The market is "half sea water, half fire." Will the differentiation continue or will there be a style switch in the second half of the year? | "Chongyang S4" Roundtable Q3 2025
Chongyang Speaking
If we exclude the short-term fluctuations caused by sudden tariffs from Trump, the market's performance in the first half regarding the broad-based Index was relatively calm, but the structure was highly differentiated, with high-quality stocks in the technology, innovative pharmaceuticals, and new consumption sectors constantly reaching new highs, while sectors related to the traditional economy were sluggish. Why has the market exhibited such extreme differentiation? What are the deeper reasons? Looking ahead to the second half of the year, will it be a continuation of differentiation or a switching of styles? This episode of the Chongyang S4 Roundtable will discuss these issues.
"Chongyang S4" is an abbreviation for the model where multiple fund managers at Chongyang jointly manage the same fund. Specifically, under the unified strategic guidance of the company's investment decision committee, the same fund is managed collaboratively by multiple fund managers through separate accounts, allowing each fund manager to operate relatively independently within their assigned scope. Practice has shown that the multi-fund manager co-management model helps build a super capability circle in investment management, achieving sustainable investment performance, iterative research and investment capabilities, replicable investment styles, and expandable management scale. The multi-fund manager co-management model originated in the United States and has become a widely adopted investment management model among the majority of leading funds in the global asset management industry today. Chongyang is the pioneer of the multi-fund manager co-management model in the domestic private equity sector.
This roundtable discussion features the partner and head of the strategic research department at Chongyang Investment, Kou Zhiwei, along with fund managers Tan Wei, Hu Min, Chen Fentao, and Zhao Yang.
Notice: The content published by this public account is for reference only and does not constitute any investment advice or sales offer. If you are interested in Chongyang products, feel free to inquire.
The market is "half sea water, half flames." Will the differentiation continue or will there be a shift in style in the second half of the year?
(1) Why was the stock market in the first half of the year "half sea water, half flames"?
Q: In the first half of 2025, the A-shares and Hong Kong stocks market displayed a typical structural market, which can be described as "half sea water, half flames." What are the main driving forces behind this structural market?
Kou Zhiwei:I believe the main driving forces are the macro economy and technological innovation. Over the past few years, China’s capital markets have been in a sustained bear market, where the market has been pricing the Chinese economy according to a Japanese model, or rather pricing deflation. The reason is simple: China’s demographic age structure is very similar to that of Japan thirty years ago, and the process of population aging is even faster than Japan’s. The macro-level deflationary pressure is likely to be similar to Japan's, which is a medium to long-term economic basic situation we face. However, China is not simply repeating Japan; we noted in this year’s annual strategy that China's innovation capacity is stronger than that of Japan back then. China is currently the only economy that can compete with the United States in various cutting-edge technology fields.Since the beginning of this year, we believe that China’s innovation has undergone changes on two levels. First, from quantitative changes to qualitative changes.During the first trade war in 2018, the innovation in China we discussed was the "New Four Great Inventions," mainly centered around business model innovations based on Chinese characteristics. In the bull market of the capital markets in 2020, the innovations we talked about were mainly the "New Three Samples," which were technically more advanced but, frankly, not globally cutting-edge technology. This time, the innovations we discuss are DeepSeek, domestically produced sixth-generation fighter jets, and innovative drugs, which are all frontier technologies that can match those of the United States.Secondly, China's innovation industry has begun to shift from value destruction to value creation.In recent years, the decline in Chinese stocks has been significant, and besides deflation factors, an important reason is that in the last bull market, many emerging industries sought high financing for capacity building, which ultimately led to an oversupply, resulting in value destruction for shareholders. This time, we see that all companies are being very cautious about capacity, and industries like innovative drugs can achieve self-circulation through BD and other means to create value for shareholders. It is based on these two changes that we see the Chinese stock market is genuinely shifting from deflationary pricing to innovation pricing.
Chen Fentao:I believe the main driving force is that our country is still in a stage of economic transformation and upgrading, with traditional industries being relatively weak, while emerging industries demonstrate strong competitiveness. This situation is reflected in the stock market as a relatively extreme structural market.
Specifically, on one hand, traditional industries are still in a stage of low adjustment, such as the Real Estate industry, where although the phase of the fastest decline has passed, data on new home sales and new starts are still in a downward trend this year; on the other hand, emerging industries are thriving, such as breakthroughs in AI models represented by Deepseek in the broader Technology field, which have amazed market and even global investors. Additionally, in the field of innovative drugs, overseas BD has experienced explosive growth in terms of quantity, fields, and the scale of funds involved.
