Huatai Securities: Recommend focusing on stable high-dividend stocks with defensive attributes and some potential high-dividend stocks.

Huatai Securities pointed out that in January, the market risk appetite continued to decline, with the high-dividend sector performing better overall than in December of last year, particularly in cyclical high-dividend stocks such as oil and petrochemicals, coal, and steel. Looking ahead to February, Huatai Securities believes that as market volatility begins to increase, the long-term yields of U.S. Treasuries and the U.S. dollar index are rebounding, marginally increasing the allocation value of high-dividend sectors compared to last month. It is recommended to focus on stable high-dividend stocks with defensive attributes and some potential high-dividend stocks.

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Huatai | Monthly High-Dividend Series: Defensive Allocation Value Emerges

In January, the market risk appetite continued to decline, with the current All-A ERP falling below the past five-year rolling average by one standard deviation. The high-dividend sector performed better overall than in December of last year, especially cyclical high-dividend stocks such as oil and petrochemicals, steel, and coal. Looking ahead to February, we believe that as market volatility begins to increase, the long-term yields of U.S. Treasuries and the U.S. dollar index are rebounding, marginally increasing the allocation value of high-dividend sectors compared to last month. It is recommended to focus on stable high-dividend stocks with defensive attributes and some potential high-dividend stocks.

Core Viewpoints

1. The performance of high-dividend sectors in January has shown some recovery, possibly due to: 1) The strong start of insurance funds, with new capital needing allocation, and OCI accounts favoring dividend assets; 2) Cyclical high-dividend stocks benefiting from rising prices, with oil and petrochemicals, steel, and coal sectors performing relatively better within high-dividend stocks.

Currently, the difficulty of further repairing market risk premiums has increased. Sharp fluctuations in cyclical stocks impact market profitability, and investor risk appetite may enter a “small plateau” phase with declining volatility. The cost-effectiveness of high-dividend strategies is further enhanced, with a focus on stable dividend-paying stocks with defensive attributes and some potential dividend stocks in consumer sectors. From a short-term multi-dimensional perspective, the allocation attractiveness of high-dividend assets has rebounded compared to December 2025: 1) The difficulty of further repairing market risk premiums is high, and high-dividend assets have defensive allocation value. Currently, the All-A ERP is located below the five-year average by one standard deviation; historically, breaking through this level requires fundamental repair or strong liquidity support, both of which are not highly visible now. Investor risk appetite may enter a volatile phase, increasing the defensive value of high-dividend strategies; 2) From a quantitative perspective, the high-dividend signal system based on the sector’s own trend (flat), interbank market turnover (bullish), and term spread (flat) has shifted from neutral to bullish; 3) With the announcement of the new Federal Reserve Chair candidate, the recent rebound in the U.S. dollar index and U.S. Treasury yields. Looking ahead, the insurance dividend strategy 2.0 era needs to balance high dividend yields with cost-effectiveness. Considering current trading congestion, chip levels, and profit expectations, focus on stable high-dividend stocks with defensive attributes (utilities, insurance, publishing, etc.) and some potential dividend stocks (railways, environmental protection, Hong Kong stocks, real estate, etc.).

The strong growth of the insurance “door-opening red” (initial premium growth), good sales of dividend insurance, and increased incremental investment funds in insurance are notable. In terms of allocation, extending asset duration remains important for most insurance companies, though some insurers may increase timing considerations for long-term bond investments. Dividend stocks are the main line of equity investment. The pressure on cash investment returns will further increase in 2026. For most companies, dividend strategies can only be strengthened, not weakened. The correction in dividend sectors provides a rare opportunity for insurers to increase holdings.

Industry Investment Opportunities

Insurance: Market bullish sentiment remains strong, and the spring market rally may continue. Overall beta trading in the insurance sector can still be expected.

Petrochemicals: Since 2026, geopolitical tensions have reignited concerns over global oil supply risks, leading to a geopolitical premium that has caused off-season oil prices to bottom out and rebound. With demand recovering and global reserves accumulating, oil prices are expected to bottom out and rise in Q2-Q3 2026. Coupled with the Fed’s rate cuts boosting demand, demand for refined oil in Asia, Africa, and Latin America may improve, raising the Brent crude price forecast to $65 per barrel for 2026. Continue to favor high-dividend energy leaders with cost reduction, increased production capacity, and natural gas business growth; as oil prices stabilize and inventory losses decrease, refining profitability is expected to improve.

