Two main consensus lines are forming

I. The Main Consensus is Gathering

Previously, investors had a clear feeling that the market style and industries have been rapidly rotating this year, with strong trading and speculative characteristics. The industry rotation intensity indicator we track has remained at a high level, especially since March, it has continued to rise, approaching the historical peak at the beginning of 2023, indicating a relatively chaotic market lacking a main direction that can gather consensus.

However, we have recently seen some changes. Since May, the industry rotation intensity has continued to converge, and this convergence is still ongoing, with the two main lines of "technology growth industry trends" and "undervalued cyclical recovery" gathering market consensus.

Behind this, on one hand, it stems from the prosperity advantages of technology growth and cycles. The clues for mid-year performance are relatively clear, with high-growth industries mainly concentrated in AI (components, games, publishing) + resource products (non-ferrous metals, steel, plastics, cement, agricultural chemicals), while sub-sectors such as innovative drugs and military industry (marine equipment) also show signs of performance improvement.

More importantly, as industrial trends continue to evolve and "anti-involution" policies are intensified, technology growth + cycles are also the two major areas where future prosperity is clearer.

On the other hand, the lack of incremental funds and stronger pricing power of marginal trading funds have also been important reasons for the previous rapid market rotation. However, recently, from the various types of funds we track, under the protection of macro policies and the market's profit-making effect, we have seen clear incremental funds entering the market, and various funds have reached a relatively consistent consensus on the main lines:

Foreign Capital: Recently, the willingness of foreign capital to flow into Hong Kong stocks has continued to rise, actively allocating sectors such as pharmaceuticals, internet, and cyclical stocks, while passive foreign capital has significantly replenished A-share positions. On one hand, since July, the willingness of foreign capital to flow into Hong Kong stocks has continued to increase. According to our calculations, since July (as of July 23), the net inflow of international intermediaries into Hong Kong stocks has exceeded 64.4 billion yuan, and the net inflow of Hong Kong Stock Connect during the same period has reached 64.9 billion yuan, with the scale of foreign capital inflow now comparable to southbound funds. Structurally, foreign capital has mainly flowed into technology sectors such as pharmaceuticals, software services, media entertainment, information technology equipment, and telecommunications, while under the drive of "anti-involution" policies, foreign capital's attention to industries such as industrial engineering (mainly CATL), automobiles, metals, and coal is also increasing. On the other hand, since July, passive foreign capital has gradually replenished A-share positions, with a net inflow of over 18 billion yuan from July 17 to July 23, reaching a weekly high since October 11 of last year.

Margin Trading: Continuous inflow exceeding 10 billion for five consecutive weeks, with inflows mainly in technology growth and actively participating in cyclical markets. Margin trading funds have been an important driving force for the recent market breakthrough, with over 10 billion inflows for five consecutive weeks since late June. Currently, the margin trading balance of Shanghai and Shenzhen has once again surpassed 1.9 trillion since March this year. Structurally, technology growth remains the preferred direction for margin trading funds, with significant net inflows in machinery, electronics, pharmaceuticals, new energy, computers, and communications in the past two weeks, while also actively participating in cyclical markets, with considerable net inflows in non-ferrous metals, construction, and chemicals.

ETF: Industry ETFs have become the main increment recently, with inflows in cyclical + technology growth + finance. Since mid-April, as the market gradually warms up, broad-based ETFs, as contrarian funds, have continued to experience outflows, with the net outflow rate further accelerating since June. However, industry-themed ETFs, as important tools for capturing structural opportunities, have gradually gained market attention, with nearly 40 billion inflows since June, becoming the main increment for ETFs recently. Structurally, in the past two weeks, the main inflows have been in cyclical + technology growth + finance, including cyclical industries such as construction materials, non-ferrous metals, chemicals, steel, and coal, as well as technology growth industries such as electronics, computers, media, robotics, and new energy, along with financial sectors like non-bank and banking.

Retail Investors: Since mid-June, retail investor funds have begun to warm up, with a further increase in market entry willingness this week, similarly favoring technology growth + cyclical. Since mid-June, retail investor funds, represented by small orders, have seen an average weekly net inflow of 93.7 billion, significantly higher than the weekly average of 66.2 billion from late April to early June. This week, it further increased to 133.7 billion, indicating that under the influence of increased risk appetite and profit-making effects, retail investor willingness to enter the market has further warmed up. Structurally, technology growth + cyclical is also a significant consensus among retail investors, with major inflows in growth industries such as TMT, machinery, new energy, and military industry, as well as cyclical industries like chemicals, non-ferrous metals, and construction materials

In summary, consistent with recent market performance, "technology growth + cycles" has become a significant consensus among various funds. However, although there has been a recent focus on a main line, the current crowding in most sectors remains at a reasonable level, with still some sub-directions to explore.

Therefore, as the two main lines of "technology growth + cycles" continue to consolidate market consensus and generate profit effects, while some sub-directions are still not highly crowded, various funds may still actively explore sub-opportunities internally. Grasping the rotation and diffusion of the two main lines through stock price positions and allocation logic will remain the main response strategy going forward.