Zhao Yang:I agree with the observations of Teacher Kou and Fentao. On one hand, the technological breakthroughs represented by Deepseek have been a catalyst for the market in the first half of the year; on the other hand, the re-evaluation of China equities still has an endogenous mean reversion demand from a pricing perspective. The Hong Kong stock market, due to its higher degree of marketization, more thorough clearing, lower valuations, and greater connectivity with global markets, benefits relatively more than A-shares in the process of global asset rebalancing. Scarce symbols such as innovative drugs, Internet, and new consumption are also key directions in this round of re-evaluation.
Tan Wei:Internal factors have been thoroughly analyzed by everyone, so I would like to add an external factor, which is the instability in the United States leading to a rebalancing of global investors' asset allocations, with some funds flowing into major markets outside the U.S., including China.
Question: In addition to the extreme structural differentiation, the significant impact of the Trump tariff war occurred in the second quarter. The market plunged sharply on April 7th but recovered within a month, creating substantial challenges for investors. Considering your own operations, what are your thoughts on investing?
Tan Wei:Before April 7th, my portfolio was not at its highest level, so during the market downturn, I further increased my positions and continued to buy stocks that I was bullish on for the long term. The fluctuations in the market this time indicate that investors should be careful to distinguish between short-term fluctuations and true risks. The core of this distinction lies in whether the factors causing the market decline impact the core competitiveness and development prospects of relevant listed companies, and whether the stock prices of these companies have a margin of safety. If the stock price is low and the long-term prospects remain good, then short-term fluctuations precisely offer opportunities to buy excellent companies further. True risks often occur when stock prices are high, and the company's development prospects can no longer sustain exceeding investors' expectations. At this point, any minor disturbance could lead to prolonged losses that are difficult to recover from.The reason stock investments can provide returns better than fixed income investments in the long term is that stock prices are continuously within short-term fluctuations. As long as investors can effectively avoid true risks, then bearing these short-term fluctuations will become a source of long-term high returns.
Chen Fentao:The extreme volatility in the market during the second quarter gave me a deeper understanding of the importance of independent thinking and contrarian investing. In early April, the U.S. government's unexpected tariff increases sparked concerns about the U.S.-China trade landscape, and our resolute countermeasures raised market worries about the risk of 'stagflation' in the U.S. economy and a slowdown in global economic growth. On April 7th, over 2,900 stocks in the A-share market hit their daily limit down, and the market was extremely pessimistic at that time.
However, after in-depth analysis and independent thinking by the team, it is believed that the impact of the tariff war on the stock market should not be viewed too pessimistically. There are several reasons for this, from China's perspective: 1) Compared to the 'Trade War 1.0' in 2018, the proportion of China's exports to the U.S. has significantly decreased; the overseas revenue of A-shares listed companies accounts for about 17%, with exports to the U.S. only making up 3% of total revenue. 2) A number of excellent companies with global competitiveness have emerged in fields like general technology and innovative pharmaceuticals. 3) The performance of the Chinese stock market is still primarily led by China's economic fundamentals. For example, the AH market declined in 2018 due to 'de-leveraging' and the 'trade war', but benefitted from timely adjustments in macro policies at the end of 2018 and the subsequent economic recovery, leading to a noticeable rise in core assets in the A-shares and Hong Kong stock markets in 2019-2020. Yet, the tariffs on exports to the U.S. during 2019-2020 were still over 20% higher than in 2018, indicating that the core of the AH market is still based on China's macroeconomic fundamentals. From the U.S. perspective: In April, there was a triple hit in the U.S. capital markets affecting stocks, bonds, and currency, a situation that has never occurred in the history of U.S. assets. This market performance reflects investors' dwindling confidence in dollar assets, and the risk of the dollar system's collapse is rising, making it critical for the Trump administration to urgently negotiate with us.
Therefore, we maintained a high position in April despite pressure. With a slight recovery in market risk appetite since May-June, the major indices have basically reclaimed their previous losses, and our persistence has also yielded rewards.
2. The driving factors for future market trends may shift from beta to alpha.
Question: With the current market levels basically returning to the position before the tariff war, how do you judge the possible trend of the market in the future?
