Summary of Key Points
On June 29th, the A-share market experienced a "seesaw" pattern: sectors that had seen rapid gains earlier, such as computing hardware (e.g., PCB materials, optical fibers, optical chips), saw a collective sell-off, while the pharmaceutical sector (innovative drugs, CRO services, etc.), which had been declining for a long time, experienced a sharp rebound. This marks a temporary relaxation of the "K-shaped divergence" that has persisted for several months—some sectors have soared to new highs, while others have plummeted to new lows. The reasons behind this include the opening of the mid-year report period, the need for technology stocks' valuations to be supported by actual performance, and the correction of pharmaceutical sector’s excessive declines along with improvements in their fundamental conditions. In the future, the market may shift from a focus on technology stocks to a rotation among various sectors, with technology still being the main driver but with internal differentiation; sectors that have been significantly underperforming, such as pharmaceuticals, could become new targets for investment.
1. The Phenomenon: Technology Stocks Slump, Pharmaceutical Stocks Soar
The contrast in market performance on that day was particularly clear:
- Technology Stocks: Companies involved in the production of upstream materials for circuit boards (e.g., electronic fabric, copper-clad laminates), liquid cooling systems, and optical fibers led the decline, with Changyingtong experiencing a limit-down and closing down more than 16%; the optical module sector also weakened. These were all sectors that had seen the most rapid gains in the previous weeks.
- Pharmaceutical Stocks: Innovative drugs, CRO companies (which assist pharmaceutical firms in research and development), and medical services all saw strong increases, with multiple stocks such as Shutai Shen and Sansheng Guojian hitting 20% limit-ups, while Rongchang Biology and Yifang Biology rose by over 14%. Almost the entire pharmaceutical sector was on the rise.
Previously, sectors outside of technology were generally weak, with more than 1,920 stocks reaching new lows in nearly a year, with the majority (187) being from the pharmaceutical sector. This day marked a turning point for them.
2. The Sharp Rise in Pharmaceutical Stocks
The rise in pharmaceutical stocks was not accidental and was driven by two main factors:
1. Correction of Excessive Declines: The pharmaceutical sector had been declining for too long, and many stocks were trading at very low valuations. For example, since the beginning of the year, 84% of内需-related stocks have fallen, with an average decline of 22.4%. As a core part of the内需 market, pharmaceutical stocks became relatively cheap and attractive to buy.
2. Solid Fundamental Conditions: This year, domestic innovative drugs have made significant progress in entering overseas markets, with several achieving positive results. However, attention was previously focused on technology stocks, leading to neglect of the pharmaceutical sector. Now that technology stocks are experiencing volatility at high levels, investors are turning their attention to the pharmaceutical sector, which was undervalued.
3. The Tech Sector's Correction
Technology stocks have declined because they reached such high levels that they are facing significant challenges:
- Mid-Year Report Pressure: It is now time for companies to release their semi-annual reports, and those that rose sharply earlier need to prove their performance to justify their high valuations. If performance fails to meet expectations, these valuations will become inflated, representing the biggest issue in the current AI sector.
- Overexaggerated Bullish Expectations: Some sectors, such as optical fibers and optical components, had seen their growth prospects overhypotheticalized by the market, leading to a pullback when those expectations were realized. However, there is still differentiation within the tech sector; some companies, like those in memory chips (Zhao Yi Innovation reaching a new high of 840 yuan) and semiconductor equipment (Beifang Huachuang), are continuing to rise due to positive performance forecasts.
4. Future Trends: Moving from a Focus on Technology to a Rotation Among Sectors
Investors generally believe that the market will not be dominated solely by technology stocks:
- Sector Rotation: Funds are likely to shift between technology and pharmaceutical stocks. The pharmaceutical sector has advantages of steady growth and significant underperformance correction, while technology remains a key driver but with internal disparities—good-performing companies will continue to rise, while those that were overhyped will fall.
- Technology Still Dominates: As long as traditional industries (e.g., real estate, consumer goods) do not develop strong momentum, technology will remain the main focus. However, bubbles have already formed in the tech sector (referred to by Zhao Xi as "bubbles that refuse to burst"), and there will be no widespread gains as before.
- Potential Style Shift in Q4: China Merchants Securities suggests that growth stocks (technology) may see a slowdown after nearly two years of strong performance, and the market could shift towards value stocks (consumer goods, pharmaceuticals, etc.) in Q4. The key factors will be changes in the Federal Reserve's interest rate policy and the growth of AI-related businesses.
5. What Do Investors Think About July and the Second Half of the Year?
- July: Volatile but Positive: Zhao Xi expects international inflation to decline (due to falling oil prices and reduced inflation expectations in the U.S.), reducing the pressure on interest rates; domestic liquidity is ample, and new funds will buy stocks, which is beneficial for the market.
- Second Half of the Year: Moderate Growth: China Merchants Securities predicts that the index will rise gradually driven by technology, but there may be a shift in market style in Q4.
In summary, the current market is seeing a rotation between technology and pharmaceutical stocks. Technology is still strong, but not all tech stocks are expected to perform well; pharmaceutical stocks have had enough time to recover from their declines and could become attractive targets. Investors should pay attention to potential changes in market trends in the second half of the year.
(The entire analysis uses clear and easy-to-understand language, aimed at helping readers understand this recent market shift.)