Founder Securities: Allocate "Zhongte Estimate", trade "Kote Estimate"

This week, the "KoteGu" market is rising while the "ZhongTeGu" market is falling, causing some investors to worry about a shift in market style. However, in our article last week "KoteGu: Aspiration and Reality", we pointed out that both "KoteGu" and "ZhongTeGu" are "safe assets" that revalue China's advantages. What are the similarities and differences between investing in "KoteGu" and "ZhongTeGu"? Our main views are as follows:

First, in the era of deglobalization, "safety assets are paramount": "KoteGu" and "ZhongTeGu" both revalue safe assets. Since the "Safety Assets are Paramount" report on June 18th last year, we have continuously emphasized: (1) "ZhongTeGu" is a revaluation driven by the rise in public utilities prices, accelerating the shift from land finance to factor finance, laying the foundation for "KoteGu"; (2) "KoteGu" aims to improve the financing availability of technology stocks, accelerate the transformation and upgrading of new quality productivity, and is the purpose of implementing "ZhongTeGu". Therefore, the "KoteGu" and "ZhongTeGu" markets will inevitably coexist. However, there are also three major differences between the two, and the market will not simply repeat itself:

Second, Difference One (Fundamentals): "ZhongTeGu" has earnings support, while the earnings realization cycle for "KoteGu" is longer. The "price increase revaluation" can immediately improve the profitability of the public utility sector (such as water, electricity, gas, transportation, and communication), solidifying the performance foundation of the "ZhongTeGu" market; while "KoteGu" focuses on exploring the potential value of new quality productivity, making it difficult to have systematic earnings support in the short term.

Third, Difference Two (Investor Structure): "ZhongTeGu" is dominated by insurance funds, while "KoteGu" is dominated by public funds. Investors in "ZhongTeGu" are mostly insurance funds and other long-term funds, so in the long-term "price increase revaluation" process of "ZhongTeGu", the market's volatility is relatively small, making it suitable as a long-term mainline allocation. On the other hand, investors in "KoteGu" are mostly public funds and foreign exchange trading, leading to a "blocked lake" phenomenon in funds. Therefore, we expect that the rebound market of "KoteGu" is still suitable as a short-term thematic allocation.

Fourth, Difference Three (Liquidity Anchor): "ZhongTeGu" anchors domestic liquidity, while "KoteGu" currently anchors overseas liquidity. The "ZhongTeGu" market is highly correlated with the 10-year domestic bond yield, which has been trending downward since the beginning of 23, continuously driving the medium to long-term market of "ZhongTeGu"; while the "KoteGu" market is highly correlated with the 10-year US bond yield, therefore, the sustainability of the current "KoteGu" market requires attention to when the Fed will start its interest rate cut cycle.

Fifth, the investment pace of "KoteGu": Before the Fed cuts interest rates, it is still a policy-driven thematic investment. We have consistently emphasized in several previous reports: a global financial crisis at the medium to large level is the opportunity for the Fed to cut interest rates. Therefore, before the Fed's interest rate cut is established, "KoteGu" remains a phased trading opportunity; after the Fed's interest rate cut is established, "KoteGu" will usher in a trend-based allocation window.

Sixth, the investment structure of "KoteGu": Focusing on "Advanced Intelligent Manufacturing" that gathers new quality productivity upgrades such as AI. "KoteGu" is not just about pulling valuation, but also about improving the financing availability of China's cutting-edge technology. The financing demand in China's "Advanced Intelligent Manufacturing" industry is strong, but valuations are still relatively low globally. "KoteGu" needs to focus on improving the financing availability of new quality productivity such as intelligent computing centers and humanoid robots 7. Industry allocation continues to adhere to the "80/20 rule": allocate "medium-special valuation" for long-term positions, and trade "science-technology valuation" for short-term positions. Before the Fed clearly cuts interest rates, the theme of short-term speculation will still be the main market trend. Industry allocation continues to follow the "80/20 rule": 80% of the portfolio is allocated to the long-term positions of "medium-special valuation" (resources/utilities) theme; 20% is allocated to short-term speculation on the "science-technology valuation" theme and the rebound opportunities in banks.

Text as follows:

Since January 2022, "medium-special valuation" has undertaken major tasks such as high-quality development and "accelerating the construction of world-class enterprises," and has shouldered important responsibilities in the areas of ensuring employment stability, protecting people's livelihoods, ensuring energy supply, ensuring food security, and ensuring combat readiness. Researching and establishing the "science-technology valuation" system is an inevitable requirement for developing new productive forces and promoting the strategy of achieving high-level technological self-reliance.