Kou Zhiwei:First, I am not pessimistic about the overall market. Currently, both the domestic and Hong Kong markets have very ample liquidity, and there has been an unprecedented divergence in short-term interest rates between the Hong Kong dollar and the U.S. dollar. The Chinese economy and stock market underwent a 'stress test' due to the tariff war in April, showing significant resilience. These factors indicate that the current market's downside risk is not great. Unlike the past few years, this year the market, especially the Hong Kong stock market, has already shown a very good profit-making effect. The Hong Kong stock IPO has become active again after several years of dormancy, and the average daily trading volume in the secondary market has reached historic highs. In this context, there are certainly many opportunities in the market. Second, structurally continue to focus on technological innovation and China's globally competitive advantageous industries. Some of these industries have already performed well in the first half of the year, but the larger industry trends are still in their initial stage, and the valuations of high-quality companies remain very reasonable, indicating that there are still many opportunities to be discovered. With the explosion of information, the market pricing is getting faster and more comprehensive. Therefore, we also place great importance on uncovering good companies that bring opportunities after being hit by event-driven shocks, and laying out leaders in industries whose competitiveness remains unaffected in the medium term.
Tan Wei:Since the beginning of this year, AI, Robotics, and innovative pharmaceuticals have led the structural trends in the market, indicating that investors have relatively clear expectations for new growth points in the Chinese economy.Historically, this kind of 'Beta' market may be nearing its end, and the future driving factors of the market may shift towards 'Alpha'.China's economic development model is transitioning from a 'quantity-driven' to a 'quality-driven' approach. In the 'quantity-driven' model, there is strong homogeneity within industries, and stocks in the Sector often exhibit characteristics of 'all prosper together'; however, in the 'quality-driven' model, differentiation within XINXINGCHANYE will become the main theme, with very few companies capable of achieving breakthroughs in technology and products. Currently, many investors are still utilizing traditional industry allocation strategies, but these are becoming increasingly difficult to adapt to the underlying logic of economic transformation. Therefore, in the directions that are seen as Bullish, greater emphasis is placed on the logic of individual stocks, and there is a willingness to hold genuinely competitive companies for the long term after the 'Beta' market fades.
Zhao Yang:The comprehensive re-evaluation of China equities has not yet started, and in terms of valuation, it is still relatively cheap compared to the European and American markets, so I remain optimistic about the market outlook. With continuous pressure on the macro economy and a lack of investment channels, quality equity will continue to attract more Inflow in the future. The second half of the year is likely to see an overall lifting but with structural differentiation.
(3) Differentiation and Style Switching
Q: In terms of specific investment strategies, based on the performance in the first half of the year, the broad Technology and innovative pharmaceuticals have already achieved good gains, and Chongyang has also received good results accordingly. How do you view the unfolding of the next market trend; will the market in the next quarter continue this differentiation or will there be a style switch? If there is a style switch, what direction might it take? How can investment strategies be specifically grasped?
Chen Fentao:From our current perspective, we estimate that the market in the next quarter may exhibit both differentiation within the broad Technology and innovative pharmaceutical sectors as well as a certain degree of market style switching.
Since the end of the third quarter last year, the Technology Sector has undergone systematic reevaluation, and overall valuations have returned to relatively reasonable levels. However, due to the presence of many high-quality companies with significant long-term growth potential, a divergence may emerge in the field of technological innovation in the future.
At the same time, for several sectors, such as the New energy Fund leading companies, which have had sufficient adjustment time and space, and the recent low-valuation traditional food and beverage leading companies impacted by policy shocks, opportunities for mean reversion may exist, reflecting a certain degree of market style switching. Over the past period, these companies have underperformed, partly due to their relatively weak fundamentals, as well as market capital being attracted to hot sectors like new consumption and technological innovation. To a certain extent, the mean reversion in these sectors and the FOMO (fear of missing out) sentiment in the field of technological innovation are two sides of the same coin, dialectically related.
Zhao Yang:Considering the current environment, overall economic pressure is likely to persist. The structural upward momentum of the economy mainly comes from XINXINGCHANYE and technological breakthroughs. Therefore, the broad technology and medical innovation industries are directions that require long-term attention. However, from a short-term perspective, market sentiments are always volatile, leading to a demand for rebalancing. This year, some industries have accumulated significant gains, and with further revelations of fundamentals, there will also be divergence within these industries, moving away from a widespread reevaluation dominated by optimistic sentiment. On the other hand, we also see that cyclical and consumer industries have lagged this year, largely driven by the market's pessimistic sentiment towards the macro economy, which may also present valuable revaluation opportunities. In terms of investment, for symbols that have risen significantly and imply relatively optimistic expectations, a decision will be made to lower holdings and take profit. For companies that, despite having accumulated considerable gains, still have an optimistic outlook for future development, choosing to hold and calmly face possible market fluctuations is advised. At the same time, actively seeking reversal opportunities within industries that have lagged this year, adjusting the portfolio structure in a more proactive manner to reduce volatility. During the adjustment process, it is crucial to carefully identify and compare the risk-return ratios presented by different symbols, without being bound by past price changes.
