The last few months of the year have marked a significant shift in economic sentiment, particularly in the A-share marketWith the Federal Reserve initiating a cycle of interest rate cuts and higher-level meetings emphasizing the need for stability in the economy and capital markets, confidence, which had been waning for the past three years, has been revitalizedInvestors are now filled with anticipation for the unfolding trends in 2025.

A critical consideration for investors is identifying which sectors possess greater safety margins and upside potential, as well as which industries are likely to thrive amidst this momentum and emerge as the new frontrunners in the next bull market.

Consumption, particularly large-cap quality stocks, is anticipated to make a comebackOver the past few years, China's top consumption stocks have faced a steep downturnThe Moutai index, a benchmark for high-quality consumption companies, has underperformed compared to the overall market index for three consecutive years, experiencing an overall decline nearing 50%. Big market players like China Duty Free and Joyoung have seen their values plummet by more than 80%, which has notably weighed on the overall market.

It's important to denote that the drastic decline in these consumption stocks isn’t indicative of a collapse in underlying performance

Instead, it represents a reckoning for the extraordinary valuation bubble that characterized the previous bull marketAfter clearing away the excesses, these blue-chip consumption stocks now present a much firmer safety margin for investors in the upcoming year.

Currently, the price-to-earnings (P/E) ratio of the Moutai index has dropped to around 20 times, while its price-to-book (P/B) ratio is approximately 3.3 times—levels generally lower than most of the last decadeThis setback in valuations has effectively made previously lofty quality assets more accessible and grounded.

With a safety net established in valuation metrics, the outlook for performance growth in the consumption sector appears more certain for next year, primarily fueled by supportive government policiesThe Federal Reserve’s decision to embark upon a cycle of rate cuts opens avenues for domestic macroeconomic stabilization

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The policymaking body has proposed employing extraordinary counter-cyclical intervention measures, along with implementing more aggressive fiscal policies and moderately accommodating monetary policiesAt the recent Central Economic Work Conference, the drive to "boost consumption and enhance investment efficiency" was placed at the top of priority tasks for the upcoming economic agendaInitiatives targeting “new energy” consumption, age-diverse economic participation, and the burgeoning winter sports economy have also been highlighted as significant focus areas.

Amidst declining investments and restricted external demand, consumption is increasingly entrenched as a key foundation of the Chinese economyIt is poised to become the primary lever for stabilizing economic growth in 2025. Through initiatives such as trade-in programs, distribution of consumer vouchers, tax reductions, and fostering consumption scenarios, the consumption sector is expected to outpace overall economic growth significantly next year.

We anticipate an upward trajectory for traditional consumption champions from sectors such as condiments, home appliances, liquor, and duty-free retail, which could experience a resurgence in 2025. Additionally, new consumption champions emerging from sectors like “new economy,” the silver economy, and winter sports may trigger explosive growth cycles, establishing a portfolio of high-quality consumer companies that stabilize the A-share market.

Furthermore, the rebound opportunities in underperforming industries, particularly in the upstream resource sectors of the new energy industry, should not be overlooked for 2025. These sectors have seen stark contrasts in fortune over the past few years

For instance, lithium carbonate peaked in November 2022, seeing prices plummet from 600,000 yuan per ton to below 80,000 yuanSimilarly, the price of silicon material in photovoltaics witnessed a substantial drop, averaging around 30,000 per ton from a peak of 300,000 yuan.

These once coveted resources, symbolizing the rapid growth of the upstream new energy sector, have now been battered into obscurity due to intense competition leading to significant overcapacityEven the most robust listed companies in the industry have faced severe declines in both performance and stock prices.

Long-term low prices falling below industry cost lines signal a gradual depletion of overcapacity, while the government’s stance against excessive internal competition will fast-track this processHistorical trends suggest the downturn in lithium carbonate typically lasts about three years, positioning it closer to recovery time as we look ahead.

For industries where demand continues to grow against a backdrop of supply issues, the eventual normalization of capacity can unleash significant elasticity in terms of performance and stock prices

For example, during the previous lithium battery and photovoltaic upcycle initiated in 2020—the second year of the last bull market—the ensuing energy and enthusiasm is still fresh in seasoned investors’ minds.

