Guosen Xun Yugen: What new narratives have emerged as this round of the bull market enters its third stage?

Guosen Xun Yugen released a research report stating that the bull market, which began on September 24, 2024, has entered its third phase. After market adjustments, a new round of upward trends often arises with new narratives. New Narrative 1: From upstream to downstream in technology, shifting from export logic to domestic substitution, focusing on domestic substitution of computing power, AI applications, as well as the extended fields of innovative drugs and brokers. New Narrative 2: Policies stimulating domestic demand and the resonance of low stock prices, with marginal weakening of export data in the future, necessitating a focus on stable growth through domestic demand, such as in the liquor and real estate sectors. The main points from Guosen are as follows: Reflecting on this year's A-share market, the first quarter saw a fluctuating and vibrant environment, while the second quarter exhibited K-shaped differentiation with contrasting performances. The severe adjustment in July marked the beginning of the second half. After the ups and downs, it is essential to reassess the stage of the market and the future narrative logic. 1. This bull market has entered its third phase. The three phases of the A-share bull market differ in DRIVES and industry themes. The bull market follows its own cyclical patterns, proposing the concept of a three-phase bull market; each phase has distinct DRIVES and main industry themes, which can be summarized as Phase 1: "Invest low," Phase 2: "Invest strong," and Phase 3: "Invest smooth." Taking the bull market from 2019 to 2021 as an example, the three phases are illustrated in the chart below. The first phase of the bull market is the incubation period, corresponding to the first wave of upward movement and the second wave of adjustment in wave theory, driven by policy easing to facilitate valuation recovery. Structurally, the market prioritizes location over fundamentals; as risk appetite rebounds from a low point, undervalued assets generally benefit. The second phase is the explosion period, corresponding to the third wave of increase and the fourth wave of adjustment, where profit improvement leads to a Davis Double-Play effect; at this time, the investment theme returns to fundamentals, with the sectors having the highest prosperity and strongest performances becoming industry themes. The third phase, marked by the fifth wave peaking, sees funds entering the market driving up market sentiment, with fields that are logical and have imaginative potential being more favored by capital. This bull market has now entered its third phase, where a new narrative in the industrial sector is expected to unfold. In this bull market, the policy reversal on September 24, 2024, initiated the bull market, with the period from September 24, 2024, to April 25, 2025, regarded as the first phase; early undervaluation in financial real estate and consumer pharmaceuticals was repaired in succession, followed by a strengthening of the technology and growth sectors. Starting from April 25, 2025, A-share net profit year-on-year turned positive, with profit improvement gradually gaining traction, leading the bull market into its second phase, where the fundamental advantages of technology are most apparent, showing significant growth, such as telecommunications with a maximum increase of 318% and electronics with a maximum increase of 235% from April 25 to July 26, while the CSI 300 index had a maximum increase of 41% during the same period. Since the adjustment in July this year, some investors confidence in the bull market has shaken. The decline in A-shares in July is a normal adjustment in the later phase of a bull market, analogous to the 1999 surge on May 19, where the turbulence from January 26 to July 26 resembles that from August 20 to February 21. The current policy environment remains loose, with macro and micro fundamentals gradually recovering, and the trend of resident funds entering the market is accelerating, indicating that the A-share bull market is gradually entering its third phase. The industry structure of the third phase of the bull market requires emphasis on "investing smoothly." Considering the current policy background and industrial logic, the two new narratives of technology diffusion and domestic demand in the second half of the year are worthy of attention. 2. New Narrative 1: Technology from upstream to downstream, from export logic to domestic substitution. The AI cycle is expected to evolve from computing power hardware to applications. Looking back at the mobile internet wave from 2012 to 2015, the initial phase with the commercialization of 3G and the release of the iPhone 4S saw a higher industry sentiment at the hardware level, with profits in electronic information manufacturing and electronic return on equity (ROE) steadily increasing during 2013-2014. At later stages, the full commercialization of 4G, the price drop of smartphones, and the application of PC software on mobile platforms collectively propelled the mobile internet industry cycle toward applications, leading to a notable recovery in the computer and media sectors in 2015-2016. In the current AI wave, since the emergence of ChatGPT in 2022, the demand for AI computing power and storage for training large models has surged simultaneously, pushing the sentiment and prices of upstream computing power hardware significantly higher. Factors such as rising upstream costs and slower revenue growth compared to expenditure are gradually worsening the cash flow situation for cloud vendors, and the narrative around AI hardware is beginning to weaken. Similar to 2012-2015, if the costs of large models decrease in the future and new AI application scenarios accelerate, the