Rebirth of the Capital Legend

“Yes, I agree.” Yu Xiaolu nodded and said, “What about ‘Oriental Yuhong,’ the core leading stock in the ‘major infrastructure’ theme? Does Mr. Lu think it will continue to strengthen, quickly reach new highs, and further lead the ‘major infrastructure’ theme to rise?”

"It depends on the overall market trend of the 'major infrastructure' theme and the after-hours sentiment," Lu Xiangxiang said. "As long as the active funds in the 'emerging industrial chain' theme continue to flow into the 'major infrastructure' theme, and the overall investment sentiment in the 'major infrastructure' theme is bullish, then I think... as long as the funds in 'Fuxing Road' haven't significantly left the market, most investors are still willing to continue buying 'Oriental Yuhong' at its current level. Also... compared to future expectations and the expectation of subsequent performance surge, the current stock price and valuation of 'Oriental Yuhong' are not expensive, and it's far from reaching a stage where risks need to be considered or where there is a valuation bubble."

It's not just about the stock 'Oriental Yuhong'.

It should be said that the overall valuation level of the entire "major infrastructure" theme, especially for heavyweight leading stocks such as Conch Cement, China State Construction Engineering Corporation, Poly Real Estate, Kewan Real Estate, and Gemdale Corporation, is still very low, and does not reflect the expectation that the fundamentals have completely changed.

That's why I said we shouldn't rashly adjust our positions; we should remain firmly bullish on the 'major infrastructure' sector.

In fact, to simply determine whether a market trend has ended or whether there is a valuation bubble, one can look at the choices made by 'Huayi Capital'.

At this stage...

Although Huayi Capital has not yet disclosed its latest holdings structure.

However, based on the trading volume of the stocks heavily invested in by 'Huayi Capital' in the market, it can be determined that the institution's current holdings have not changed much from before.

I estimate that this institution's main holdings are most likely still focused on the "major infrastructure" theme, as well as the core sectors of liquor and white goods.

“The logic behind Huayi Capital’s continued heavy investment in the ‘major infrastructure’ sector is understandable,” Yu Xiaolu said. “However, the liquor and white goods sectors follow a consumer logic. I feel that these two sectors, after the continuous hype by major institutions over the past six months, have already fulfilled their expectations for the subsequent period, right? At least this year’s expectations have been largely realized. Moreover, these two sectors, whether it’s the sector index or the related core leading stocks, such as ‘Qianzhou Moutai,’ ‘Wuliangye,’ ‘Luzhou Laojiao,’ ‘Jincheng Fenjiu,’ ‘Gree Electric Appliances,’ ‘Midea Electric Appliances,’ ‘Haier Electric Appliances,’ etc., have basically recovered from the losses of the previous rounds of stock market crashes and are at a relatively high level, right?”
Furthermore, looking at the recent trends of these two lines, and even the main board sector, as well as other major sectors, we can see their performance.

It's quite noticeable that the major institutional funds that previously concentrated in these key sectors are now reducing their positions, taking profits, and leaving the market!

You can sense that its internal shareholding structure is showing signs of loosening!
I always felt that with the expectations already met and the stock prices at a relatively high level, it would be quite difficult for the liquor and white goods sectors to continue to rise significantly or maintain the upward trend of the previous six months.

At least in comparison to the 'major infrastructure' line.

I don't think its underlying logic is that strong.

Many institutions have previously touted the so-called "social consumption upgrade," but I've always felt there are some flaws in the underlying logic of these claims. What I don't understand is why 'Huayi Capital,' with its holdings in liquor and white goods stocks already showing significant profits, hasn't reduced its holdings to lock in profits or shifted its portfolio to other sectors.

“I don’t quite understand the logic behind the liquor sector either,” Lu Xiangxiang said. “But currently, there are indeed many institutional investors pooling their funds in the liquor sector. However, I think the logic behind the ‘white goods’ sector is relatively clear, and its fundamentals are consistently positive. In addition, the ‘white goods’ sector is not only supported by the underlying logic of ‘consumption upgrade,’ but it can also be seen as a related sector in the ‘real estate industry chain.’ As the real estate market continues to be hot and housing prices continue to soar, from the underlying logic, with the delivery of new homes, the ‘white goods’ industry will also see a huge increase in demand during the renovation of many new homes.”

