"AI Bottleneck Trade" Ignites Upstream Sector—Who’s Raking in the Profits?

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Market Forecaster Weekly Call | Stock and Commodity Interconnection Opportunities in the Global Capital Expenditure Cycle

【Content of this episode]: Futu conducted an in-depth review of the performance of the 'Golden Stock Portfolio', analyzing capital flows and market divergence under the logic of reflation trading. [Cyclical Opportunities]: Extending from AI software technology to hard infrastructure, providing a deep analysis of the allocation logic for power equipment, shipping, oil transportation, and commodities amidst the 'reindustrialization' wave.

[Special Guests]

Joe Yu: Executive Director of Institutional and Private Wealth at Futu Securities, with over 15 years of investment research experience, specializing in industry research and in-depth small-cap stock analysis.

Ye Cong: Research Director at Hongding Capital, whose firm has won the HFM Asia-Pacific Best accolade, achieving annualized returns exceeding 20% for five consecutive years, a macro hedge fund practitioner who has navigated both bull and bear markets.

[Core Conclusions]

The market is gradually pricing in reflation expectations for 2026, with AI capital expenditure strongly diffusing into power infrastructure. Power investments have emerged as the strongest certainty theme aside from direct AI investments; recommended Hong Kong stocks include Tencent and HKEX. Compliant oil transportation is entering a strong cyclical upturn due to supply-demand mismatches, while shipbuilding and strategic resources like copper and gold hold long-term allocation value.

[Market Review and Outlook]

Overall market conditions

Logic of Reflation Trade:Joe noted that as commodity prices rise, tariffs increase, and with added financial stimulus from the US and Japan, the market has started pricing in heightened expectations of reflation by 2026, making reflation trades a potential dominant strategy. Copper prices have become a key indicator, with every 1% increase in copper prices driving a 0.02% rise in US inflation. The front-end of Hong Kong's stock market is trading at around 23 times earnings, with high valuations for tech giants causing inconsistent earnings guidance and divergent share price movements. A relatively cautious stance is advised for the US market next week.

Signals from the Chinese market:Positive signals are emerging in the Chinese market, with a surge of 80% in special bond issuance in January, and a significant rise to 78% allocation towards infrastructure projects. The RMB exchange rate remains within the range of 6.6 to 7.3.

Market volatility situation:Last week saw substantial volatility in regional markets, with the Hang Seng Index gaining 2.4%, though it experienced some pullback on Friday due to external influences. The contradiction between capital expenditure and ROI among US tech giants became pronounced, leading to notable divergence this week. For example, despite both Meta and Microsoft reporting strong performances, their differing guidance caused significantly varied stock price reactions.

Investment Strategy Recommendations

HKEX allocation recommendation:Joe recommends allocating to the Hong Kong Exchanges and Clearing Limited (HKEX) this week, predicting a volatile upward trend in Hong Kong stocks. Concerns remain over pressure on technology stock valuations amid uncertainty about the Federal Reserve's interest rate cut trajectory. Tencent is specifically chosen due to its better moving average performance compared to Alibaba.

Review and recommendations for stock picks:A review of recommended stock picks shows that BYD remains favored in the Hong Kong market due to trends in electric vehicle imports and passenger vehicle substitution, with no signs of debt or liquidity crises. Long-term deployment in platform companies like Tencent and Alibaba is suggested, while short-term positions in Kuaishou have yielded approximately 20% gains over the past month, with an estimated further 20% upside potential in the near term. High-elasticity AI-related stocks such as SMIC and Horizonrobot have seen significant pullbacks over the past two weeks but are expected to experience another wave of growth related to new energy vehicles and chip industries later this year. In the US market, NVIDIA, Broadcom, and Intel form the multi-line triangle of computing power. NVIDIA is the top choice for GPU allocation, Intel represents a medium-term target, and Meta is the preferred pick for February.

[Global Market and Asset Analysis]

Market Structure and Characteristics

Severe market volatility:Ye Cong pointed out that the market experienced severe volatility in January this year, with fast rotation in market trends, ranging from aerospace to media and then to gaming. Last year, the performance of major asset classes diverged, with gold and copper showing strong performance among commodities. In the equity market, Tencent stood out, while the CSI 300 outperformed the S&P 500 with lower volatility. In terms of bonds, Chinese bonds were the top trade of 2024.

Core Value of the Hong Kong Market:The essence of the Hong Kong market is an automatic arbitrage market, with its core elements being Stock Connect and the linked exchange rate system. As long as these two factors remain unchanged, the core value of Hong Kong stocks will remain solid.

