Industrial: Foreign investments largely increase allocations to highly prosperous sectors. Subsequent market pricing will shift from external geopolitical risks to internal economic indicators.

Industrial released a research report stating that the first quarter data of the A-share market through the Stock Connect program has been disclosed recently. Although there is no sign of a turning point in foreign capital inflow, foreign capital has significantly adjusted its portfolio structure by significantly increasing allocations to sectors such as batteries, communication equipment, and components with high business prospects. This further confirms the view that a unified front embracing prosperity is being established. Looking ahead to April, as the market focuses more on business performance, the main contradiction in market pricing will shift from external geopolitical risks to internal business prospects. Key points from Industrial include: Industrial points out that foreign capital's allocation to A-shares in the past has shown three main characteristics: 1. In terms of total quantity, they reduce positions at highs to lock in profits, and the rotation of their portfolio structure is accelerating. Since the market bottomed out in September 2024, the trend of foreign capital reducing holdings has slowed down, entering a two-way fluctuation phase. However, after rapid market increases, they often reduce positions to lock in profits. Meanwhile, the rotation of their portfolio structure has significantly accelerated, with a turnover rate of 7.9 and 10.4 in 2024-2025, compared to 5.5 in 2020-2023. Other institutional investors, such as active mutual funds, have maintained relatively stable turnover rates during this period. 2. In terms of overall allocation, foreign capital continues its consistent high-profit-quality strategy. Their long-term allocation can be summarized as "buy assets that can provide high profits at reasonable prices." Each quarter, they increase their positions in stocks with significantly higher ROE levels. From 2023 to 2024, due to the impact of the macroeconomic downturn, industries such as food and beverage, home appliances, and banks that foreign capital had long favored experienced varying degrees of profit decline. Since 2025, they have increased their allocation to sectors such as power equipment, communication, electronics, and non-ferrous metals. 3. There has been a gradual shift from prioritizing ROE to prioritizing a combination of ROE and profit growth, with an increasing focus on business prospects. Since 2025, foreign capital has increased its positions in stocks with significantly higher profit growth rates. In the first quarter of 2026, their focus on high business prospects was even more pronounced. The median expected growth rates for the top 10/20/40 stocks that foreign capital increased their positions in during the first quarter of this year were 57.2%, 46.0%, and 47.0%, respectively, significantly higher than the median expected growth rate of 18.9% for the constituents of the Shanghai and Shenzhen 300 Index. During the first quarter of this year, the pricing weight of business prosperity factors in the eyes of foreign capital increased significantly. They increased their allocations to industries and individual stocks that had shown significant profit increases since the beginning of the year. In terms of primary industries, the top industries where foreign capital increased their positions in the first quarter of 2026 were communication (+23.2 billion yuan), power equipment (+20.4 billion yuan), machinery equipment (+8.1 billion yuan), and media (+6.0 billion yuan). At the secondary industry level, the top industries where foreign capital increased their positions were batteries (+25.7 billion yuan), communication equipment (+22.8 billion yuan), components (+8.4 billion yuan), and games (+4.4 billion yuan). At the individual stock level, the top stocks where foreign capital increased their positions were Contemporary Amperex Technology (+26.4 billion yuan), Zhongji Innolight (+9.2 billion yuan), Eoptolink Technology Inc. (+7.1 billion yuan), Suzhou TFC Optical Communication (+7.0 billion yuan), with the top four companies receiving a total net inflow of around 50 billion yuan. As China's security strategy advantage becomes more evident in the current US-Iran conflict, it is expected that the central point of foreign capital's asset allocation to China will systematically rise. By embracing business prospects and focusing on ROE, they are further consolidating the unified front of investment in business prosperity. Additionally, it is worth noting that foreign capital's influence on A-shares is not only through the Stock Connect program but also through the premium of AH shares, driving the premium of the H shares of small-cap companies and affecting the risk preferences of A-shares. Represented by Contemporary Amperex Technology, China's leading industry in advantageous industries has long been favored by foreign capital moving north. Since its listing in Hong Kong in 2025, H shares have maintained a long-term premium, making it one of the few companies among AH dual-listed companies with H-share premiums. Risk Warning: Model calculation errors, policies falling below expectations, and equity market volatility.