Therefore, I believe the underlying logic behind the strong stock performance of leading companies in the 'white goods' sector is still sound.

Of course, the underlying logic of the 'white goods' sector is strong enough.

Indeed, the valuations of many leading stocks in this sector are not low at present. Compared with other main sectors in the market, especially the "major infrastructure" sector, such as core leading stocks like "Anhui Conch Cement," "Poly Real Estate," "China Merchants Shekou," and "Shenhua Coal Industry," they do not offer high value for money.

You just said you didn't quite understand why 'Huayi Capital,' despite substantial profits and the fact that the 'liquor' and 'white goods' sectors had already partially realized their expectations and the shareholding structure had slightly loosened, still held a large number of core leading stocks in these two sectors without any intention of reducing positions to take profits or adjusting its portfolio. I think... I think I understand now.

"What do you think is the reason, Mr. Lu?" Yu Xiaolu then asked.

Lu Xiangxiang responded: "First of all, Huayi Capital already has a significant holding in the strongest sector of the market, namely the 'major infrastructure' sector. Based on the holdings disclosed by Huayi Capital, it can be estimated that the institution's holdings in the 'major infrastructure' sector are at least 400 billion yuan, and it should have holdings in the corresponding core leading stocks."

Generally speaking, large institutions in the industry like 'Huayi Capital'.

I won't put all my positions on one main line, as that would increase the risk.

In the current market, apart from the 'major infrastructure' theme, which has a very strong underlying logic and is unanimously recognized by most investors, there are other themes that are not widely discussed.

In terms of trend performance, underlying logic, and future expectations.

The main sectors with relatively high certainty and good liquidity, capable of absorbing large capital inflows and outflows, are actually only the main board heavyweight sectors that major institutions have previously favored: liquor, white goods, pharmaceuticals, power, and finance.

Among these key investment themes, liquor and white goods are undoubtedly the most cost-effective and have the strongest potential.

Furthermore, although the expectations for the liquor and white goods sectors have already been realized, and the stock prices have recovered their valuations after a six-month-long upward trend, they are now at a relatively high level.

However, the fundamentals of the entire industry are still gradually improving, and the trend is continuing.

As early-mover funds with considerable cost advantages, there is no reason for them to reduce their positions, take profits, and leave the market at this time.

In our A-share market, the vast majority of investors are retail investors, who are easily influenced by emotions and tend to chase highs and sell lows.

When emotions are at play, trends tend to continue, which can easily lead to extremes.

Therefore, the A-share market is prone to the so-called pendulum effect.

In other words, when the trend is unfavorable, prices tend to fall excessively and pessimism can easily become excessive. However, when the trend is favorable and the fundamental logic continues to improve, prices often tend to rise excessively, forming a certain degree of bubble valuation. Currently, the liquor and white goods sectors have not yet reached the so-called bubble valuation stage.

At the same time, the high degree of consensus among various market participants regarding these two sectors has not been reflected.

In other words, as long as the fundamental logic does not deteriorate, these two lines will likely continue to rise due to the inertia of the trend, and the bullish sentiment will further intensify.

Since its valuation has not yet reached the stage of a bubble valuation, and at the same time, the market sentiment has not yet reached the stage of a consistent and concentrated bullish outlook.

Therefore, we adhere to the investment and trading philosophy of 'letting profits run'.

This location is naturally not a selling point.

If I were Mr. Su from 'Huayi Capital', even with a head start and a significant cost advantage, I wouldn't reduce my holdings and take profits at this point, and instead move into other key sectors.

Furthermore, considering the current size of Huayi Capital's funds...

Then compare it with the overall market, and the current daily trading volume.

In fact, the main investment themes and core stocks that this institution can invest in are relatively few. Overall, holding leading stocks in the 'major infrastructure' theme, as well as core leading stocks in the 'major consumer' sector, such as liquor and white goods, is indeed the optimal solution for its current portfolio.