(4) Evaluation of the Prospects of Innovative Drugs
Question: Discuss innovative drugs specifically. In the second quarter, innovative drugs shone brightly with significant gains, but recently there have been some adjustments, and the market voices have diverged. How do you view the next trends in innovative drugs, and what are the reasons?
Hu Min:It is difficult to assess the short-term trend of innovative drugs. After a sharp rise, it is normal for some adjustments to occur. However, in the long term, there remains a strong bullish outlook for the innovative drug market, hence a firm stance to hold positions will continue.
The reasons are as follows:
Firstly, this round of innovative drug market has solid fundamental support. After enduring ten years of hard work, China’s innovative drugs have finally reached the harvest season, with impressive clinical data, substantial and frequent business development, and a continuous approval of major products marking China’s innovative drugs stepping onto the world stage. However, all of this is just the beginning: first, the R&D capability of China’s innovative drugs has gradually improved over the past decade, leading to increasingly better product innovations; second, China’s innovative drugs have only recently gained widespread recognition from international MNCs, but there remains a significant gap between the business development prices and international fair prices. As more products enter the market and recognition continues to rise, this price gap will continue to narrow.
Secondly, the warming policies for the pharmaceutical industry have yet to be reflected in stock prices. The pharmaceutical industry is extremely sensitive to policy changes. Over the ten years following the new medical reform, pharmaceutical policies have primarily been restrictive. This year is set to be the most notable year of warming policies in the last decade for the pharmaceutical industry, with changes in the centralized procurement rules and the advancement of commercial insurance as symbolic events; however, these noticeably warming policies have not yet impacted the industry.
On June 25, "Learning Times" published an article titled "Why Are Innovative Drugs Important?" This article clearly states: "Innovative drugs are not only the cornerstone of national pharmaceutical safety but also a new engine for promoting high-quality economic development, serving as an important lever in global health governance. In global health governance, whoever seizes the first-mover advantage and leads the technical standards can influence the direction of the international market." This paragraph illustrates the industrial positioning of innovative drugs in China. To achieve such a level of industrial development, relying solely on business development from Europe and the United States is not feasible; there must be a corresponding domestic industrial environment. From this perspective, there is a strong need to have confidence in the development of commercial insurance in China and the reform of innovative drug pricing mechanisms.
Thirdly, from a horizontal industry comparison, similar industrial opportunities to innovative drugs are very rare. Currently, China’s economy is still undergoing transformation and continues to show certain pressures. Compared to other industries, the stage of the innovative drug industry is highly advantageous. The innovative drug sector has already endured its most challenging phase and has entered an explosive growth period; the international competitiveness of China’s innovative drugs has been proven and will only strengthen in the future.
Fourth, from a market perspective, the opportunity for the innovative drug industry has just begun. In recent years, macroeconomic cycles in China and the United States have been misaligned, and US-China conflicts have led foreign capital to continuously exit the A-share and Hong Kong stock markets. Although there has been some foreign capital flow back into Hong Kong stocks recently, the proportion remains historically low. With the global economy entering a rate-cutting cycle and US-China relationships undergoing extreme disconnection stress tests, the return of foreign capital to both Hong Kong and A-shares is merely a matter of time. China’s pharmaceutical assets have consistently been favorites for foreign investors, particularly those that have been revalued by MNCs, especially the innovative drug assets from China.
Finally, from a micro perspective, although innovative drugs have experienced a significant price surge, most companies' valuations are still below reasonable levels, and many companies are clearly undervalued. This is evidently not the state expected at the tail end of a market trend.
Tan Wei:In my view, having disagreements is normal, as not all innovative drug companies can be future big stocks. The recent price increases reflect that investors have moved out of the pessimistic expectations for innovative drugs from the past four years and achieved a systemic valuation repair. The focus in the future will be on identifying which companies can truly become leaders in innovative drugs and which are merely 'free riders.'
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