Changes in the Monetary System

The Dollar System and Inflation:Ye Cong believes that the global system operates on a trade framework centered around the US dollar and a security framework based on the US military. However, this system inevitably leads to inflation issues. While inflation helps address intergenerational wealth distribution problems within society, it also exacerbates class conflicts. The rise of Trump reflects an inherent necessity within the system. Currently, the global system is undergoing significant changes, with peace and development no longer being the dominant themes. Instead, conflict and compromise, as well as security and development, have become the main topics.

RMB Exchange Rate Index:The People's Bank of China launched the CFETS RMB Exchange Rate Index, which uses a trade-weighted approach. In December last year, the weight of the US dollar was reduced. Currently, the US dollar accounts for approximately 18.3%, and the Hong Kong dollar about 4%. Our exchange rate exposure to the US dollar is 22%. The change in the purchasing power of the RMB within the trade framework is influenced by factors such as production capacity, real estate clearance, and fiscal policy. The central bank and offshore markets have different analytical frameworks and relative positions regarding the RMB exchange rate. China places more emphasis on using the RMB for pricing and penetration in the trade account.

Gold Price Analysis

New Variables in Gold Pricing:Ye Cong proposed that new variables are introduced into gold pricing when the US is unwilling to bear the cost of maintaining the system, and non-US systems need to diversify risks.Gold becomes an insurance, and its value depends on the determination of non-US central banks to avoid risks, representing a vote of confidence in the existing system.。

Factors Affecting Gold Trends:There are three core factors affecting gold trends. First, momentum trading driven by price momentum; currently, market enthusiasm for gold is high, and momentum has been exhausted to an extreme, making short-term trading unfavorable. Second, the US dollar; the nomination of Kevin Warsh as the new Fed chairman awaits confirmation, and his policy orientation remains to be observed. If the Fed's credibility is restored, it could put negative pressure on gold. Third, US government credibility; Trump's behavior is the biggest bullish factor for gold, but if there are changes in Republican votes during this year’s midterm elections, the momentum for gold may weaken. In the short term, gold needs to digest its momentum, while in the medium term, it depends on policy and political directions.

[AI and Capital Expenditure Cycles]

Characteristics of AI Capital Expenditures

Strong Industry Diffusion:Ye Cong believes that the AI technology cycle is different from previous ones, with strong diffusion into physical industries, ranging from chip capital expenditure expansion to power infrastructure and related sectors.

Entering the credit expansion phase:Currently, AI capital expenditure has shifted from being financed by tech giants' own cash flow to off-balance-sheet credit expansion investments. Market attention is on credit risk changes for companies like Oracle. To support core pillar industries, the Federal Reserve is highly likely to enter a rate-cutting cycle this year, which will steepen the yield curve.

Healthy capital expenditure cycle

Price and demand signals:Cloud computing demand driving price increases demonstrates robust demand. Taiwan Semiconductor is significantly boosting spending, and memory manufacturers are also taking corresponding actions, keeping the overall capital expenditure cycle on a healthy trajectory.

Risks and interventions:The key variable is observing whether cracks emerge in the most vulnerable areas, such as continued widening of CDS spreads or balance sheets becoming unsustainable. If issues arise in the AI sector, the Federal Reserve or government will likely intervene. Short-term AI investment can continue, but structural changes may occur.

[Reindustrialization and investment opportunities]

The importance of manufacturing

Manifestation of scarce capabilities:Ye Cong pointed out that manufacturing represents a scarce capability. Traditional investment frameworks are not optimistic about the manufacturing sector, but when short-term demand surges, prices can rise significantly, such as in memory chips, gloves, and masks. The need for security across countries is driving reindustrialization, with military capabilities fundamentally being an extension of industrialization.

Relevant industry trends:The fluctuation trends in sectors like defense, semiconductors, and global power grid equipment ETFs are consistent. Rising electricity prices in the U.S., coupled with AI competition essentially being a competition over power supply, contrast with falling domestic electricity prices in China. The price difference in electricity can be arbitraged through industries like aluminum electrolysis, creating structural excess returns.

Global wave of reindustrialization

Political factors involved in pricing:Every country has an incentive to monetize its national debt, which is both an economic and political goal. Political factors are increasingly influencing pricing systems,such as the Democratic Republic of the Congo restricting cobalt exports and Indonesia limiting nickel export quotas.

Copper-to-oil ratio and inflation expectations:The copper-to-oil ratio reflects expectations for economic growth and inflation. If the economy expands healthily, rising oil prices will confirm a new commodity-driven inflation cycle, aligning with the People's Bank of China’s aim to push up prices. China may shift towards exporting inflation, with this year’s key domestic macroeconomic indicators being PPI and CPI.

