CITIC SEC: The necessity of returning to a barbell structure in the A-share market increases. AI+Energy will be a more suitable structure this year.

CITIC SEC released a research report stating that the main source of funds driving this round of structural market is from stock adjustment and inflow of financing positions. After the proportion of TMT transactions reached a peak, it is estimated that the turnover rate of the entire A-share market will gradually fall below 1.8%. Trump's visit to China has established the framework of "competition without conflict" between China and the United States. However, market sentiment may be at a temporary high. Once the sentiment cools down, the expectation of global liquidity tightening will begin to have a greater impact on investors' decision-making. After cooling down, the market structure's diversified characteristics are expected to return, and the need to return to a barbell structure will increase. It is expected that AI+ energy will be a more suitable structure for this year. CITIC SEC's main points are as follows: The main source of funds driving this round of structural market is from stock adjustment and inflow of financing positions After the market experienced a violent adjustment in overall positions, it usually goes through three stages of "comprehensive replenishment of positions", "differentiated replenishment structure", and "rotation of stock funds". The process of increasing the overall market position is approaching its end, and it is gradually entering the stage of rotation of stock funds. The rapid breakthrough of financing positions constitutes the main increment of this round of structural market. Leveraged funds demonstrated resilience during the downturn in March and continued to rise afterwards. As of May 14th, the proportion of margin buying in the Shanghai and Shenzhen stock exchanges as a percentage of total turnover (MA5) was 10.3%, at the 92.2nd percentile since 2021. Meanwhile, leveraged funds are mainly focused on the broad AI sector represented by communication and electronics. In the past 4 weeks, the net buying ratio of the communication and electronics industry accounted for 51%, 55%, 42%, and 61% respectively. In addition to leveraged funds, other fund flow indicators show limited incremental market, with a clear structural market characteristic of stock fund rotation. Since April 9, A-share ETFs have seen a net outflow of 459.1 billion yuan; during this period, broad-based ETFs saw a net outflow of 398.6 billion yuan, with the major ETFs held by Huijin accumulated a net outflow of 286.1 billion yuan by the end of 2025; sector/theme ETFs saw a net outflow of 60.5 billion yuan, with technology, cyclical, and manufacturing sectors seeing net outflows of 45.7 billion, 17.5 billion, and 16 billion yuan respectively, while dividend-related ETFs saw net inflows of 14.6 billion yuan. Small and medium-sized active private equity funds have limited increase in positions, with their research positions still below the peak in January; individual investors have not aggressively entered the market on a large scale, with the number of new accounts in April failing to reach the level of March, decreasing by 46% month-on-month. According to CITIC SEC channel research, the settlement fund size in May did not break through the level of January despite the market rise, and the search index for A-share related terms on WeChat is significantly lower than in January this year. Overall, leveraged funds are focused on the technology sector while other stock funds are switching to the technology sector, forming the main characteristics of this round of structural market. According to CITIC SEC's calculations, in the past 10 weeks, the profit effect of the technology sector relative to the other six major sectors has reached the highest level since 2025. After the proportion of TMT transactions reached a peak, it is estimated that the turnover rate of the entire A-share market will gradually fall below 1.8% Since September 2024, the turnover of the TMT sector in the A-share market has shown a high degree of synchronization with the overall turnover rate of the entire A-share market. From a microstructural perspective, reviewing the seven stages since 2019 when the proportion of TMT sector transactions exceeded 40%, the A-share daily turnover rate returned to between 0.6% and 1.8% (median 1.11%) following the peak of the main trend within 120 trading days, showing initial volatility decline, mid-term compression, and late-stage restructuring. In the first stage (T to T+25), the A-share trading sentiment reached a boiling point on the day of the peak (median daily turnover rate of 1.47%, with an upper limit of 2.22%), followed by the cool-down of the core assets in the TMT sector, leading the market to enter a period of "main trend extinguishment", with the median of the A-share turnover rate falling consistently to between 0.6% and 1.8% (median 1.11%). In the second stage (T+25 to T+60), the market entered a month-long "quiet period with no main trend", with a maximum turnover rate of about 2%. In the third stage (after T+60), the market's trading structure underwent spontaneous repair. Overall, based on historical experience, the market's turnover rate needs to fall below 1.8% to consider the basic end of the emotional cooling phase. Given the total market value of the current market, the corresponding daily turnover is expected to be around 2.5 trillion yuan. Trump's visit to China established a framework for China-US relations to return to "competition without conflict," but market sentiment may be at a temporary high Overall, the core purpose of the recent high-level meeting between China and the United States is to establish barriers and maintain stability, with its constructive role relatively limited. Following strategic setbacks for Iran, the United States is expected to enter a state of "strategic calm." Under this status, China-US relations are more about setting boundaries and maintaining stability, engaging in partial trades in controlled areas, managing competition in key areas to avoid escalation, and fundamentally returning to the framework of "competition without conflict" by the Biden administration. Looking ahead, the relative stability of China-US relations may not only be limited to the current year, as Trump's strategic thinking continues to oscillate and reshape, even possibly through Trump's term. From a market perspective, significant contacts between China and the United States, whether in reaching trade agreements or leader meetings, are usually seen by the market as a signal of a temporary peak in optimism. This is because such meetings often occur when disagreements are minimal and