend, sectors focused on high dividend yields continue being perceived as valuable holding assets

With parts of the growth sector seeing significant corrections, cautious investors are increasingly attracted to such defensive sectors due to their potential to mitigate external financial shocksAssistant Director and chief economist at Huaan Securities, Zheng Xiaoxia, pointed out that the period’s performance indicates that high dividend stocks show resilience in turbulent markets, offering opportunities for enhancing investors' defensive strategies.

In evaluating these shifts, Fang Yi asserts that for long-term institutional investors, such as insurance and wealth management funds, dividends present a promising avenue for investmentWith the looming pressures on their liability sides, the allure of consistent dividend yields becomes more pronounced, prompting suggestions to consider investments in segments like electricity, highways, banks, and telecommunications within both the A-share and Hong Kong markets.