Recent ETF flow data shows net outflows from popular sectors like artificial intelligence, healthcare, and biotech, while stable assets such as low-volatility dividend stocks and free cash flow-focused investments have gained traction.
This shift has reignited market discussions about potential style rotation in A-shares, with the "AI bubble" narrative resurfacing. Industry experts base this assessment on historical year-end style rotations in A-shares and current valuation metrics for high-flying sectors like AI and healthcare.
While mutual funds acknowledge technology growth as a potential 2026 market theme, year-end capital rotation has refocused attention on stable industry demand growth and sustainable cash flows. Analysts anticipate funds may gradually shift from tech to cash-flow-resilient manufacturing sectors, with dividends remaining a portfolio stabilizer amid low interest rates.
**Low-Volatility Dividend and Free Cash Flow Strategies Attract Inflows** The style rotation debate stems from recent capital movements. Wind data shows沪深300 and中证A500 broad-based ETFs saw net inflows exceeding ¥12 billion and ¥300 billion respectively as of December 22. Meanwhile, low-volatility dividend and free cash flow ETFs also recorded inflows, with the former attracting over ¥1.5 billion.
Conversely, previously popular医疗and创新药ETFs experienced outflows. AI-themed ETFs saw over ¥1 billion in net redemptions this month, with semiconductor and solar ETFs also facing significant withdrawals. On December 19, robotics, general aviation, and non-ferrous metal ETFs led outflows.
This trend emerged as early as mid-December.中证A500ETF trading volume progressively expanded from December 10, surpassing ¥30 billion, ¥40 billion, and ¥50 billion thresholds, pushing its AUM above ¥240 billion. ChinaAMC noted year-end institutional investors typically rebalance by trimming high-valuation winners for stable, undervalued alternatives.
**Potential Multi-Sector Capital Diffusion** Year-end style rotations have precedents, like 2019's consumer-to-semiconductor shift or 2024-25's AI surge. Beyond technical factors, funds now scrutinize fundamental changes during this rotation.
The first focus is AI's sustainability in 2026. Addressing "bubble" concerns, Great Wall Fund's manager stated at a strategy conference that AI investments remain embryonic, with core holdings showing reasonable PEs and strong earnings growth—far from bubble territory.
Comparing current AI to the 2000 dot-com bubble, the fund highlighted stronger fundamentals, with GPU leaders and cloud service providers demonstrating tangible revenue and cash flow. While 2026's AI landscape presents complexities, infrastructure demand—from computing power to energy supply—remains robust.
Meanwhile, dividend and cyclical assets' cash flow logic features prominently in year-end strategies. Morgan Stanley China CIO noted global investors are reassessing Chinese assets' value as industrial competitiveness grows. He emphasized identifying quality assets beyond traditional sector frameworks, focusing on stable demand and cash flow sustainability.
ChinaAMC predicts 2026's incremental capital will come from foreign and mutual funds, with "core assets" blending hard tech and cash flow strength becoming primary targets. Invesco forecasts technology remaining dominant while resources and cyclical sectors offer niche opportunities, with dividends anchoring portfolios.
**New Funds Position Ahead** Among nearly 60 equity funds currently raising capital, tech and healthcare products coexist with free cash flow and consumer value funds. Examples include E Fund's科创板chip design ETF and China Universal's沪深300free cash flow index fund.
A quant director revealed his firm adopts a "barbell strategy" for 2026—simultaneously positioning tech and dividend ETFs across A-shares and HK markets.
A southern fund manager warned that post-2025's AI euphoria, any event-driven rotation could accelerate style shifts. Unlike past cycles, potential rotations may trigger faster, more structural market moves—necessitating proactive positioning based on cash flow, valuation, and earnings fundamentals.
Morgan Stanley's equity head highlighted two opportunities: 1) cyclical sectors (e.g., metals) transitioning into cash-flow-stable, dividend-growing value plays; and 2) globally competitive advanced manufacturers leveraging China's supply chain advantages for overseas expansion.
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