consensus is easier to achieve. However, in the six months or longer after such meetings, there is rarely an opportunity for further improvement in China-US relations; in fact, negative disruptions are more common. Therefore, these events are considered as temporary points of minimal disagreement and maximum optimism that influence market sentiment. Historical data also supports this view. CITIC SEC analyzed the performance of A-shares before and after 8 major China-US contacts such as leader meetings and important agreement signings since 2018. In the 20 trading days before the event, the A-share sentiment index constructed by CITIC SEC increased from 62 to 66 on average, and the Shanghai and Shenzhen 300 Index rose by an average of 1.6%. In the 20 trading days after the event, the A-share sentiment index dropped from 66 to 45 on average, and the Shanghai and Shenzhen 300 Index fell by an average of 2.2% (with 2 increases and 6 decreases, ranging from a maximum retracement of -11.9% to a minimum of -2.1%), with the most significant adjustments occurring in the first 5 trading days, gradually returning to normal levels thereafter. Once sentiment cools down, global liquidity tightens, and the expected impact on investor decision-making increases The inflationary effects brought about by the disruption in the Hormuz Strait have already begun to manifest. China recently announced that its PPI in April recorded a monthly increase of 1.7%, the second-highest value since 2021. This increase was particularly evident in upstream subcategories such as raw materials, while downstream categories remained weak. The United States also released higher-than-expected inflation data for April (CPI, core CPI, PPI, core PPI), as high inflation continues to erode the real purchasing power of American households, with real hourly wages in April declining year-on-year for the first time in three years (down 0.3%). Implied interest rates in CME rate futures have been steadily increasing since April 17, nearing the highest level of the year at 3.7% (i.e., no interest rate cuts within the year). Global bond markets have started to price in inflation, as long-term bond yields in the United States have been rising. The 10-year Treasury bond yield has reached nearly 4.5%, close to a new high since June 2025, and Japan's long-term bond rates have also been steadily rising, reaching 2.6% recently. Selling has also occurred in European government bond markets. While the stock market has mainly focused on the strong industrial trends related to AI, it has temporarily ignored the impact of inflation and interest rates. However, excessively high interest rates may ultimately affect the level and pace of spending on the AI infrastructure supported by debt. This logic has always been present, but during times of high market heat, it can be selectively ignored. As the market cools down, the importance of liquidity expectations in investor decision-making increases, making negative narratives temporarily dominate. The need to return to a barbell structure is increasing, and AI+ energy is a more appropriate structure for this year 1) Conservative funds are temporarily absent, but the demand for conservative allocations has never disappeared. Recently, large bank stocks in the Hong Kong stock market have generally reached new highs, proving that there is no lack of conservative funds in the market, but rather that the structure of A-shares is extreme and attention is too concentrated, masking the movements of these conservative funds. If a conservative return-oriented sector of A-shares falls along with a market correction and enters a cheaper price range, it is likely to attract these conservative funds to expand their purchases. Even when constructing a barbell, it is necessary to focus on areas with predictable supply-demand gaps or stable cash flows. The energy chain is expected to be the most suitable choice for one end of the barbell structure this year. The only short-term issue is the significant fluctuations in commodity prices before the US-Iran talks, making it difficult for the market to judge the real supply-demand gaps and the sustainability of the gaps after the Strait resumes navigation, thus hindering the participation of conservative funds. Once the US-Iran talks are reached, commodity price fluctuations are expected to stabilize, leading to a noticeable improvement in the market sentiment. However, short-term commodity price fluctuations may still persist, and energy-related products are expected to demonstrate a defensive nature during the market's cooling down process. 2) AI+ energy may be a more suitable barbell structure for this year. AI+ energy for the year can be compared to AI+ dividends in 2023-2024, and AI+ resources in 2025, expected to be the main source of supply-demand gaps and excess returns for the full year. In terms of allocation, the underlying logic remains the reassessment of China's pricing power in the advanced manufacturing industry, with the most representative industries being new energy, chemicals, non-ferrous metals, and power equipment. Continued attention to the progress of domestic AI development, with the logic of hardware "volume" likely to still have significant room for growth in the AI chain and the progress of domestic models expected to drive a rise in cloud service prices, showing confidence in domestic computing power and cloud platforms. In addition, it is recommended to continue adding some undervalued varieties, with a focus on securities firms and insurance companies. For cyclically rising varieties, the AIDC chain, lithium battery chain, and other cyclical growth sectors are still strong, but the expectation gap is currently very limited. It is suggested to focus on the most in-demand segments, which can be reflected in the recent frequency of price increases, mainly in areas such as copper-clad laminates, fiberglass, high-speed silicon, electronic special gases, optical fibers, MLCCs, chromium, lithium carbonate, rare earths, and carbon fibers. For traditional cyclical products, the focus should be on areas where systemic capacity clearance has occurred or where supply is constrained, such as phosphorus chemicals, MDI, spandex, dyes, glyphosate, urea, rubber, refrigerants, etc. Risk factors Increasing tensions between China and the United States in the technology, trade, and financial sectors; the strength of domestic policy measures, actual implementation, or economic recovery falling short of expectations; unexpected tightening of macroeconomic liquidity domestically and internationally; further escalation of conflicts in regions such as Russia-Ukraine, the Middle East, etc.; unexpected delays in the digestion of housing inventory in China.