Construction and Building Materials: Due to the later Chinese New Year, January’s PMI for the construction industry weakened month-on-month, but fiber glass, waterproofing, and gypsum board companies have begun raising prices, with expectations of improved actual construction volume after the holiday. The State-owned Assets Supervision and Administration Commission (SASAC) will focus on “three集中” (centralized focus), using restructuring and integration as leverage to promote the optimization and restructuring of state-owned enterprises, accelerate the building of more world-class companies, and possibly speed up the restructuring of low-valuation central construction enterprises. High profitability from overseas expansion of building materials is expected to boost capital expenditure, benefiting overseas international projects. In the medium to long term, the outlook remains optimistic for overseas markets and domestic stock renewal.

Public Utilities: Power: Starting in 2026, China’s power supply growth will slow, with demand rebounding; the most challenging phase has passed. As long as coal prices stabilize, electricity prices and valuations of power stocks are already in the bottom zone. Gas: Cost reductions are expected in 2026, with profits and dividends possibly stabilizing or rising, characterized by low valuation and medium-high dividend yields. Environmental protection: Water and waste volume are expected to stabilize in 2026, with accelerated debt repayment and capital expenditure reduction, leading to improved free cash flow. Dividend payout ratios and dividend yields are expected to increase.

Transportation: Roads: Recent strong growth in freight volume, combined with the peak travel season of the Spring Festival, has slightly improved sector prosperity. Railways: Hong Kong’s real estate market is experiencing an “early spring” peak season. Supply chain: December’s PPI decline narrowed year-on-year, and industrial enterprise profits turned positive, suggesting further supply-side improvements in 2026 amid a bullish commodities market, maintaining a neutral to optimistic outlook on supply chains.

Banking: Banks actively lent at the start of the year, with a significant narrowing of interest rate spreads, and profit prospects are expected to improve. The impact of the real estate sector is relatively controllable. Ten banks, including Nanjing, Ningbo, and Qingdao, disclosed their 2025A performance reports, with 7 showing revenue growth and 7 profit improvement. We expect strong performance in 2026 amid stable interest rate spreads and contributions from wealth management. Since December, the CITIC Bank index has declined by 7.2%, mainly due to real estate sentiment, rate cut expectations, and capital style shifts. The index valuation has fallen to 0.65x PB, near the 65th percentile over the past five years, with some quality stocks’ 2025E dividend yields approaching 6%. Insurance funds’ strong growth in the “door-opening red” is expected to continue, with additional premium growth still requiring high-dividend, low-volatility bank stocks.

Real Estate: In 2025, Hong Kong’s private residential transaction volume increased by 20% year-on-year, with new homes up 21%, reaching a twenty-year high; second-hand homes increased by 19%, a four-year high. Home prices turned positive for the first time since 2022, up 3.3% year-on-year. The Zhongyuan Leading Index showed a 1.0% increase in the first three weeks of January. Although office and retail property rents have not yet stabilized, front-end indicators like net absorption and retail sales continue to improve, with structural recovery leading in Central’s office buildings and high-end retail. We remain optimistic about Hong Kong’s local real estate stocks.

Mandatory Consumption: Leading companies in mandatory consumption are gradually reaching a mature development stage, with small capital expenditure needs, stable cash flows, and ongoing implementation of long-term and medium-term dividend plans. Looking ahead, domestic structural upgrades and overseas expansion opportunities for mandatory consumption companies remain broad. In recent years, leading companies’ dividend payout ratios have increased, providing advantages such as dividend yields under low interest rates, high long-term growth potential, and low valuation elasticity. We maintain the view that the milk raw material cycle will balance supply and demand in 2026. Currently, raw milk prices are stabilizing month-on-month, and dairy product stockpiling for the Spring Festival is worth期待. Focus on leading enterprises with stable operations, solid performance, and healthy cash flows.

Risk Warning: Risks of dividend payout policies falling short of expectations, and domestic policy measures being less effective than expected.

Charts

Risk Warning

1. Risks of dividend payout policies falling short of expectations: The dividend payout policy of listed companies has always been an important component of investor return expectations. If the pace of dividend policy implementation is slow or the final results do not meet expectations, investor returns may fall short.

2. Risks of domestic policy measures being less effective than expected: External shocks such as sudden changes in the global economy, intensified trade frictions, and large fluctuations in exchange rates may disrupt the established pace of domestic policy implementation. If domestic policies are less effective than expected, investor sentiment could be affected.

(Source: People’s Financial News)