China Merchants Securities (CMSC) released a research report stating that looking ahead to February, the market is expected to be predominantly volatile for some time, with post-holiday index performance likely to be stronger than pre-holiday performance. Calendar effects indicate that small-cap and growth styles have a relatively higher win rate in February. Considering the market is still in the Spring Festival rally phase, the report continues to recommend a growth style at the strategy level, with the performance divergence between large and small caps expected to narrow, favoring large caps first followed by small caps. Recommended indices primarily include the CSI 1000, ChiNext 50, CSI 300 Quality, and CSI 800 Information. The main views of China Merchants Securities are as follows:

Style Outlook: Growth Outperformance, Narrowing Large/Small-Cap Performance Gap. Entering February, and considering the market remains in the Spring Festival rally stage, the report continues to recommend a growth style, expecting the performance gap between large and small caps to narrow, favoring large caps initially then small caps. The recommended index portfolio includes: CSI 1000, ChiNext 50, CSI 300 Quality, and CSI 800 Information. Specifically, first, over the 10-year period from 2016-2025, small-cap and growth styles have shown a relatively higher win rate in February. Given the later timing of the Spring Festival this year, the "Two Sessions" will convene in the week following the holiday; historically, small-cap stocks have a higher probability of outperforming around the Two Sessions, primarily due to relatively higher market risk appetite during this period, allowing small-caps to demonstrate greater elasticity. Second, regarding fundamentals, the January Manufacturing PMI registered 49.3, falling back into contraction territory, with both production and demand marginally cooling. The structural contradiction of insufficient domestic demand persists, and expanding domestic demand will continue to be the main focus of policy efforts. Third, overseas, as the market undergoes a phase of correction in expectations for future Fed policy and a weak US dollar, the dollar may experience a temporary strengthening. This could exert some pressure on the cyclical styles within the A-share market. In contrast, the tech/AI sector, catalyzed by industrial trends, is likely to be less affected. Fourth, in terms of capital flows, foreign capital and ETF funds often tend to significantly increase positions before the holiday to hold stocks over the break, with net inflows slowing or turning into outflows after the holiday; margin financing funds typically flow out before the holiday and flow in afterwards, benefiting the post-holiday small-cap style.

Review of Major Asset Class Performance: Global Commodities Lead Gains. In January, market concerns about the Federal Reserve's policy independence once intensified, coupled with Trump's "weak dollar" rhetoric, causing the US Dollar Index to briefly fall below the 96 mark, while global equity markets generally performed well. The unfolding "de-dollarization" narrative, combined with the market front-running expectations for a weak dollar and monetary easing, drove up prices for gold and silver, leading to strong commodity performance. Regarding A-shares, the market rose initially in January before entering a consolidation phase, with a style shift towards pro-cyclical sectors.

Liquidity and Capital Supply/Demand: Incremental Funds May Continue Net Inflows in February, Foreign Capital Expected to Maintain Net Inflows Pre-Holiday, Margin Financing Expected to Return Post-Holiday. Regarding macro liquidity, the concentrated issuance and payment for government bonds in January created a certain draining effect on liquidity. The central bank implemented precise and forceful countermeasures, using medium-term liquidity tools to fill the funding gap; the liquidity environment is expected to remain stable and ample in February. Concerning external liquidity, judging from the policy stance of Warsh, newly nominated by Trump for Fed Chair, Warsh is more likely to adopt a mild and gradual interest rate cut strategy, preferring to coordinate rate cuts with balance sheet reduction (QT) to offset the easing effects and avoid an inflation rebound. The market has currently revised its expectations for 2026 rate cuts upwards from one cut to two cuts. Regarding stock market capital supply and demand, trackable funds in the stock market turned to net outflows in January, with margin financing becoming the main source of incremental funds, while ETFs experienced significant net redemptions. On the supply side, the scale of new equity-focused fund issuance recovered somewhat, ETFs tracking major indices like the CSI 300 saw substantial net outflows, and margin financing funds showed a recovery in risk appetite leading to net inflows. On the demand side, net减持 by major shareholders expanded; the scale of IPO issuance and refinancing declined somewhat, keeping the overall capital demand size stable. Looking ahead to February, incremental funds are expected to continue net inflows, foreign capital is anticipated to maintain net inflows before the holiday, and margin financing is expected to return after the holiday.

Market Sentiment and Capital Preference: The Wind All-A Share Equity Risk Premium (ERP) first declined then rose in January, with major indices rising initially then consolidating. In terms of style, the technology style remained the relatively dominant style in January, with trading热度 for small-cap growth and the STAR 50 index rising significantly, while the trading concentration for large-cap growth style remained relatively low. From a sector perspective, the leading gainers were primarily pro-cyclical sectors like non-ferrous metals and petroleum & petrochemicals.

Risk Warning: Economic data and policies falling short of expectations; overseas policies tightening beyond expectations.