AI cycle is likely to evolve from the hardware side to the application side. Additionally, the intensification of trade frictions in the tech field between China and the U.S. will drive the AI trend from computing power hardware to applications and domestic substitution. The technology narrative may expand from exports to domestic substitutes and applications. Drawing from the experiences of 2012-2015, the stock market in the mobile internet followed the industrial cycle and gradually spread from hardware to applications. In this round of AI market, since 2022, the AI computing index has significantly outperformed AI applications and the Hang Seng Tech index. From a PEG perspective, the valuation profitability of fields like Siasun Robot & Automation and application software has gradually become apparent, and the future AI market is likely to see expansion, particularly in the following sectors: Domestic substitution of computing power: In August, the U.S. Federal Communications Commission (FCC) announced plans to prohibit the import of new types of optical transceiver modules from China, among other sanctions. Subsequently, amidst domestic technological advancements and policy support for self-sufficiency, the uncertainty in the trade environment may lead to a gradual shift in the technology narrative from export technology to domestic demand technology, focusing on domestic substitution opportunities in storage, computing power, and semiconductor equipment materials. AI applications: The multi-modal large models of AI are rapidly evolving, expected to continue penetrating various scenarios in finance, media, and consumption. Meanwhile, many products related to embodied intelligence are gradually transitioning from B-end to C-end. Coupled with the imminent listing of Yushutech on the A-share market, application directions such as internet platforms, humanoid Siasun Robot & Automation, and intelligent driving may enter a period of explosive growth. Innovative drugs and brokers: These two fields represent technological extensions. Innovative drugs follow a growth investment style; this year, the momentum for innovative drugs entering overseas markets remains strong, with the volume and diversity of business development transactions continuing to increase, and innovative drugs with fundamental advantages are expected to achieve market repricing. Furthermore, in the later phase of the bull market, transaction volumes are gradually increasing, and the warming of tech IPOs also broadens broker revenue streams, thus brokers with a clear trend of profit improvement also possess configurational value. 3. New Narrative 2: Policy stimulation of domestic demand and resonance with low stock prices. This year, the domestic economy exhibited a K-shaped differentiation in the first half, and policy support for domestic demand is expected to increase in the second half. In the first half, the three driving forces of the economy showed varied performance, with exports growing year-on-year by 17.60%, retail sales by only 1.30%, and investments decreasing year-on-year by 5.70%. The GDP growth mainly relied on exports, revealing a critical contradiction of insufficient domestic demand in the current economic operation. Looking ahead to the second half, amidst the backdrop of last year's high export base and heightened trade risks, the export-driven effect on the economy may weaken marginally. The actual GDP growth rate for Q2 2026 was 4.3%, the lowest in nearly four years and below the annual target range of 4.5%-5.0%, making an increase in domestic demand policy necessary. At the end of July, the Central Political Bureau meeting called for "implementing a more proactive fiscal policy and moderately accommodating monetary policy," emphasizing the need to "enhance counter-cyclical adjustments and significantly expand domestic demand, optimizing supply," directing attention to the unfolding narrative of domestic demand in the stock market for the second half. The domestic demand sectors have the potential for policy stimulation resonating with low allocation. In this round of bull market, sectors like food and beverage, real estate, and service consumption have clearly lagged, exhibiting characteristics of low stock prices and low allocations. Historical analysis indicates that when an industry shows "dual lows," future absolute or relative returns tend to be significant, especially against the backdrop of potential policy increases for domestic demand in the second half, where consumption and real estate sectors are expected to recover. Liquor: With the gradual depletion of liquor channel inventories and increased demand for stocking ahead of the autumn-winter peak season, the supply and demand dynamics of the liquor market are continuously improving. This year, Moutai has raised its factory prices twice against the trend, leading to a gradual stabilization and recovery of bulk prices. As policies bolster resident income confidence, future Moutai prices are expected to stabilize further, potentially driving expectations in the high-end liquor market to warm up, indicating that undervalued, under-allocated liquor stocks possess configurational value. Real estate: With city-specific policies gradually implemented to stabilize the real estate sector, some first-tier cities have already shown signs of price stabilization. Additionally, rental prices in a hundred cities across the country have stabilized over the past six months, with rents potentially serving as a leading indicator for housing prices. Confirmation of stabilized housing prices may restore overall confidence in the real estate market, offering opportunities for valuation recovery in the real estate sector. Risk Warning: Significant warming of expectations regarding Federal Reserve tightening and fluctuations in domestic economic recovery.