Case Analysis of Gaming and Shipbuilding

Market Supply and Demand and Distortions

Supply and Demand Framework Analysis:The container shipping market once experienced a major upswing, while the oil shipping market showed a structure of supply contraction with decent demand, but freight rates remained persistently low. A dual-track system has emerged in the oil shipping market, with the global market being split into compliant and non-compliant sectors; demand contraction has led to stabilized freight rates at the bottom.

Impact of Key Events:Last year, the US banned crude oil and sanctioned Sinopec's Qingdao terminal, while constraining India’s demand, causing a large shift of compliant demand into the compliant market. This year, black oil suppliers are also being constrained, which is beneficial for the legitimate market. Currently, shipbuilding orders are high, but shipowners lack motivation to build new ships, making short-term delivery in the oil shipping market difficult.

US-China Policy Interaction

Sanctions and Counter-Sanctions:Last year, the US conducted a Section 301 investigation into China’s shipbuilding industry, prompting China to introduce counter-sanctions. Both sides deferred mutual tariff hikes for a year.

Market Opportunity Assessment:This case suggests that the US may introduce supportive policies for the shipbuilding industry. The short-term performance pressure in the shipbuilding sector is not significant, but attention should be paid to whether the new order cycle can sustain its prosperity. Currently, major shipyards' orders have been scheduled out.The year 2028Moreover, shipowners are not highly motivated to build new ships. This means that even if demand surges, supply cannot be increased through new shipbuilding in the short term, and the shortage of ships cannot be alleviated. If the upswing in oil shipping continues, it will affect the shipbuilding sector. Chinese private companies tend to place more orders with domestic shipyards, forming an internal cycle, creating new interlinked opportunities for the shipbuilding industry.

Conclusion:High certainty prosperityAs 'off-balance-sheet' demand shifts back to 'on-balance-sheet', combined with a locked supply, the compliant oil transportation market is entering a strong boom cycle driven by intensified supply-demand contradictions.

[Interactive Q&A session]

Tungsten market issues

Question raised:Joe raised a question about the cobalt market, noting the reduction in cobalt export quotas and the resulting demand gap. He asked whether this year's market would see a supply shortage and whether the trend in 2026 could mirror that of 2025.

Ye Cong responded:Ye Cong stated that his research on the cobalt variety is limited. This commodity was originally in oversupply, with supply and demand distorted by administrative intervention. Investing in this commodity requires speculating on policy direction. The policies of African countries are difficult to predict, leading to significant policy uncertainty.

Shipping capacity issues

Question raised:Joe asked whether, under the expectation of political conflict, normalized shipping would lead to a continuous extension of actual capacity, causing sustained tightness in shipping capacity.

Ye Cong responded:Ye Cong believes this issue requires tracking. If peace is achieved, market allocation will return to being efficient, and distortions in supply and demand will contract. From a portfolio perspective, the shipping theme is about betting on conflict. Currently, there has been significant deviation towards defense and container shipping, and the probability of further conflict deterioration is low. It is more likely to revert. The speculative nature of oil shipping is higher than that of container shipping.

Capital expenditure cycle issues

Question raised:Joe asked which industries, apart from direct AI investment, might experience a new round of capital expenditure cycles.

Ye Cong responded:Ye Cong believes that electricity is the strongest theme apart from AI. National grids across countries need to be upgraded simultaneously. Re-industrialization inevitably involves power investment, which coexists with AI. The government has both the willingness and capability to promote this, including aspects like power generation, grid infrastructure, and application-side development.

The issue of the industrial chain de-Sinicization

Question raised:Joe inquired whether relevant US industrial chains would de-Sinicize under the drive of debt optimization and national security demands, and how the progress would unfold.

Ye Cong responded:Ye Cong stated that the struggle will be long-term, while compromise is temporary. Both sides have the motivation to push for autonomy and control, and it is necessary to differentiate between core and non-core industries. Core industries must be independently controllable by each side, while non-core industries can be managed based on the degree of compromise and mutual understanding between the two parties. Currently, both sides are in a phase of temporary compromise, which is conducive to doing business. In the future, it will be essential to dynamically observe the interactions between the two sides, which may bring new opportunities. Joe summarized that core industrial chains demand higher standards, whereas non-core industrial chains, if possessing comparative advantages and reasonable pricing, will continue to operate. In the short term, industries such as power generation equipment might experience explosive opportunities due to supply shortages.

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