"Premium of Certainty"! Global mainstream institutions embrace the "Barbell Strategy"

Since the Russia-Ukraine conflict in 2022, the previously popular investment strategies of "high ROE" and "cyclical investment" have become ineffective, and global investment has entered a new paradigm.

As pointed out by GF Securities, in an environment of uncertainty, global investors are pursuing certainty premiums. Under the "new paradigm," asset performance follows a "barbell strategy" - with advantages at both ends. This means that growth assets in the digital economy, such as "AI+", and sustainable operating assets, such as "central state-owned enterprises with special valuation," are favored.

In its latest report on July 11th, GF Securities confirmed the effectiveness of the "new paradigm" from two perspectives: global cross-border capital and mainstream institutional asset allocation.

At the same time, three investment insights for A-share strategies were summarized: first, select countries with characteristics of the "new paradigm factors"; second, focus on AI assets; and third, the main theme of "central state-owned enterprises with special valuation" is expected to run throughout the year.

The New Paradigm of Investment - "Barbell Strategy"

There is no eternal track in the history of A-shares, only the succession of investment paradigms. GF Securities pointed out:

The investment paradigms of "DCF certainty premium," high ROE, and cyclical investment that were popular in A-shares from 2019 to 2021 have become ineffective, and the performance of related hot sectors has lagged behind the market.

The "uncertain environment" driven by global decoupling and high inflation has led capital to switch to safe assets and embrace "certainty premiums," with cross-border capital tending to flow to both ends of the "barbell."

The so-called "barbell strategy" refers to one end providing excess returns through high-risk, high-volatility assets with a trend of certainty, while the other end provides safety margins through sustainable operating assets. According to the GF Securities report:

First, safe assets with characteristics of "sustainable operating certainty," such as low valuation, low volatility, high dividends, high cash flow, and low leverage, have outperformed. According to Bloomberg data, the relative returns of low valuation, low volatility, high dividends, high cash flow, and low leverage factors in major global stock markets have been 13%, 12%, 13%, 14%, and 14% respectively from 2022 to the end of May 2023.

Second, growth assets with "distant profit certainty" have outperformed. AI assets represent the mapping of a new round of general technological innovation to the capital market. Since 2023, global stock markets have actively priced AIGC-related industries. According to Wind data, the overall AI theme index of A-shares, US stocks, and Asian markets has generally risen by 30-50% since November 2022.

Cross-Border Capital Flow to Both Ends of the "Barbell Strategy"

Firstly, looking at the flow of cross-border capital, since 2023, countries such as China, Japan, the United States, India, South Korea, France, and Brazil have received net inflows of cross-border capital and have seen significant increases in their stock markets.

Guangfa Securities pointed out that these countries either have a dominant "new paradigm" factor in their stock market transactions, or their AI assets have outperformed, confirming the effectiveness of the "barbell strategy" under the new paradigm.

Confirmation 1: In the major markets where the "certainty" factor dominates and attracts net cross-border capital inflows, such as Japan, South Korea, France, and Brazil, there is a phenomenon of the dominance of "certainty" factors such as low valuation, low volatility, high dividends, high cash flow, and low leverage in countries like China, Japan, South Korea, France, and Brazil, confirming the pursuit of "certainty premium" in global investment.

Confirmation 2: In addition to the dominance of "certainty" factors in the stock markets of China and the United States, there is also a phenomenon of relative outperformance of AI assets in some stock markets, mainly in the United States where ChatGPT was born and China where AIGC-related industrial products have emerged. According to Bloomberg data, from early 2023 to June 30, the U.S. AI Index/S&P 500 rose by 13%, and China's AI/CSI 300 rose by 40%.

Mainstream Institutional Asset Allocation Confirms the Effectiveness of the "New Paradigm"

The asset allocation of major sovereign wealth funds and pension funds worldwide serves as a compass for global investment, confirming the effectiveness of the "new paradigm" in asset allocation. Guangfa Securities' report points out the following four characteristics of mainstream institutional allocation:

• Increased Allocation to Safe Physical Assets

In recent years, broad physical assets (mainly commercial real estate and infrastructure) have seen increased allocation. These assets have a certain level of safety and are conducive to achieving the unity of economic and social benefits, aligning with the principles of ESG investment.

• Diversification in the Face of "Uncertainty"

Firstly, in the current uncertain global situation, there is an increased regional diversification in the stock holdings of large international institutions. Secondly, changes in the regional allocation of large international institutions are closely related to the international political and economic situation.

• High Allocation to "Long-term Profit Assets" and "Sustainable Operation Assets"

Not only A-share investors have shown this preference this year, but similar trends can also be seen in the industry allocation changes of major global investment institutions, providing evidence for the transformation of the global capital market investment paradigm.

With the rise of "deglobalization" and the accelerated development of cloud computing and artificial intelligence, major sovereign wealth funds around the world have increased their holdings of "remote profit assets" and "sustainable operating assets". Moreover, starting from the end of 2022, under the background of AI leading a new round of general technological innovation, the trend of major international investors increasing their allocation to technology leading companies is evident.

• "Factors of Certainty" Emerge

On the one hand, the global institutional allocation reflects the characteristics of "factors of certainty" such as undervaluation, low volatility, high ROE, high dividends, high cash, and low leverage.

On the other hand, since 2022, the world has faced challenges such as repeated outbreaks of the pandemic, the Russia-Ukraine conflict, and the Fed's interest rate hikes. The allocation value of assets with the feature of "sustainable operating certainty" has emerged, such as undervalued assets in Japan. In addition, the trend of international institutions increasing their holdings of "China underestimated" has become increasingly evident recently.

Insights into Global and A-share Investment Strategies under the "New Paradigm"

The flow of global funds and the characteristics of mainstream institutional asset allocation have both confirmed the trend of allocating assets at both ends along the "barbell strategy" under the "new paradigm". GF Securities points out three insights for A-share investment:

Insight 1: In terms of global stock market country allocation, prefer countries with "new paradigm factors" (China/Japan/South Korea/France/Brazil) or countries with high-quality AI assets (China/USA);

Insight 2: Focus on AI assets in industry allocation. Firstly, industries with high computing power demand (focus on optical modules/AI chips/servers), and secondly, industries empowered by AI that are expected to drive valuation growth (focus on semiconductor design/games/advertising and marketing);

Insight 3: The main theme of "China underestimated - revaluation of central state-owned enterprises" with the feature of "sustainable operating certainty" is expected to run through the whole year. Firstly, pay attention to industries that combine undervaluation, high dividends, high cash flow, and low leverage factors (petrochemical and trade/rail transit equipment/oilfield service engineering); secondly, focus on seven directions for improving ROE ("Belt and Road"/horizontal integration/vertical integration/specialized integration/backdoor listing/spin-off/warfare).