June: Stick to the main line of technology

After experiencing a V-shaped volatility in May, the technology sector of A-shares faces dual internal and external pressures, and market discussions about style rotation are heating up. The latest strategy report from Dongwu Securities believes that the market may be in the early stages of style rotation, but the AI industry trend is not over; technology core assets remain the strongest sector in terms of prosperity. The June allocation strategy should stick to the technology mainline, while also balancing and laying out defensive assets.

Lu Zhe, strategy analyst at Dongwu Securities, pointed out in the monthly report released on June 1 that under the backdrop of marginal tightening liquidity, it is difficult for the technology sector to continue its unilateral upward trend. Volatility will increase, and market rotation will accelerate, but as long as the overseas AI capital expenditure logic is not falsified and overseas tech markets perform well, technology core assets in A-shares are still the strongest sector in terms of prosperity. The report also reminds that in June, attention should be paid to the US-Iran conflict and oil price trends, as well as the policy statement at the first Fed meeting since Waller took office on June 16–17.

Style Rotation Debate: Technology Mainline Not Over, but Smooth Rally Hard to Repeat

Dongwu Securities' report points out that the overall index showed a V-shaped trend in May, with growth sectors under obvious pressure in the latter half.

Externally, Japanese and US bond yields hit new stage highs, and indexes in the US, Japan, and South Korea all experienced adjustments around May 15–20; internally, the technology rally “contracted,” combined with style drift funds returning and loosened positions, leading to concentrated risk in marginal stocks.

Regarding the widely discussed issue of style rotation, the report believes that valuation levels and trading congestion are not the core criteria for judging market tops or style rotation; style cycles are essentially driven by liquidity and industrial cycles. Global liquidity has entered a key inflection point from easing to marginal tightening, which is an important prelude to style rotation, but will not directly end the industrial trend rally. With strong industrial trend support, the mainline will not see a rapid unilateral pullback, but will instead build a complex top structure through repeated volatility and multiple rounds of gaming.

The report clearly judges that the market may be in the early stages of style rotation, and smooth unilateral rallies for the technology sector are hard to continue; overall sector volatility will increase, rotation will accelerate, and it's much harder to earn excess returns. But the high-prosperity AI industry trend remains intact, and technology tracks will still be the mainline going forward.

Two Macro Focus Points in June: Oil Prices and the Fed's Debut

Dongwu Securities' report lists the US-Iran conflict and oil price trends as the primary macro focus points for June.

The report notes that the current market pricing of geopolitical risks has clearly cooled, and both oil prices and equity markets have largely reflected expectations of easing tensions in the Middle East. Two scenarios could follow: if the Strait of Hormuz reopens smoothly, market focus may shift from geopolitical risk premium to oil supply-demand fundamentals, driving an oil price rebound; if Middle East tensions only ease temporarily, and not substantially improve, the geopolitical risk premium could return.

The second major focus is overseas liquidity risk. The report points out there's significant uncertainty in US inflation trends and the Fed's monetary policy path. The Fed’s first rate decision meeting since Waller took office on June 16–17 and its policy statement and guidance over the rate cut pace could have an important impact on global liquidity expectations and trigger a repricing of global assets.

Allocation Strategy: Technology as Mainline, Also Considering Dividends and Domestic & Overseas Demand

Dongwu Securities recommends that June allocation should stick to the core technology asset mainline, while also considering dividend defense and high-quality targets supported by both domestic and overseas demand to balance portfolio volatility. The report highlights that structural opportunities for core technology assets remain robust and this is not a full style shift. Coupled with the short-term market catalyst from a giant IPO landing, the sector rally still has support.

For non-technology sectors, the report believes that domestic consumption currently lacks strong prosperity and policy catalysts. Although positions are advantageous, fundamentals are relatively weak; small positions are advised to bet on a rebound to smooth portfolio volatility.

On the sector operation level, the report suggests technology should still be held as the mainline, but marginal and pure thematic stocks within the sector should be avoided. Stocks with solid fundamentals should be preferred; at the same time, further allocation can be made into energy storage, power, and leading subsegments supported by domestic and overseas demand.

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