"A-shares' "K-shaped differentiation" reaches extreme values since 2009! Guotai Junan Securities strategy: Stemming from economic and policy consensus, prosperity remains the core of pricing."

Industrial released a research report stating that the most deeply felt words in the market this year, especially since April, are "differentiation." Several indicators tracked by Industrial also reflect this characteristic: as of June 18th, the A-share market has risen by 10.4% since the beginning of the year, but the median stock has only dropped by -10.9%, showing an accelerating deviation between the overall market and the median stock performance since April; in industries such as food and beverage, real estate, social services, and coal, over 30% of individual stocks have returned to pre-"924" levels; the "extreme disparity in one-year cumulative return of primary industries" measuring the degree of industry differentiation has reached a new high since 2009. How to deal with the current differentiation? On one hand, the marginal tightening of global macro liquidity this year is further accelerating the market's pricing focus shifting from valuation to earnings. On the other hand, with the upcoming July earnings disclosure period and improved effectiveness of cyclical investments, the market's emphasis on performance will also strengthen. These changes also mean that the root cause of this round of market differentiation - economic conditions, will remain the core of market pricing in the future. Therefore, in terms of allocation, the relative strength of economic conditions and the relative changes in performance are still the core clues. Whether it is from the changes in consensus earnings expectations after the first quarter report, the latest industrial enterprise profit data, or institutional investor surveys, the economic consensus is still highly concentrated. AI hardware (optical communication, semiconductor, PCB) remains the strongest consensus, and some advanced manufacturing sectors (AI upstream equipment, battery energy storage, shipping) are also seeing an improvement in economic expectations. Additionally, upstream resource products (many of which are also driven by AI demand, such as minor metals, energy metals, plastics) are also being positively impacted. Industrial's main points are as follows: 1. How to understand the recent extreme differentiation? The past few months, especially since April, the market has felt the most deeply the word "differentiation." Several indicators we track also reflect this characteristic: 1) as of June 18th, the A-share market has risen by 10.4% since the beginning of the year, but the median stock has only dropped by -10.9%, showing an accelerating deviation between the overall market and the median stock performance since April; 2) in industries such as food and beverage, real estate, social services, and coal, over 30% of individual stocks have returned to pre-"924" levels; 3) the "extreme disparity in one-year cumulative return of primary industries" measuring the degree of industry differentiation has reached a new high since 2009. The recent market is more deeply feeling this. Looking at industry performance this week, electronics and communications continue to be the strongest consensus. In addition to machinery, computers, and new energy, upstream resource products such as building materials, non-ferrous metals, and chemicals, as well as construction and environmental protection, are rising due to the AI logic driving them. How to understand the recent extreme differentiation? Risk appetite and overseas mappings cannot fully explain it. Although the easing of tensions between the US and Iran has increased global risk appetite, the market was still impacted by statements made by Powell during the FOMC meeting, causing significant fluctuations in US tech stocks. We believe that the core issue is domestic and economic conditions, especially the ones revealed in economic data this week and the policy statements from the Shanghai Lujiazui Finance & Trade Zone Development Forum, which have further strengthened the market's consensus on the current economic and policy "differentiation". Economically, the "K-shaped differentiation" in May's domestic macro data has become even more pronounced. Social retail and investment growth rates have both turned negative, with high-tech industries related to AI and exports continuing to rise. AI has become the main support driving exports, with the cumulative year-on-year growth rate of AI-related products in the first five months approaching 65%, significantly higher than the overall 15.5%. In terms of policy, the direction of macro prudence and focus on technological innovation has become clearer. At the Shanghai Lujiazui Finance & Trade Zone Development Forum, the previously anticipated loose monetary policy was not heavily mentioned, and the medium and long-term credit "weakness" did not trigger the conditions for a relaxed monetary policy. It was stated that "it is difficult and unnecessary to maintain the past growth rate of all credit" and that "as the economy transitions to a period of high-quality development, this change will become the norm and must be gradually adapted to." Emphasis was placed on technological innovation: "actively embrace a new round of technological revolution and industrial transformation, continuously enhance the inclusiveness and adaptability of the capital market system," and "expand the application scope of the fifth set of standards for the Science and Technology Innovation Board to the field of artificial intelligence." In this context, the recent differentiation can be easily understood as a natural selection of funds focusing on fundamental strengths and policy certainty, grasping visible certainty in pricing first in this new era and development stage. 