Recently, the 2023 annual reports and the first quarter reports for 2024 of A-share listed companies have been successively released. Looking at the first quarter reports, the net profit attributable to the parent company of all A-shares has decreased by 7.46% year-on-year (a 4.45% decrease in 2023), and even after excluding financial, oil, and petrochemical sectors, the decline is still 8.68% (a 5.66% decrease in 2023), indicating that the earnings growth rate of listed companies has not yet bottomed out.

However, investment requires a forward-looking perspective. Despite the poor performance in the first quarter, the market still has optimistic expectations for the full-year performance in 2024. According to the consensus forecast data from securities firms compiled by Wind, the expected net profit for all A-shares in 2024 is 6.21 trillion yuan, a year-on-year increase of 9.37%; excluding financial, oil, and petrochemical sectors, it is 3.51 trillion yuan, a year-on-year increase of 18.88%.

Market forecasts are often criticized for being inaccurate, and sometimes the deviations are quite large. But the market always trades on forecast values in advance and then makes real-time Bayesian revisions based on new information. Ultimately, as the data release points approach, the forecast values will continuously converge towards the actual values.

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At every point in time, the market forecast is the most reliable judgment under the existing information. Perfection is the enemy of excellence; laying out plans based on current market forecasts is sufficient.

Based on the latest market forecasts, A-shares are expected to see a year-on-year profit increase of 9.37% in 2024, signaling a reversal in performance and indicating that A-shares will emerge from a bottoming-out bull market pattern. From the beginning of the year to the present (May 8th), the Wind All-A Index has fallen by 1.1%, significantly lagging behind profit expectations, and a profit-driven catch-up rally can be anticipated next.

Specifically, in terms of industries, the focus should be on changes in industry prosperity, with higher future profit growth rates being better, and an upward trend year by year being ideal. Combining the consensus forecast values from Wind, the two-year compound annual growth rate of net profits for the first-tier industries of Shenwan from 2023 to 2025 is as follows:

High prosperity industry group, with computers (82.11%), electronics (63.23%), national defense and military, commerce and retail, social services, basic chemical industry, beauty and personal care, steel, and light manufacturing leading in growth, with an average annual growth rate exceeding 30 percentage points;

Low prosperity industry group, with coal (-8.33%), banking (0.78%), building decoration (1.38%), public utilities, non-ferrous metals, non-bank finance, oil and petrochemicals, and transportation having poor prosperity, with average annual profit growth rates below 10%;

Medium prosperity industry group, with media (26.63%), automobiles (25.58%), pharmaceuticals and biotechnology, machinery and equipment, environmental protection, power equipment, building materials, and other industries having medium prosperity, with average annual profit growth rates between 10% and 30%.

Considering the significant differences in valuations, simply selecting industries based on their prosperity levels may not be an effective strategy. The market is efficient; high prosperity industries usually correspond to higher price-to-earnings ratios, such as computers, electronics, and national defense and military, which have high expected future profit growth rates and current price-to-earnings ratios exceeding 50 times; correspondingly, medium and low prosperity industries correspond to medium and low levels of price-to-earnings ratios.To address this, Peter Lynch made adjustments to the growth rate of earnings based on valuation, inventing the PEG investment method. PEG = Price-to-Earnings Ratio (PE) / Growth Rate. The lower the PEG, the higher the potential cost-performance ratio.

Using the PE ratio on May 6th and the expected two-year compound growth rate from Wind data to calculate PEG, industries such as utilities, banking, construction decoration, nonferrous metals, and telecommunications all have PEGs above 2, indicating a lower cost-performance ratio; coal has a negative value, which is not meaningful for reference; in other industries, commerce and retail, steel, computers, social services, basic chemical industry, electronics, automobiles, etc., all have PEGs less than 1, meeting Peter Lynch's stock selection criteria.

Industries selected based on the PEG indicator tend to lean towards a growth style. It can be inferred that technology growth sectors, represented by new quality productive forces, have a higher cost-performance ratio. Coupled with the support of thematic investments under the backdrop of dense policy issuance, these sectors are expected to achieve excess returns in the next few months and are worth focusing on. For specific targets, one can pay attention to the STAR 100 ETF. Currently, the top five industries held by the STAR 100 Index are pharmaceuticals and biotechnology at 32.1%, electronics at 21.1%, power equipment at 15.7%, computers at 11.8%, and mechanical equipment at 8.8%, which have a high overlap with new quality productive forces.

However, the effectiveness of the PEG investment method is questionable and should only be used as a reference. The lesson here is that investors should not be deterred by the high PE of certain industries and reject them outright, nor should they arbitrarily believe that a low PE necessarily has investment value. It is necessary to make a comprehensive assessment with reference to the growth rate of earnings.

In addition, the aforementioned data also provides insights for dividend sector investments.

Since the beginning of this year, the dividend sector has achieved significant excess returns, attracting much attention from investors. In the short term, the dividend sector leads due to the decline in market risk appetite; in the medium to long term, against the backdrop of an aging population and a gradual decline in economic growth, high-quality growth targets become increasingly scarce, and the uncertainty of the global environment increases, the dividend sector that can provide a stable cash flow is expected to be favored by capital in the long term.

Looking at the industry distribution, the dividend sector is mainly distributed in low-growth group industries such as banking, coal, construction, utilities, and oil and petrochemicals, with profit growth rates mostly in the low single digits over the next 1-2 years. Calculated with a dividend yield of around 5% and a profit growth rate of around 3%, the annual investment return of the dividend index is around 8%. Since the beginning of the year, the dividend index has risen by 14.2%, and there is limited room for further increases.

It is evident that dividend investment is different from track investment, emphasizing "slow is fast," and investors need to lower their return expectations. In terms of investment strategy, the dividend sector is more suitable for buying on dips and holding long-term to earn the money of time.