II. How to grasp the rotation and diffusion of the technology growth and cycle main lines?

(1) Resource products: "Anti-involution" has risen to the level of a main line, grasping long-term allocation logic from three dimensions.

We first highlighted resource products in our report after the new high on June 29, focusing on which directions in July? Based on the logic of "peak season + price increase," we prioritized resource products and have repeatedly emphasized investment opportunities in resource products since the "anti-involution" began in July, which has now evolved into a vigorous investment main line.

The reason for the sustained strength of the resource product market this round is, on one hand, the government's determination regarding "anti-involution" is exceeding previous market expectations, further strengthening the expectation of supply-side contraction; on the other hand, the commencement of projects has also increased the demand-side logic.

On one hand, the government's determination regarding "anti-involution" should not be underestimated. Previously, the market expected this round of "anti-involution" to mainly rely on industry self-discipline, but it can be seen that the national level has recently introduced various policies to promote the implementation of "anti-involution" from the top down. Since July, not only have industries such as photovoltaics, cement, steel, and coke begun to take substantial actions such as production cuts and price increases, but on July 18, the Ministry of Industry and Information Technology announced that "the work plan for stabilizing growth in ten key industries including steel, non-ferrous metals, petrochemicals, and building materials is about to be released," on July 22, the National Energy Administration initiated a rectification of coal overproduction, and on July 24, the National Development and Reform Commission and the State Administration for Market Regulation publicly solicited opinions on the "Draft Amendment to the Price Law," indicating the government's determination regarding this round of "anti-involution," further reinforcing expectations of supply-side contraction in resource products. As one of the most important policy main lines this round, the Politburo meeting in July is expected to make further deployments regarding this.

On the other hand, the commencement of major projects in Yaxia is boosting expectations on the demand side for resource products. The Yaxia Hydropower Station, as a large-scale, long-cycle, and far-reaching century project, will drive investment in various supporting infrastructure construction and enhance physical workload, further releasing long-term elasticity on the demand side for resource products.

Therefore, as the status of policy main lines is elevated, coupled with the current market having undergone a round of internal diffusion within the main line, various sub-sectors have already seen relatively sufficient pricing. The current allocation towards the "anti-involution" main line may shift towards long-term logic. We analyze which industries have a better foundation for anti-involution from three dimensions: the urgency of participating in anti-involution (the proportion of loss-making enterprises & interest coverage ratio), the sustainability of anti-involution execution (trends in concentration changes & the proportion of state-owned enterprises), and the resistance to capacity reduction (trends in government subsidy intensity & the strength of expansionary capital expenditure) (see Anti-involution: Comparative Opportunities in Three Dimensions).

Among the key industries involved in anti-involution, the new energy chain (silicon materials and wafers, photovoltaic battery components, lithium battery specialized equipment), ordinary steel, glass fiber, and titanium dioxide currently have corporate profitability and capital expenditure at historical lows, with a strong willingness to participate in anti-involution, and positive changes in the industry are expected to be seen subsequently. Among them, the steel sector has a high proportion of state-owned enterprises and relatively low resistance to capacity reduction, making it one of the industries where further policy issuance may lead to smoother implementation of anti-involution.

(2) Military Industry: The previously high level of congestion has been digested, and under a high win-rate window, it is expected to continue reflecting the catalysis of military parades + "Five-Year Plan," with long-term logic in the global military trade market opening up.

Since June, based on the domestic "Five-Year Plan" + the opening of the global military trade market and other long-term logic, we have continuously indicated the repair of the military industry in this round. After the market accelerated pricing this expectation, the congestion level in the military sector has also risen to a high level.

After the emotional digestion since July, the current congestion level in the military sector has fallen back to a moderate level, making it a suitable and worthy sub-sector for allocation within the growth main line. During the high win-rate window in July and August, it is expected to continue reflecting the catalysis of military parades + "Five-Year Plan," with long-term logic in the global military trade market opening up.

On one hand, the intersection of the domestic "Five-Year Plan" and the enhancement of external global competitiveness is strengthening expectations for a new round of order releases in the military industry, which supports the long-term logic of continuous improvement in the military industry's fundamentals:

Domestically, as a highly planned industry, the Five-Year Plan has a significant impact on industry prosperity and market expectations. Historical experience shows that from the initiation of the Five-Year Plan's preparation to the first year of its formal implementation, the military industry typically sees significant excess returns. This year marks the concluding year of the "14th Five-Year Plan" and the preparatory year for the "15th Five-Year Plan." As the execution of the military construction "14th Five-Year Plan" has entered a critical phase of capability integration and delivery, coupled with the advancement and implementation of the "15th Five-Year Plan," the development guidance for the industry over the next three to five years will gradually become clearer, and the previously suppressed downstream demand is expected to see a significant release. With the opening of a new round of order cycles, it is expected to drive a recovery in overall industry prosperity

Externally, the world is currently facing unprecedented changes in a century, and a global arms race has begun. As China's weapons continue to demonstrate strong competitiveness worldwide, the market space for China in international military trade is expected to further open up. Since February, the tariff war initiated by the Trump administration has escalated, geopolitical tensions in regions such as India-Pakistan and the Middle East have intensified, and governments around the world are increasingly prioritizing national security, marking the beginning of a global arms race. With the unveiling of China's sixth-generation fighter jet at the end of last year, the demonstration of Chinese warships circling Australia in March, and the joint exercises in the Taiwan Strait in the second quarter, along with the impressive performance of the J-10CE during the India-Pakistan conflict, Chinese weapons continue to showcase global competitiveness. Against the backdrop of geopolitical conflicts, national security drives long-term military trade demand, and China's market space in international military trade is expected to further expand.

