In recent days, as market volatility has intensified, we reiterate that ETF investing should focus on simple plays rather than complex challenges. The core reason is that global markets remain in an environment of extremely loose liquidity, where assets with clear industry trends are likely to command valuation premiums, and these premiums may continue to expand.
What constitutes a simple play? The answer lies in well-defined industry trends. Sectors with upward trajectories in both earnings and valuation channels represent favorable trends. As liquidity continues to expand, valuation premiums will also increase, meaning even short-term setbacks can be rescued. Examples include overseas computing power (ChiNext Artificial Intelligence), large language models (Hong Kong Internet), technological self-sufficiency (STAR Market Chips, STAR Market AI), cyclical commodities (non-ferrous metals, chemicals), and robotics.
So, what qualifies as a complex challenge? These are sectors where you are fully aware that realizing the industry's potential is extremely difficult, with no mature products yet, and the core companies likely to achieve future earnings are not even listed on the A-share market. Investing here essentially bets on other funds buying in. Under the current wide-ranging market fluctuations, trading friction increases significantly. Examples include commercial aerospace, AI applications, controlled nuclear fusion, and brain-computer interfaces.
Reflecting on the market since January, three key observations summarize the period: (1) Deep trading focused on supply resistance, with significant price increases in commodities and basic components—regardless of demand, anticipation of price hikes drove stock surges. (2) The market completed second-order derivative pricing for inflation, with inflationary sectors transitioning to first-order rate dynamics. (3) Downstream terminal stocks collapsed (from overseas CSPs to Chinese consumer terminals), while midstream trend companies stagnated (e.g., NVIDIA, optical modules).
Medium to long-term prices are ultimately determined by supply-demand dynamics. During periods without major disruptions like wars or pandemics, when cost pressures from the upstream sector prevent midstream companies from revising expectations upward, the pace of upstream price increases tends to slow as cost constraints create a negative feedback loop. Therefore, we believe continued cyclical inflation depends on the midstream sector not faltering excessively. For instance, while all demand is attributed to AI computing infrastructure build-out, the most AI-correlated players like NVIDIA and optical modules aren't rising—does this seem rational? We contend that currently, upstream represents price momentum, while midstream embodies value trends. In the tug-of-war between upstream costs and downstream demand, the midstream sector may still represent an undervalued opportunity.
Overall future expectations: Given our relative optimism for the market through the first half of 2026, the Shanghai Composite Index's 3,990 point level should provide strong support. After sufficient spatial adjustment, the market may enter a period of consolidation. Among growth sectors, by late December we identified only five sectors with both valuations and industry trends: non-ferrous metals, optical modules, gaming, Hong Kong Internet, and batteries. In January, non-ferrous metals demonstrated strong outperformance. Currently, optical modules, gaming, Hong Kong Internet, and batteries may represent the market's only viable buying opportunities. Among these four sectors, optical modules and Hong Kong Internet maintain leadership positions with industry trends and catalysts expected in February-March. Consequently, we anticipate optical modules and Hong Kong Internet will continue leading, while gaming and batteries may play catch-up relative to optical modules.
Now, let's examine the current market pricing dynamics across five major sectors: (1) Major cyclicals (non-ferrous metals, chemicals): Non-ferrous metals exhibit strong expectations, solid fundamentals, and low valuations. Speculative plays without actual price increases may weaken, while gold likely remains in an upward price channel through the first half.
(2) Major consumption (food & beverage, automotive): Characterized by weak expectations, soft fundamentals, and low valuations. Sluggish consumption and high costs suggest opportunities may only emerge in the second half (coinciding with cyclical price peaks).
(3) Overseas computing power (ChiNext Artificial Intelligence): Features strong expectations, robust fundamentals, and low valuations. During market consolidation periods, ChiNext AI representatives like optical modules may strengthen (potentially alongside imminent NVIDIA breakthroughs).
(4) Chip self-sufficiency (STAR Market Chips, STAR Market AI): Demonstrates strong expectations, solid fundamentals, but high valuations. Recent semiconductor equipment strength stems from memory chip price momentum. The next chip opportunity will likely leverage domestic computing logic, dependent on optical module and Hong Kong Internet strength.
(5) Hong Kong Internet: Shows weak expectations, challenging fundamentals, but low valuations. As consumption's vanguard, Hong Kong Internet companies face slightly lower cost pressures than traditional consumer terminals. Large language model advancements are boosting valuations, suggesting potential for early momentum.
Regarding specific ETF allocations, Cao Xuchen recommends currently focusing on four key investment opportunities: (1) The ChiNext Artificial Intelligence ETF Huabao (159363), heavily weighted in optical modules, may represent an attractive destination during market consolidation.
(2) Prioritize Hong Kong-focused products like Hong Kong Internet ETF (513770), Hong Kong Connect Innovative Pharma ETF (520880), Hong Kong IT ETF (159131), and Hong Kong Connect Auto ETF Huabao (520780). Short-term emphasis should be on Hong Kong Internet ETF (513770).
(3) For domestic AI, given maintained market liquidity, server and IDC companies within the big data industry may see front-loaded pricing and long-term logic plays. Consequently, Big Data ETF Huabao (516700) will likely demonstrate synchronized strength with STAR Market Chips and STAR Market AI, warranting close attention.
(4) With digital RMB acceleration accelerating, FinTech ETF (159851) serves as both broad market and thematic offensive play, re-entering observation window.
Special reminder: Recent market volatility may intensify, with short-term fluctuations not indicative of future performance. Investors must rationally allocate based on personal capital status and risk tolerance, paying utmost attention to position sizing and risk management.
Risk disclosure: The funds mentioned are issued and managed by Huabao Fund. Distributors assume no responsibility for investment decisions, redemption, or risk management. The manager rates Hong Kong IT ETF, Hong Kong Connect Auto ETF Huabao, Hong Kong Internet ETF, ChiNext Artificial Intelligence ETF Huabao, and Hong Kong Connect Innovative Pharma ETF as R4-medium-high risk, suitable for aggressive (C4) or higher investors. Big Data ETF Huabao and FinTech ETF are rated R3-medium risk, appropriate for balanced (C3) or higher investors. Index constituents adjust per index methodology, with past performance not predicting future results. These Huabao Fund products carry distribution disclaimers. Investors should review fund documents to understand risk-return profiles and select products matching their risk tolerance. Sales institutions provide risk assessments per regulations; investors should follow suitability opinions, noting assessments may vary between institutions but cannot be lower than manager's rating. Contractual risk characteristics may differ from ratings. Investors must understand fund risks and independently assume investment decisions. CSRC registration doesn't guarantee investment value or returns. All information herein is for reference only, with investors bearing full responsibility for decisions. No content constitutes investment advice, and no liability is assumed for related losses. Past performance doesn't indicate future results, and other fund performance doesn't guarantee these funds' results. Investing carries risks—proceed cautiously. Fees detailed in legal documents.
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