2. Will the differentiation converge? Look at Japan in the 1970s and 1980s The market's disagreement and confusion over the current K-shaped economy and market lies in the recent profound transformation of our economic growth model. The gradually exiting old growth model dependent on real estate and infrastructure is being replaced by a wave driven by technology and high-end manufacturing in Shenzhen New Industries Biomedical Engineering. The macro environment, industrial structure, and market landscape are simultaneously undergoing a profound change, leading to discomfort with old knowledge and frameworks. Looking back at history and overseas, Japan in the 1970s and 1980s went through a similar path. Previously, when reviewing Japan, the most discussed topic was the "Lost 30 Years" after the 1990s. But before that, in the 1970s and 1980s, how Japan became the world's second-largest economy, with its manufacturing industry surpassing the US at one point, and the 15-year bull market driven by economic transformation, this history has been rarely studied. However, it holds significant lessons for today: After the oil crisis, Japan in the 1970s and 1980s "learned from its pain" and began a transformation. High-end manufacturing and exports became the core of Japan's economy, leading the country in a similar path to the one we are currently experiencing. Looking back at this history, a core conclusion is that the stock market theme of an era is determined by the core DRIVE of the economy in that stage. Before the 1970s, Japan's core industries were heavy energy-intensive industries such as steel and chemicals. However, after the first oil crisis in 1973, the sharp rise in oil prices greatly impacted the existing industrial structure. Japan then began its transition towards high-end manufacturing, leading to the emergence of new industries represented by automobiles, electronics, electrical appliances, and precision instruments, which gradually went abroad. During the golden age of the Japanese economy and stock market in the 1970s and 1980s, these industries were both the engine of the economy and the core theme of the bull market. However, the differentiation brought about by such a transformation does not last forever. The strength of the new dynamics can overflow into areas such as real estate and consumption. The stock market will also reflect the diffusion of this style. After 1970, Japan began to face problems such as an aging population and a slowing urbanization rate, where the population and urbanization that supported the previous rise in house prices and high demand were no longer present. However, the large middle class generated by the upgrading of the manufacturing industry brought about population concentration and increased purchasing power, leading to improvements in core city house prices and service consumption. The stock market will similarly reflect this overflow of demand: although the consumption and real estate sectors have weaker growth rates compared to the major core industries, they too have seen significant increases. This example from Japan at that time is also a path we may be following or have already begun to unfold. For example, in recent years in China, industries with faster wage growth have mainly focused on midstream manufacturing, especially in advanced manufacturing. The improvement in residents' purchasing power and the transmission of wealth effects are likely to first occur in these industries. Another example is that the "quantity with science" has become a core variable affecting house prices in various cities. The industrial structure is influencing the fundamental aspects of cities, attraction, and real estate purchasing power, thereby determining the resilience of house prices. Therefore, once this model is further established as a closed loop, we will eventually see the market style shift from technology growth to real estate consumption. However, we emphasize that once technology and high-end manufacturing become the new engines of the Chinese economy, real estate and consumption become the "dragged" sectors in the late cycle, and the relationship between the two fundamentally becomes "prosper together, decline together," this kind of diffusion in style is unlikely to be a systematic "switch" again. 3. How to deal with the current differentiation? Economic conditions are still key On one hand, the marginal tightening of global macro liquidity this year is further accelerating the main contradiction in market pricing shifting from valuation to earnings. On the other hand, with the upcoming earnings disclosure period in July, the effectiveness of cyclical investment will increase, and the market's emphasis on performance will also strengthen. These changes also mean that the root cause of this round of market differentiation - economic conditions, will remain the core of market pricing in the future. Therefore, in terms of allocation, the relative strength of economic conditions and the relative changes in performance are still the core clues. Whether it is from the changes in consensus earnings expectations after the first quarter report, the latest industrial enterprise profit data, or institutional investor surveys, the economic consensus is still highly concentrated. AI hardware (optical communication, semiconductor, PCB) remains the strongest consensus, and some advanced manufacturing sectors (AI upstream devices, battery energy storage, shipping) have also seen improvements in their economic expectations. Within AI, optical modules, fiber optic cables, storage, and semiconductor packaging and testing are currently positioned at a medium or slightly low level of crowding. From an overseas mapping perspective, domestic fiber optic cables, power grids, edge chips, and Siasun Robot & Automation still have room for further recovery compared to overseas. As a conclusion, Industrial believes that the current extreme differentiation can be understood as a natural selection process focusing on fundamental strengths and policy certainty, seizing the certainty of pricing in the current new era and development stage. Will the differentiation