CITIC SEC: The technology sector is reaching new levels of congestion, "re-evaluating" consumption is necessary.

CITIC SEC released a research report stating that the technology sector is crowded at an all-time high, "anti-internal circulation" policies are transitioning from supply-side reforms to stimulate domestic demand, and the low-interest rate era is officially beginning. Under the convergence of these three signals, the current situation is not a binary choice between "consumption vs technology," but a necessary rebalancing to construct a barbell-type portfolio. The core feature of the current consumption recovery is expected to be "supply-side clearance prior to demand-side recovery," presenting a pattern of moderation, differentiation, and reliance on individual stock alpha. Sustaining the view of short-term inflection points and long-term structural restructuring: in the short term, the logic of supply is still leading, with the hope that top companies will continue to warm up first due to factors such as inventory clearance and easing competition. Meanwhile, there may be opportunities for policy catalysis or overall beta opportunities under the unexpected economic conditions in the future. Long-term investment should adhere to the structure: new products, new technologies, new channels, and new markets are the long-term main themes. Why "reassess" consumption at this moment? 1) The global technology sector is crowded, and under the barbell strategy, consumer allocation has "rebalancing" value: as of now, the market is still expecting consumer stimulus policies, especially demand-driven fiscal stimulus policies, to support consumer spending. However, without clear signals or implementation, it is difficult to boost consumer sentiment solely based on weak recovery expectations. The allocation of consumer institutions has continued to decline to around 40% from the peak level during the "core asset" market. In comparison, technology allocation is high, and with the weakening expectations of market liquidity and the focus gradually shifting towards profit verification trends, the divergence is increasing. We believe that gradually adding a certain proportion of consumer allocation or building a barbell-type strategy in the portfolio is necessary. 2) The improvement in shareholder returns for leading stocks, coupled with the low-interest rate era, may bring a reassessment window for high-yield assets. Domestic CPI is gradually recovering, but deposit rates are declining. With the large scale of Chinese residents' savings, as deposit rates decrease, some funds may seek high-yield assets as alternatives due to the risk tolerance level of residents' deposits. The dividend yield of consumer stocks has significantly increased with the continuing decline in valuation, and it has profit growth elasticity during the consumption recovery cycle. If the consumption prosperity in 2026 sees expected marginal improvements, high-yield consumer targets are expected to benefit from both "dividend support + earnings upgrades" dual drivers. 3) Boosting domestic demand with clear policy direction, short-term fundamentals are stabilizing. Under the expectation of CPI warming, some sub-sectors are gradually emerging from the bottom. Supply-side clearance (dairy products, frozen foods, condiments, pigs) and the marginal recovery of CPI (core CPI exceeding 1% for four consecutive months) collectively support the narrative of profit inflection points for some sub-sectors, with expectations of improved dividend sustainability. Looking ahead to the second half of 2026, weak recovery in total consumption and marginal improvement in prices, looking for structural inflection points. In April 2026, CPI rose by 1.2% year-on-year, and core CPI has maintained above 1% for four consecutive months; at the same time, in April, PPI rose by 1.5% year-on-year, showing continuous strength after turning positive. The repair of core CPI indicates a structural shift from continuous price declines to structural price recovery in consumption. Over the past few decades, the simultaneous rise in both volume and price in Chinese consumption, which stems from the essence of DRIVE, comes from the appreciation of residents' wealth and income driven by the real estate economy. However, under the backdrop of China's economic structural adjustment, the recovery of consumer confidence cannot rely on the positive wealth effects brought about by rising property prices as the main asset and must depend on substantial income growth and fundamental improvement in employment expectations or the emergence of new sources of wealth appreciation, such as a "bull market" in the equity market. Such a cyclical change requires time. Therefore, the short-term view on consumption rebound is judged by CITIC SEC to be more indicative of structural differentiation and recovery, rather than a rapid outbreak in total volume. Structurally, it is recommended to still focus on the supply-side logic, including factors such as inventory clearance and easing competition, which bring opportunities for top companies to continue to warm up. In the short term, the recommendation for allocation should mainly focus on the wealth effect transmission, operational turning points driven by supply-side optimization, and overall beta opportunities under policy catalysis or economic conditions beyond expectations. Long-term investment should adhere to the structure: new products, new technologies, new channels, and new markets are the long-term main themes. CITIC SEC believes that the structural changes in the Chinese consumer market are not short-term fluctuations but long-term trends towards the upgrade of consumption from goods to services, from survival to experience, and from functional satisfaction to emotional and health values. In terms of new products, emotions and health are two high-certainty demands, and opportunities for new product categories are expected to continue to be nurtured in directions like outdoor sports, sports health, IP consumption, beauty and fragrance, pets, and health products. In terms of new technologies, AI+ and biotechnology innovations will continue to drive the iteration of consumer scenarios. In the future, whether it is the introduction of AI native applications for consumption or the embedding of AI functions in traditional consumption platforms, it is expected to bring new interactive entry points and business models. In terms of new channels, under the trend of rational consumption, consumers' double demands for value for money and quality are driving the continuous evolution of formats such as discount retail, instant retail, urban outlets, and snack discount stores. At the same time, the consumption habits of lower-tier cities are spreading to higher-tier cities, making the "consumption upgrade" a new channel change worth noting. In terms of new markets, Chinese consumer companies have entered a period of internationalization strategy implementation, and directions such as the internet, professional chain stores, catering, clothing, beauty, etc., are expected to be the first to receive positive feedback from going global.