Daily Market Watch | Institutional funds may take over, and the A-share focus is expected to shift upward with volatility

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On Wednesday, the A-share market surged strongly again. Driven by a strong momentum in AI hardware themes represented by CPO, as well as the “compute-power and electricity coordination” main line, among other categories, the ChiNext Index and the Science and Technology Innovation Growth Index rose by more than 2%. Mid- and small-cap issues led the gains even more sharply; the CSI 2000 Index has already moved to close the down-gap from Monday’s drop first. It appears that active momentum capital is still the core force driving the rise in A-shares.

Risk appetite rises, and momentum capital goes all in

Although negotiations regarding the geopolitical conflict are being discussed differently by different parties, international capital still bets that the geopolitical conflict will reach a conclusion with marginal easing. Therefore, international oil prices saw resistance and a pullback on Tuesday and Wednesday, while international gold prices and resource-related categories began to rebound again. Global stock markets and other risk assets even launched a collective offensive, indicating that global risk appetite has clearly improved. This, in turn, encourages active momentum capital in A-shares to further increase its positions.

In the trading action, first, the “compute-power and electricity coordination” sector—one that has managed to resist the selling despite the recent sharp drop—has become the most strong-performing category in the A-share market over the past few trading days. Some mid- and small-cap power stocks even continued to hit the daily limit, showing the powerful influence of momentum capital in guiding price action. Because most of these individual stocks are constituents of the CSI 2000 Index, the sustained surge in such stocks has driven the CSI 2000 Index to lead A-shares for two consecutive trading days, and on Wednesday it quickly closed Monday’s down-and-gap opening. Such a trend also implies that there is still additional rebound strength for the CSI 2000 Index. Second, the AI hardware main theme—especially categories represented by CPO—has been filling in the recent adjustment declines that were relatively severe. These individual stocks performed exceptionally well on Wednesday, which in turn helped the ChiNext Index and the Science and Technology Innovation Growth Index rise by more than 2% on Wednesday, making them the best witness to the increase in short-term risk appetite in A-shares.

Anti-“involution” information may further intensify institutional funds’ willingness to go long

It can be seen from this that the strong rebound in the A-share market on Tuesday and Wednesday mainly benefited from two factors: first, an improvement in risk appetite; second, momentum capital seized this rare time window to go long aggressively. However, judging from Wednesday’s market performance, although the indices rebounded strongly, there are still some suppressing factors—for example, trading volume has not been able to expand. The Shanghai Composite Index rebounded by more than 100 points over two trading days, yet on Wednesday the combined trading value of the Shanghai and Shenzhen markets was still only 2.18 trillion yuan. This shows that while momentum capital is going long with full force, even including strong institutional funds, they have not massively and proactively increased their investment scale. This has also been verified by the market action. For example, leading stocks in the energy storage industry, power equipment stocks, chemical sector stocks, and others guided by strong institutional funds also rebounded, but clearly they were passive follow-through rallies rather than a strong, proactive “aggressive accumulation of chips” type of rally.

This may be because strong institutional funds still have doubts about the spillover risks of the geopolitical conflict, which leads them to be cautious over the past two trading days. However, on Wednesday, the news flow has a new incremental piece of information that could dispel their concerns—namely, anti-“involution” information in the food delivery industry. This implies that price competition will further narrow; the upward momentum of PPI and CPI may be further reinforced. This, in turn, benefits boosting market participants’ expectations for China’s economic recovery, thereby offsetting the pressure from spillover risks of the geopolitical conflict. This has actually been corroborated by developments in Hong Kong stocks. Meituan—W (03690) and Alibaba—W (09988) have both shown relatively rare long white (bullish) candlestick patterns in recent trading sessions, which, from one side, indicates how much overseas capital recognizes the anti-“involution” information.

What’s more, stronger anti-“involution” information also helps various funds to boost their premium expectations for sectors such as food and beverage and chemicals, thereby encouraging institutional funds to strengthen their conviction to go long. Therefore, it is reasonable to speculate positively that as more new local economic information emerges, strong institutional funds will gradually increase their positions, becoming a new driving force for rising in A-shares. In other words, for the subsequent market performance, even though short-term gains have been too large and the short-term intraday index overbought phenomenon is becoming increasingly obvious—meaning there may be some technical pullback needs—still, with expectations that strong institutional funds will add to their positions, A-shares will continue to rise further. In terms of trading, you may increase attention to main themes that benefit from anti-“involution” dynamics such as food and beverage and chemicals, as well as categories such as power equipment, energy storage, and resources.

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Editor: Liu Wanli SF014