converge? Look at Japan in the 1970s and 1980s The market's disagreement and confusion over the current K-shaped economy and market lies in the recent profound transformation of our economic growth model. The gradually exiting old growth model dependent on real estate and infrastructure is being replaced by a wave driven by technology and high-end manufacturing in Shenzhen New Industries Biomedical Engineering. The macro environment, industrial structure, and market landscape are simultaneously undergoing a profound change, leading to discomfort with old knowledge and frameworks. Looking back at history and overseas, Japan in the 1970s and 1980s went through a similar path. Previously, when reviewing Japan, the most discussed topic was the "Lost 30 Years" after the 1990s. But before that, in the 1970s and 1980s, how Japan became the world's second-largest economy, with its manufacturing industry surpassing the US at one point, and the 15-year bull market driven by economic transformation, this history has been rarely studied. However, it holds significant lessons for today: After the oil crisis, Japan in the 1970s and 1980s "learned from its pain" and began a transformation. High-end manufacturing and exports became the core of Japan's economy, leading the country in a similar path to the one we are currently experiencing. Looking back at this history, a core conclusion is that the stock market theme of an era is determined by the core DRIVE of the economy in that stage. Before the 1970s, Japan's core industries were heavy energy-intensive industries such as steel and chemicals. However, after the first oil crisis in 1973, the sharp rise in oil prices greatly impacted the existing industrial structure. Japan then began its transition towards high-end manufacturing, leading to the emergence of new industries represented by automobiles, electronics, electrical appliances, and precision instruments, which gradually went abroad. During the golden age of the Japanese economy and stock market in the 1970s and 1980s, these industries were both the engine of the economy and the core theme of the bull market. However, the differentiation brought about by such a transformation does not last forever. The strength of the new dynamics can overflow into areas such as real estate and consumption. The stock market will also reflect the diffusion of this style. After 1970, Japan began to face problems such as an aging population and a slowing urbanization rate, where the population and urbanization that supported the previous rise in house prices and high demand were no longer present. However, the large middle class generated by the upgrading of the manufacturing industry brought about population concentration and increased purchasing power, leading to improvements in core city house prices and service consumption. The stock market will similarly reflect this overflow of demand: although the consumption and real estate sectors have weaker growth rates compared to the major core industries, they too have seen significant increases. This example from Japan at that time is also a path we may be following or have already begun to unfold. For example, in recent years in China, industries with faster wage growth have mainly focused on midstream manufacturing, especially in advanced manufacturing. The improvement in residents' purchasing power and the transmission of wealth effects are likely to first occur in these industries. Another example is that the "quantity with science" has become a core variable affecting house prices in various cities. The industrial structure is influencing the fundamental aspects of cities, attraction, and real estate purchasing power, thereby determining the resilience of house prices. Therefore, once this model is further established as a closed loop, we will eventually see the market style shift from technology growth to real estate consumption. However, we emphasize that once technology and high-end manufacturing become the new engines of the Chinese economy, real estate and consumption become the "dragged" sectors in the late cycle, and the relationship between the two fundamentally becomes "prosper together, decline together," this kind of diffusion in style is unlikely to be a systematic "switch" again. How to deal with the current differentiation? Economic conditions are still key On one hand, the marginal tightening of global macro liquidity this year is further accelerating the main contradiction in market pricing shifting from valuation to earnings. On the other hand, with the upcoming earnings disclosure period in July, the effectiveness of cyclical investment will increase, and the market's emphasis on performance will also strengthen. These changes also mean that the root cause of this round of market differentiation - economic conditions, will remain the core of market pricing in the future. Therefore, in terms of allocation, the relative strength of economic conditions and the relative changes in performance are still the core clues. Whether it is from the changes in consensus earnings expectations after the first quarter report, the latest industrial enterprise profit data, or institutional investor surveys, the economic consensus is still highly concentrated. AI hardware (optical communication, semiconductor, PCB) remains the strongest consensus, and some advanced manufacturing sectors (AI upstream devices, battery energy storage, shipping) have also seen improvements in their economic expectations. Within AI, optical modules, fiber optic cables, storage, and semiconductor packaging and testing are currently positioned at a medium or slightly low level of crowding. From an overseas mapping perspective, domestic fiber optic cables, power grids, edge chips, and Siasun Robot & Automation still have room for further recovery compared to overseas. Therefore, in the current economic environment, paying attention to economic conditions and performance changes is essential for making informed investment decisions.