CITIC SEC: When about 60% of institutions' positions are related to AI, we prefer to choose varieties with a bottom-up trend in ROE.

CITIC SEC released a research report stating that market volatility has increased since October, but the success rate of market timing is not high. The reason behind this is that the structure of incremental funds is changing, with the continuous entry of stable absolute return funds into the market reducing the effectiveness of traditional aggressive timing strategies. The most important variables currently are the stability of the overseas business environment for companies and AI, which involve Sino-U.S. relations and the investment and construction process of AI infrastructure. Not only the TMT sector, but also sectors such as non-ferrous metals, chemicals, and electrical machinery have been influenced directly or indirectly by the AI narrative, with these sectors accounting for over 60% of institutional holdings. In this situation, the approach to rebalancing is not to deliberately avoid the AI narrative, but to choose stocks that are showing a rising trend in ROE at the bottom, as the AI narrative only affects the slope of the market rather than the trend. Key points by CITIC SEC: - Market volatility has increased since October, but the success rate of market timing is not high. - Incremental funds with stable absolute returns entering the market are reducing the effectiveness of traditional aggressive timing strategies. - The proportion of funds entering the market in the form of stable returns is increasing steadily, affecting short-term market timing effectiveness. - The sustainability of AI infrastructure is crucial for both U.S. and Chinese markets, affecting market trends and investment decisions. - Adjusting holdings to focus on sectors with independent logic and improving ROE is recommended, even if influenced by the AI narrative. Overall, the report suggests focusing on sectors with independent growth potential and evaluating current valuations based on assumptions of profit margin recovery. It also highlights the potential risks related to Sino-U.S. technological, trade, and financial frictions, as well as domestic policy effectiveness and international macroeconomic liquidity tightening.