1.1 Both "science-technology valuation" and "medium-special valuation" are "safe assets" revaluing China's advantages

In our article "The Era of Great Security" on June 18 last year, we clearly pointed out that "medium-special valuation" is the revaluation of China's advantageous "safe assets" such as resources and general public utilities. Similarly, cutting-edge technologies represented by AI can bring about differences in economic efficiency between China and the U.S., which also need to be revalued as "safe assets." In the trend of deglobalization, "medium-special valuation" helps accelerate the transition from land finance to factor finance (equity finance), solidifying the foundation for financial subsidies in basic industrial categories; while "science-technology valuation" helps improve the financing availability of cutting-edge technologies such as AI, accelerate the transformation and upgrading of new productive forces, and achieve the goal of revaluing China's advantageous "safe assets."

Therefore, as emphasized in our articles "Science-Technology Valuation: New Productive Forces, Breakthrough" on March 10 and "Science-Technology Valuation: Vision and Reality" on June 10, after the rise and revaluation trend of "medium-special valuation," the trend of "science-technology valuation" will follow. However, there are three major differences between "science-technology valuation" and "medium-special valuation" in terms of fundamentals, investor structure, and liquidity anchor points. The pace and structure of the "science-technology valuation" trend will not simply repeat that of "medium-special valuation."

1.2 Difference One (Fundamentals): "Medium-special valuation" has earnings support, while the earnings realization cycle for "science-technology valuation" is longer

"Medium-special valuation" has earnings support: the general public utilities sector (water/electricity/gas/transportation/communication, etc.) are "revalued due to price increases." In multiple reports since last year, we have repeatedly pointed out that as the real estate cycle declines and land finance revenue falls, central state-owned enterprises in the general public utilities sector, which used to rely on a lot of subsidies, will see supply clearance → leftward shift of the supply curve → formation of a new price equilibrium. The "revaluation due to price increases" can immediately improve the profit capabilities of industries such as general public utilities in the "medium-special valuation" theme.

"Science-technology valuation" focuses on exploring the potential value of new productive forces, and it is difficult to have systematic earnings support in the short term. The U.S.-China tech blockade that began in 2019 has led to a significant retraction in the valuation of Chinese technology stocks represented by semiconductors "KoteGu" prioritizes repairing the valuation level and financing availability of China's technology manufacturing industry, then achieves technological breakthroughs and improves factor productivity through continuous research and development, before realizing systematic performance realization.

1.3 Difference Two (Investor Structure): Insurers dominate "ZhongTeGu," while public funds dominate "KeTeGu"

In the top ten heavy-weight industries of insurance companies and social security funds, industries related to resources and general public utilities, such as "ZhongTeGu," dominate (see Figure 3 below). The holding period of these allocation-type funds is relatively long, therefore, in the medium to long-term "price increase and revaluation" process of "ZhongTeGu," the market volatility is relatively small, making it suitable as the main theme for long-term allocation.

On the other hand, "KeTeGu" has more participation from public funds, foreign trading boards, speculative funds, and retail investors. Historical experience also indicates that the trend of technology stocks is more influenced by public funds and foreign trading boards. Therefore, we expect that the current rebound trend of "KeTeGu" is still suitable as the main theme for short-term trading.

1.4 Difference Three (Liquidity Anchor): "ZhongTeGu" anchors domestic liquidity, while "KeTeGu" currently anchors overseas liquidity

The market of "ZhongTeGu" is highly negatively correlated with the 10-year national bond yield. Since the end of 2022, the national bond yield has been continuously declining, bringing long-term allocation value to "ZhongTeGu." The resource and general public utility sectors related to "ZhongTeGu" generally exhibit the characteristic of "high dividend yield." The central shift of the real estate cycle, the trend of the 10-year national bond yield decline, and the "asset shortage" in the domestic capital market collectively endow "ZhongTeGu" with long-term allocation value.

The market of "KeTeGu" is highly negatively correlated with the 10-year U.S. Treasury yield, and the sustainability of the market also needs to pay attention to when the Fed's interest rate cut cycle will start. Data from 2016 onwards shows that during the Fed's interest rate cut cycle, the market of Chinese technology stocks is highly negatively correlated with the 10-year national bond yield. On the other hand, during the Fed's interest rate hike cycle, the market of Chinese technology stocks is highly negatively correlated with the 10-year U.S. Treasury yield (see Figure 7 below). Therefore, until the Fed's interest rate cut cycle is clearly initiated, the market of "KeTeGu" remains the theme of policy and U.S. Treasury liquidity-driven phased trading.