“Mr. Lu is right.” Yu Xiaolu thought for a moment and said, “For an institution with such a large amount of funds as ‘Huayi Capital’, there are indeed not many investment targets in the A-share market. It is unlikely that Mr. Su will continue to concentrate his positions on more volatile small and medium-sized growth stocks as before. It seems that as the amount of funds increases, the primary consideration for trading conditions is not profit, but liquidity.”

Lu Xiangxiang nodded and said, "That's for sure. The larger the amount of capital, the higher the requirement for liquidity. Without the support of liquidity, even if the expected profit margin is large, it will be useless if you can't get out after entering. When you are the largest main force in a stock, no other funds will be willing to come in and support you. This is a very normal thing."

However, our fund products haven't reached that point yet; there are still many investment options available on the market.

"With such a large amount of capital and such high liquidity requirements, it's truly astonishing that 'Huayi Capital' can still rank among the top fund investment companies in China, achieving a doubling of performance within the year," Yu Xiaolu thought to herself. "It seems like this institution has made all the money in the market."

“‘Huayi Capital’ is indeed a very abnormal institution.” Lu Xiangxiang nodded, quite agreeing. “The stocks it holds in large amounts have basically followed independent trends this year. Take ‘Qianzhou Moutai’, which has the largest amount of its holdings, for example. This stock’s increase this year has exceeded that of 97% of the stocks on the market.”

“Since Huayi Capital is still heavily invested in its original main theme…” Yu Xiaolu paused and continued, “and judging from the trading volume, there are no obvious signs of reducing positions, taking profits, or leaving the market. Given this institution’s almost abnormally high success rate in predicting market trends, does this mean that the medium- to long-term market trend will still revolve around the core theme? If that’s the case, it seems that the ‘emerging industry chain’ theme, and even the entire ‘technology theme,’ really doesn’t have much of a chance to turn around!”

“No one can predict the future market trend that hasn’t happened yet,” Lu Xiangxiang continued. “However, judging from the current holdings of Huayi Capital and its potential views on market trends, this is indeed the case. As I said before, the ‘emerging industrial chain’ sector, without fundamental and underlying logic support, even if sentiment can stimulate an upward trend, it will still be difficult to attract a large number of institutional investors. Without the intervention of a large number of institutional investors and without their help to lock in positions, the shareholding structure of the entire ‘emerging industrial chain’ sector cannot truly settle down.”

If the chips cannot be truly accumulated, then there is no way to create a sustained market trend.

After all, speculative capital is unlikely to have the patience to hold positions for a long time.

Furthermore, retail investors who chase short-term gains and like to buy high and sell low are unlikely to have that much patience.

With the various industry sectors and concept sectors along the 'emerging industrial chain' theme failing to retain funds and accumulate shares, these short-term speculative funds, after realizing a wave of profits, will inevitably converge on the core themes of the market that have stronger underlying logic, more solid fundamentals, and higher certainty of trend.

Although the underlying logic supporting long-term stock price fluctuations is expectations and performance.

However, when it comes to the specific market trend and short-term direction, what drives stock prices is the specific situation of buying funds.

It has a large amount of institutional and major funds helping to lock up its position.

The "major infrastructure" theme, along with sectors such as liquor, white goods, pharmaceuticals, consumer goods, power, and finance on the main board, show that although most of the core leading stocks have larger circulating shares than the stocks in the "emerging industrial chain" theme, their potential buying power is clearly stronger.

With large amounts of capital locked up, and even better potential buying volume, the outlook is also better.

Naturally, the market trend will be stronger.

This can actually be seen by looking at the strength or weakness of the major themes during the adjustment phase.

When sentiment declines, the industry sectors and concept sectors of the 'emerging industrial chain', as well as their related stocks, often experience sharp corrections.

This includes related industry sectors and concept sectors such as liquor, white goods, and major infrastructure, as well as their associated stocks.

In the recent short-term sentiment downturn, the price pullbacks have generally found corresponding support levels, and the pullback magnitude has not been large.

From this perspective, it's easy to see the specific investment trends in the market, as well as the focus of large-scale buying in the market.

"Hmm." Yu Xiaolu nodded. "It seems the market is leaning towards the heavyweight sectors, with many institutions clustering around them. The overall trend of the Shanghai Composite and Shenzhen Component indices consistently outperforming the ChiNext in the long term is unlikely to change in the short term." (End of Chapter)