On the other hand, historical experience suggests that events such as military parades will serve as important catalysts for the military industry market. Military parades, as significant moments to showcase national military strength, are important catalysts for driving up the military industry sector. Looking back at the military parade on September 3, 2015, commemorating the 70th anniversary of the victory in the World Anti-Fascist War, the military industry sector began to reflect expectations of the parade event starting from July 9, with a cumulative return of 78% by August 17, outperforming the entire A-share market by 45%. In the near future, the military industry sector may be in an upward expectation driven by event catalysts.

(3) AI: Emphasizing opportunities for diffusion towards domestic computing power and mid-to-low-end applications

Since June, we have been the first to repeatedly highlight the repair opportunities in the AI sector based on stock price positions, industry trends, calendar effects, and other dimensions (see 6.2 What directions to focus on in a rapidly rotating market in June?, 6.8 Seizing the repair window for technology in June, 6.15 Will geopolitical risks affect the repair logic of technology?), which has now become a clear main line in the market.

However, we have observed that despite the overall recovery of the AI sector since June, there have been two obvious divergences within it. On one hand, upstream computing hardware represented by PCBs and optical modules has begun to outperform midstream software services and downstream edge applications; on the other hand, within the upstream computing hardware, the North American computing chain represented by optical modules and PCBs has significantly outperformed the domestic computing chain

However, from the perspective of rolling yield differentials, trading volume ratios, and other indicators, the sector as a whole has not yet reached overheating levels:

In terms of rolling yield differentials, with the recent overall market rise, the rolling 40-day yield differential between TMT and the entire A-share market remains around 5%, and has not risen above 10%, which would indicate overheating.

Looking at trading volume ratios, the cyclical sector has performed stronger recently, and the current trading volume ratio of TMT has dropped below 30%, still some distance from the historical overheating range of 40%-45%, and has not yet issued overheating signals.

Moreover, since the AI sector encompasses a vast industrial chain covering multiple sub-sectors, although some segments may experience localized "overheating," we can still find relatively cost-effective directions within the industrial chain. The AI and TMT sectors themselves represent a massive industrial chain with a market capitalization share exceeding 20%, covering upstream computing hardware, midstream software services, and downstream applications. While localized "overheating" may occur in certain phases, it is still possible to identify relatively cost-effective directions. Therefore, in AI investments, we must not only assess the major industrial trends and mainline directions but also focus on timing rotations within the sector and comparisons among sub-industries.

From the perspective of the congestion levels in the major sub-directions of AI50, most fields currently remain at a moderately congested level, including upstream computing (AI chips, IDC, GPUs, liquid-cooled servers), midstream software services (office software, basic and general software, operating systems, industrial software, SASS, AIAgent, etc.), and downstream applications (autonomous driving, gaming, humanoid robots, smart healthcare, etc.).

Furthermore, as the earnings disclosure period passes, the technology sector's focus on immediate performance weakens, and it begins to price in medium- to long-term industrial trends. Coupled with recent events such as the lifting of restrictions on H20 chips, the release of new models by Kimi and Alibaba, and the 2025 World Artificial Intelligence Conference, there are better opportunities for the AI market to expand towards domestic computing power and mid- to downstream applications: In terms of domestic computing power, the capital expenditure growth of domestic internet companies remains a long-term trend. With the recent relaxation of restrictions on H20 chips and the expectation that NVIDIA's new card B30 will complete market introduction in the third quarter, concerns about the capital expenditure of internet companies are likely to continue to diminish. Additionally, the potential IPOs of domestic chip companies such as Suiyuan Technology and Birun Technology in the second half of the year are expected to act as catalysts, reinforcing the certainty of the supply chain under the logic of domestic substitution.

In terms of applications, after DeepSeek promotes AI equity, more vertical applications are expected to accelerate landing, with the trend of market expansion from upstream to midstream and downstream being significant. The recent releases of new models such as Kimi K2 and Alibaba Tongyi Qwen3 indicate that domestic large models are still rapidly iterating. With the relaxation of H20 chips and major companies increasing their investment in AI again, the progress of domestic AI applications is also expected to accelerate further. Moreover, in the third quarter, there are multiple potential catalysts in the midstream and downstream, including the progress of large models like GPT-5 and DeepSeek R2, as well as the AR glasses that Meta is set to release in September, all of which are expected to bring new catalysts for AI applications and edge computing.

Authors of this article: Zhang Qiyao, Hu Siyu, Cheng Luyao, etc. Source: Yao Wang Hou Shi, original title: "[Xingzheng Strategy Zhang Qiyao Team] Mainline Consensus is Gathering"

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