![](https://wpimg-wscn.awtmt.com/89f1f3ea-564a-436e-87b6-f40a8f94eb25.png? 1.5 "Coterie Estimation" Investment Rhythm: Before the Fed cuts interest rates, it is still a policy-driven thematic investment

Before the establishment of the Fed interest rate cut, "Coterie Estimation" is still a phased trading opportunity; after the establishment of the Fed interest rate cut, "Coterie Estimation" will usher in a trend-based allocation window. In the article "Will the Fed Cut Interest Rates on June 2nd?", we reviewed the experiences of the past 30 years and the past 100 years, showing that before the start of the Fed interest rate cut cycle, there will generally be a major global financial risk outbreak. Before the Fed cut interest rates in 1998, the Asian financial crisis broke out in 1997; before the interest rate cut in 2001, the global dot-com bubble burst in 2000; before the interest rate cut in 2008, the subprime mortgage crisis brewed in 2008. Currently, as the Fed's balance sheet reduction process slows down, some investors believe that the interest rate cut cycle is about to start. However, we believe that similar to the Silicon Valley bank risk event in March last year, the Fed chose to expand the balance sheet instead of cutting interest rates. Currently, the U.S. banking industry is facing the risk of a "grey rhino". The Fed's slowing down of balance sheet reduction instead implies that there will be no interest rate cut in the short term.

1.6 "Coterie Estimation" Investment Structure: Focusing on "Advanced Manufacturing" that Gathers New Quality Productivity Upgrades such as AI

In our previous two reports, we divided new quality productivity into Advantage Manufacturing (new energy), High-end Self-making (hard technology), and Advanced Manufacturing (AI and other cutting-edge technologies). The U.S.'s technology blockade against China in 2019 led to a significant retraction in the relative valuation of China's technology manufacturing industry represented by semiconductors. Among the three types of new quality productivity, the PB-ROE of "Advanced Manufacturing" is significantly undervalued compared to the U.S., and the demand for financing is also more vigorous. We judge that "Advanced Manufacturing" urgently needs to repair its valuation level, improve financing availability, and is expected to become an important direction for "Coterie Estimation".

AI, represented by "Advanced Manufacturing," is mainly oriented towards future cutting-edge technologies, highly overlapping with the "future industry." On January 29th, the Ministry of Industry and Information Technology and seven other departments jointly issued the "Implementation Opinions on Promoting the Innovative Development of Future Industries," providing guidance on the direction of the "future industry," covering six major directions, listing key development technologies and innovative landmark products. Globally, most of China's "future industry" PB and PS valuations have a lot of room for increase. Among them, sub-sectors with significant valuation increase potential such as intelligent computing centers and humanoid robots may become key areas where "Coterie Estimation" needs to focus on in the future

Industry allocation continues to adhere to the "80/20 rule": allocating to "Zhongtegu" for long-term investment, and trading "Ketegu" for short-term gains.

In the era of deglobalization, the "Ketegu" and "Zhongtegu" are important clues for the revaluation of China's advantageous "safe assets". "Zhongtegu" focuses on "price appreciation revaluation" as the foundation, while "Ketegu" aims to develop "new quality productivity". By leveraging the value discovery and resource allocation functions of the capital market, it better serves the real economy. However, due to three major differences between "Ketegu" and "Zhongtegu" in terms of fundamentals, investor structure, and liquidity anchors, the market performance of "Ketegu" will not simply replicate that of "Zhongtegu". "Zhongtegu" is the long-term allocation theme driven by fundamentals, while "Ketegu" is currently a short-term trading theme driven by policies and liquidity. Industry allocation continues to adhere to the "80/20 rule" that we have been advocating since early December last year, with 80% of the allocation remaining unchanged, but there are slight changes in the 20% trading allocation—

80% of the allocation focuses on the long-term "Zhongtegu" theme: (1) Supply constraints (some resources): coal/metals/oil; (2) Administrative constraints (pan-public utilities): water/electricity/gas/transport/communications.

20% of the allocation engages in short-term trading of the "Ketegu" theme and bank asset quality repair: (1) "Ketegu" is a long-term trend, but before the large-scale AI computing power infrastructure is implemented and the Fed starts cutting interest rates, it is still a theme driven by policies and liquidity. It is recommended to focus on "advanced intelligent manufacturing" (AI computing power infrastructure/low-altitude economy/biotechnology, etc.); (2) The continuous push for "housing acquisition" will continue to drive down real estate prices and reduce inventory, allowing banks' valuations to continue to recover to 0.7 times PB. (For more details, refer to the May 19th report "Housing Acquisition: Time and Space")

This content is excerpted from the June 15th report of Founder Securities titled "Similarities and Differences between 'Ketegu' and 'Zhongtegu'", authored by Cao Liulong (S1220523060003)