Predictive analyses from brokerages suggest that the median net profit growth rate in the photovoltaic and lithium carbonate sectors could surpass 15% by 2025. Major industry leaders like Longi and Tongwei are projected to rebound from losses back into profitable territory, reclaiming net profits worth billions, with companies previously discarded by the market due to overcapacity and heavy losses now poised for resurgence, underpinned by low valuations and high elastic potential for performance in the upcoming year.

Another industry poised for reversal is real estate, often criticized but still viewed as a cornerstone of the Chinese economyDespite nearly halving in scale compared to peak levels, the real estate market in China is projected to reach sales approaching 10 trillion yuan in 2024, dwarfing emerging sectors like new energy vehicles and semiconductors.

In the ongoing economic transition, the significance of real estate remains unmatched

As policy stances concerning the industry shift, signs of stabilization are emerging after three years of lackluster performance, particularly in first-tier cities, where transaction volumes have started to reboundThe steep decline in construction activities over the past two years is also laying the groundwork for potential price increases in real estate.

As the effects of these policies begin to take hold and the macroeconomic environment warms, 2025 may bring an opportunity for reversal in real estate, where many high-quality companies trading below net asset value could see vastly improved performance and stock values.

The application of artificial intelligence (AI) is another sector expected to display notable resilienceBeyond encouraging consumption, the recent Central Economic Work Conference highlighted technology innovation as a leading driver of new productivity, aiming to construct a modern industrial system.

If consumer industries represent a stabilizing foundation for the Chinese economy, the technology sector embodies its vast potential for growth, illustrating the dual-driven approach of consumption and technology

Currently, within the realm of technological advancements, AI stands out as the most strategically significant industry, inciting a fresh wave of information industry revolution.

The ascendance of AI has notably impacted upstream industries such as hardware and infrastructure as markets react positively to breakthroughs in computing powerFor instance, Nvidia, known as the global leader in computing power, has seen its stock value surge 50-fold, now eclipsing 30 trillion yuan, subsequently leading to bullish trends within the AI supply chain in the A-shares market.

As the foundational infrastructure for AI experiences explosive growth, new opportunities may emerge in downstream applicationsRecent successes in AI applications, like the rapid rise of Doubao under ByteDance, signify the dawn of domestic superapps driven by AIThe Central Economic Work Conference’s first mention of “AI+” initiatives signals a strong alignment of governmental focus toward technology, likely propelling AI applications as a critical focal point of innovation next year.

Among the multitude of AI applications, the greatest expectations hinge on the integration of traditional industries with AI

Many sectors in China, despite appearing lucrative, often struggle with low profit margins, primarily due to high costs and inefficiencies, resulting in lower market valuationsIf AI leverages cost reductions and efficiency gains, even slight improvements in profit margins could lead to significant net profit increases.

For instance, Sanlian Hongpu, a chemical company with a dynamic P/E ratio below 20, partnered with Huawei to enhance its production processes using AI, leading to a 6% increase in margin and a near doubling of its net profits over the last few yearsSimilarly, Kute Intelligent, a custom apparel company with a dynamic P/E around 23, utilized AI to streamline production and design interactions, achieving a near 10% rise in profit margins and tripling net profits.

From an investment perspective, traditional industries with low valuations stand to gain significantly once they tap into emerging sectors or embrace new technologies

Companies like Wanfeng Aowei, initially focused on auto parts with low valuations, witnessed stock prices soar nearly four times after entering the low-altitude economy sector, with valuations jumping to over 50 times.

Reflecting on the mobile internet wave that began in 2012, one can see a trend where super applications emerged alongside massive market playersTencent, empowered by WeChat's rise, came close to reaching a trillion-dollar valuation while blending financial services birthed opportunities for stocks such as Tonghuashun and Dongfang Caifu, which skyrocketed nearly a hundredfold.

As we move into 2025, AI applications may well give rise to domestic tech giants with close to trillion-dollar market caps and AI leaders seeing share prices increase dramaticallyThe potential growth tied to AI represents hope for sustained innovation and economic rejuvenation, riding the wave of advanced technology into the next phase of economic transformation.