Industrial: The extreme rotation of A-shares is hard to sustain. After the recovery of the economy, prioritize the layout of AI hardware and high-end manufacturing.

Industrial released a research report stating that the recent extreme rotation in the A-shares market is driven by an uncertain macroeconomic environment, coupled with a vacant period in industrial narratives, leading to chaotic market expectations. This has intensified the competition among existing capital while making it difficult for new funds to form a collective force. However, all things must unite after separation, indicating that extreme rotation is not the norm. It is highly likely that subsequent convergence will occur through the alignment of macroeconomic and industrial expectations. Since the earnings report season in July, the typical sectors where earnings upgrades have been concentrated remain in high-end manufacturing, represented by AI computing hardware (electronics, communication equipment, computer hardware), AI devices, upstream AI materials (new materials, glass fiber, minor metals, industrial metals), and the manufacturing & export chain (innovative drugs, shipbuilding, battery storage, papermaking). After the return of prosperous investments, these sectors will still be the ones with greater elasticity. I. Behind the Recent Extreme Rotation in the Market The most significant impression the recent market gives is still one of chaos, rotation, and a lack of a main theme. The industry rotation intensity indicator constructed by Industrial continues to rise, reaching a new high for the year this week. Behind the extreme rotation are primarily one: the uncertain macroeconomic environment and shrinking risk appetite. Rising oil prices amid the U.S.-Iran conflict and interest rate hikes by the Federal Reserve due to inflation expectations form a cycle, causing fluctuations in U.S. Treasury yields; especially, the volatility of various economic data and internal divergences within the Federal Reserve further exacerbate uncertainties in monetary policy expectations and the contraction of global risk appetite. Secondly, there is a vacant period for new industrial narratives and a lack of an industrial main theme. There have yet to be blockbuster applications or scenarios that can once again reignite global capital expenditure upgrade expectations; high-frequency data from the industrial chain mostly remains elevated or declining, and the consensus on a new industrial mainline still takes time to coalesce. The market is in a state of fluctuations and rotations, awaiting a new narrative similar to the AI+Coding/Agent discourse at the beginning of the year. Thirdly, there is a structural differentiation of incremental funds and a lack of market cohesion. According to Industrials research on institutional investors, since August, the increased funds mainly consist of two categories: first, relative-return public offerings; second, absolute-return insurance capital. These two distinct investment styles of funds are "fighting their own battles," making it difficult for the market to form a combined strength. II. How Extreme Rotation May Converge: Discussing Several Opportunities Thus, the recent extreme rotation is driven by an uncertain macro environment and a time gap in industrial narratives, causing market expectations to fall into chaos, and intensifying the competition among existing capital, while also making it difficult to form a collective force with new funds. However, Industrial tends to believe that all things must unite after separation, and extreme rotation is not a norm. It is most likely that future convergence will occur through the alignment of macroeconomic and industrial expectations. We discuss several opportunities for the subsequent convergence of rotations: First, the reduction of macroeconomic uncertainty. This is currently a relatively fast and effective path to help the market form a structural consensus. For the current market, especially for technology growth assets, the crux may not be interest rate hikes. Experiences from 1999s internet boom, 2021s new energy sector, and this years Q2 indicate that tightening macro liquidity has limited disturbance to trends supported by strong industrial backing. The greater suppression comes from the risk appetite contraction caused by monetary policy uncertainties. As monetary policy becomes clearer, the reduction of market divergences and uncertainties may actually help increase market risk appetite. For instance, on Friday (September 4), the non-farm employment data exceeded expectations and interest rate hike predictions warmed up, yet U.S. technology stocks surged, illustrating this point. Several important observation points influencing the Federal Reserve's decisions are not far off and may help bridge market divergences and reduce macro uncertainty. These include the U.S. CPI data scheduled for September 11, and the FOMC meeting on September 17. Second, the emergence of a new round of industrial narratives. This is the foundational path capable of coalescing a new round of mainline consensus. The period from September to November is a traditional window for intensive catalysts in the overseas AI industry for the latter half of the year, and the number of resonant catalysts available will continue to increase. Several important observation windows include: First, as the IPO of Anthropic approaches, its upcoming ARR data will be disclosed. Anthropic is highly likely to go public before the end of October, and companies seeking an IPO must submit and release their prospectus to the entire market at least 15 days before the roadshow begins, during which clearer ARR calculation methods and financial data will be disclosed. Historical experience shows that after leading model companies unveil impressive ARR data, market expectations for hyperscaler capital expenditures and upstream AI profitability will be upgraded, which will also help alleviate recent market concerns regarding ARR and AI ROIC. Second, the arrival of a new earnings report season will provide clearer guidance on next years industrial expectations. The new round of overseas tech earnings report season will commence in mid-October. Compared to the interim reports from July to August, this earnings report season will offer more insight and information for market judgment regarding next years industrial expectations. Specific time points to note include Oracle on September 10, Micron on September 30, and Intel along with the four major cloud providers in late October, followed by some significant optical communication leading companies in November. Third, September to November is a traditional dense window for major North American companies to hold annual conferences, where they will showcase the latest achievements and progress, serving as important observation opportunities for new AI applications and scenarios. September will feature Salesforce, Meta, and OpenAI, while November will see Microsoft and Amazon. Therefore, as the macro uncertainty decreases and the weight of industries and prosperity increases, it will help to break the recent state of extreme rotation in the market. As market confusion and divergences are resolved through the convergence of macro and industrial expectations, the main consensus will gradually coalesce during this process. III. After Extreme Rotation Converges, Prosperous Investments Are Expected to Return During the recent process of extreme rotation in the market, three strategies have been adopted to respond. Firstly, there is a shift towards a micro-disk + dividend dumbbell configuration to cope with the structural rotation in industries; secondly, seeking catch-up in previously lower-tier industries, pursuing safety based on probability; and thirdly, rapidly switching between hot topics and concepts (such as El Nio and AI applications) to gain excess returns through short-term elasticity. The collective outcome of these three response strategies has led to a failure of prosperous investments. The high prosperity index, which measures the performance of high-prosperity industry leaders, has again turned negative this year and has underperformed dividends and micro-disks. With the anticipated upcoming opportunities for convergence in rotations and increasing pricing power of fundamentals, benefiting from the tightening macro liquidity and shifting the main contradictions in pricing towards earnings, prosperous investments are expected to return. Since the earnings report season in July, the typical sectors of earnings upgrades remain concentrated in high-end manufacturing directions represented by AI computing hardware (electronics, communication equipment, computer hardware), AI devices, upstream AI materials (new materials, glass fiber, minor metals, industrial metals), and the manufacturing & export chain (innovative drugs, shipbuilding, battery storage, papermaking). After the return of prosperous investments, the aforementioned sectors will still be the ones with greater elasticity.