Positive news emerged frequently during the visit to China. How to seize the rotation rhythm?

Guest: Joe Yu, Executive Director of Futu's Institutional and Private Wealth Team

Host: Richard, Futu's Institutional and Private Wealth Team

Market Macro: Tug-of-war between improving numerators and deteriorating denominators (00:01:33 ~ 00:04:16)

Trump led the most technology-intensive corporate delegation in history to complete a visit to China, but the market reaction was not uniformly positive. Energy, aircraft, and agricultural procurement intentions dominated, with efforts to institutionalize trade development.

Meanwhile, the US April PPI exceeded expectations across the board, with two-year Treasury yields returning to 4.5%, ten-year yields breaking through 4.5%, and thirty-year yields surging past 5%. Upstream supply chain inflationary pressures intensified, substantively pressuring the valuation space for high-valuation assets.

US Stock Strategy: Neutral to slightly positive, lowering expectations for index-level rallies (00:04:21 ~ 00:06:30)

Market concerns over corporate earnings are rising. The combination of Trump’s balance sheet reduction and unchanged interest rates theoretically provides support, but rising oil prices remain the biggest wildcard.

The mid-term logic remains unchanged: AI profit diffusion and operational leverage continue to deepen. HoweverThe one-sided upward trend over the past six weeks cannot be linearly extrapolated; caution is needed in the second half of May.。

Key stock recommendations (00:06:30 ~ 00:10:29 / 00:26:46 ~ 00:27:40)

$AXT Inc (AXTI.US)$ Upstream of indium phosphide wafers

The world's second-largest upstream supplier of indium phosphide wafers with the lowest cost (only behind Sumitomo of Japan). Quarterly capacity may double by 2027, with 61% of revenue coming from indium phosphide (an essential component in optical modules)

$LENS (06613.HK)$ A multi-theme technology company focused on robotics, automotive glass, AI servers, and liquid cooling/liquid metal solutions

Component growth surged in May; AI server orders are full. The second half of the year is expected to see explosive growth in China’s robotics sector

References:[Weekly Market Insights] Easing of US-China tensions reconfirmed, how to grasp the rotation rhythm amid higher-than-expected PPI?

Three-phase rotation framework for China-related transactions (00:13:05 ~ 00:22:30)

Phase One - Technology Priority (semiconductors/AI infrastructure/large-cap tech/Chinese stocks listed abroad): Most sensitive to regulatory changes; valuation recovery can be achieved as expectations shift from tightening to marginal stability

Phase Two - Finance & Industry (the most overlooked part of the market): Earnings expectations will only improve with increased order visibility. A barbell strategy is recommended for allocation

Phase Three - Agriculture & Energy: Energy was already the strongest sector before the meetings; there is no need to chase highs unless US-Iran tensions escalate again

①Finance + industry undervalued by the market; tech stocks remain the sector with the highest post-meeting upside potential

②More than half of the export control variables are leaning positive (H200 exemption, 18-month extension of penetration rules, and WF1 easing have all been verified)

③The scale of the 200-aircraft order is smaller than in 2017, but it's better to have initiated it than not. The key is whether it can be fulfilled over the long term

The triangular game among oil prices, interest rates, and tech stocks (00:24:00 ~ 00:26:37)

The market has not lowered Middle East risk premiums due to the China visit. If US-Iran tensions do not ease or even escalate into military action → oil prices rise → inflation spikes → higher and longer-lasting interest rates → stricter profitability requirements for tech stocks

However, a rise in 30-year US Treasury bonds does not equal a catastrophic adjustment for US stocks. When US Treasuries reach above 5%, the Federal Reserve will not rush to raise interest rates, allowing the market time to cool naturally

References:The resurgence of US Treasury yields: Is it necessarily bearish for US stocks?

Related stocks:

$NVIDIA (NVDA.US)$ : H200 expected to be approved, 150,000 units / 10 companies, approximately 7,000 units per company; partial verification of easing export controls

$Apple (AAPL.US)$ : Positive outlook for consumer electronics

$Boeing (BA.US)$ : Initiation of 200-aircraft order, key focus on execution and long-term fulfillment

IV. Q&A Session

Q: Which phase of the three-stage rotation are we currently in? Has the valuation recovery for tech stocks been fully priced in? (00:28:08 ~ 00:30:56)

A: Tech stocks have surged significantly over the past month, with valuations now relatively high, making the current entry point less attractive. The market is undergoing a phase of adjustment given that talks haven’t produced unexpected outcomes. It’s recommended to shift some funds intothe financial and industrial sectors, focusing on opportunities related to enterprises involved in financial access, incremental Boeing orders, and C919 cooperation, while waiting for the next catalyst.

Q: What new developments might emerge from the triangular dynamics between oil prices, US Treasury bonds, and tech stocks? (00:31:19 ~ 00:33:07)

A: The key variable here is oil prices. If tensions between the US and Iran do not ease and oil prices continue to rise → leading to higher inflation → resulting in rates staying higher for longer → markets will impose stricter profitability demands on tech stocks.

Easing tensions through diplomatic visits → oil prices falling → interest rates stabilizing → providing support for tech stock valuations,this transmission chain is being tested under the current oil price trends. However, the Federal Reserve is unlikely to rush into rate hikes, allowing the market some time to cool naturally.

The above content is for reference only and does not constitute investment advice. Feel free to share your thoughts in the comment section!

Friendly reminder: May 25th (Monday) is a public holiday in Hong Kong, so next Monday's Weekly Call will be paused for one issue. Thank you for your attention, fellow investors!

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