Summary of Key Points
The A-share market in May exhibited a stark divergence, creating a situation akin to "heaven and hell": on one hand, leading stocks in technology sectors such as AI reached record highs, with 584 companies seeing increases in their stock prices; on the other hand, nearly 4000 stocks declined (accounting for 70% of the market), and more than 2000 stocks were priced lower than when the Shanghai Composite Index was at 3000 points last year. This divergence stems from investors' willingness to concentrate their funds on the "certainty" offered by AI sectors in an uncertain environment, leading to a cycle where the strong get stronger and the weak get weaker. Looking ahead to June, the market is likely to remain volatile with little chance of reversal in this divergence. However, there may be a reshuffling within the AI sector (leading companies with solid performance will continue to rise, while those based on pure speculation could fall), while traditional sectors need to wait for fundamental improvements or policy signals before showing signs of recovery.
I. How extreme was the divergence in May? 70% of stocks fell, nearly 40% underperforming compared to last year's 3000-point level
The data speaks for itself:
- High proportion of declining stocks: Out of more than 5500 stocks in the market, 3987 declined in May (72%), with a median decline of -7.21% (meaning that half of the stocks fell by more than 7%).
- Many stocks below pre-pandemic levels: 2132 stocks were priced lower than when the Shanghai Composite Index was at 3000 points in April last year, indicating that nearly 40% of the market did not perform well despite the market's overall growth over the past year.
- Concentrated funds: On May 29th, the total trading volume was 3.34 trillion yuan, with the top 5% of stocks (276) accounting for nearly half of the total trades (48.5%). Leading AI companies like Zhongji Xuchuang and Tianfu Communication saw daily trading volumes exceeding 28 billion yuan, while many traditional stocks were largely ignored, with some even hitting record lows.
- Even large, well-performing companies were affected: Major corporations such as China National Offshore Oil Corporation, Wuliangye, and Sany Heavy Industry saw declines of over 10%.
II. Why was the divergence so severe? Funds flocked to AI sectors
The root cause of this divergence is the extreme pursuit of "certainty" by investors:
- **AI as the only "safe haven": Given the uncertain macroeconomic environment (slow economic recovery, potential interest rate hikes by the Federal Reserve, high oil prices), the AI sector is one of the few with clear growth prospects. The global demand for AI-related products, such as optical modules and chips, is driving substantial performance improvements, attracting investors.
- A self-reinforcing cycle: Rising stock prices in AI sectors attract more funds, leading to even greater gains; meanwhile, non-AI stocks face reduced interest from buyers, prompting fund managers to sell their holdings, which further drives down stock prices, creating a vicious cycle where the AI sector thrives while traditional sectors suffer.
- Institutional investment dominance: Private fund managers point out that this divergence reflects the search for stability in an uncertain market, with AI being one of the few reliable options.
III. Which sectors are rising and which are falling?
Rising sectors: Almost all are part of the AI ecosystem:
- Among the 584 stocks with significant gains, those in electronics (195), machinery and equipment (97), and power equipment (59) accounted for 70%, mainly involving AI-related components like optical modules, chips, and advanced packaging. For example, Shengyi Technology rose by 83% in May, while Megui Innovation and Huahong Company saw gains of over 50%.
Falling sectors: Traditional industries have generally performed poorly:
- The majority of stocks that declined this year are from sectors such as pharmaceuticals and biotechnology (369), machinery and equipment (362), computers (non-AI components, 261), basic chemicals, and automobiles. The oil and petrochemical sector fell by 15%, the worst-performing segment, showing a stark contrast to the 20% increase in the communications sector.
IV. Will things change in June? Volatility is expected, with little chance of reversal in divergence, but potential reshuffling within AI
Institutions are generally consensus on the market outlook for June:
- Short-term volatility, persistent divergence: The concentration of funds in AI sectors is too significant; it will take time (perhaps a year or longer) to see a shift in investment patterns, similar to previous trends in consumer and renewable energy sectors. June is a period of limited performance updates from companies, so the divergence is unlikely to change.
- Diversity within the AI sector: The trading volume in AI is extremely high, leading to a distinction between companies with solid performance and those based on speculative concepts. Leading companies with real earnings will continue to rise, while speculative stocks may experience adjustments.
- Traditional sectors need signals: Consumer and cyclical sectors that have declined significantly need fundamental improvements or policy support to recover. For now, such signals are not in place.
- Defensive sectors as a safe option: Stable sectors like coal, banking, and utilities can serve as diversification tools.
Conclusion
The extreme divergence in May reflects investors' preference for AI-related stocks. This trend is likely to continue in June, with a greater focus on companies with tangible financial performance within the AI sector. For individual investors, it is recommended to focus on leading AI companies with solid earnings or to allocate funds to defensive sectors to mitigate risk. Traditional sectors should wait for more favorable conditions before attempting to buy into them.