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Picture provided by Tuchong Creative

Securities Times reporter Xu Nuo

A severe underweight of an industry by all-market funds is often seen as a contrarian signal.

Securities Times reporter noticed that after the fund products underweighted military stocks, the recovery of military-themed funds accelerated upward, and some products even completely wiped out the nearly 20% loss this year. Not only did the A-share products managed by star fund managers significantly increase their allocation of military stocks, but some star fund managers who prefer liquor and new energy funds, and even low-risk bond funds, also began to highlight military positions in their core heavy stocks.

Industry insiders believe that considering that military orders are beginning to gradually recover and that military stocks currently have room for valuation switching, the core products of this sector are expected to contribute excess returns to the fund.

Military-themed funds are strong against the market trend

The past week was a week in which global military stocks had an independent trend. Although technology stocks, high dividend stocks and other sectors have fallen in the US and A shares, military stocks have become one of the few sectors that provide positive returns for fund managers.

In terms of U.S. stocks, since Lockheed Martin's stock price first hit a high of US$450 in March 2022, U.S. military stocks represented by it have been fluctuating and consolidating for two years. Recently, Lockheed Martin's stock price has suddenly become active again, with a large jump last week. After rising for four consecutive trading days, the company's stock price rose by more than 10% in a single week, setting a new high since its listing.

At the same time, the Securities Times reporter noticed that some star fund managers who manage US stock-themed QDII fund products have also begun to increase their allocation of military stocks in the A-share fund products they manage, and the relevant A-share military-themed funds have also become the few lucky ones that resist the decline. For example, Yongying High-end Equipment Fund, Morgan Stanley Mass Innovation Fund, Oriental Alpha Select Fund, Qianhai Kaiyuan Great Ocean Fund, Red Soil Innovation Technology Fund, and Harvest Theme New Power Fund, which are heavily invested in military stocks, all ranked at the top of the net value increase list last week.

Military stocks also helped some fund products to recover quickly. For example, Huaxia Industry Upgrading Fund, which has nearly 70% of its positions in the military sector, once suffered a loss of 19.5% this year. However, the net value of this product has rebounded by 8.82% in the past month, thanks to the recovery of military stocks. Combined with the rebound in the previous few months, this also allowed the fund to completely offset the net value loss this year by relying on the performance of the military sector.

It is worth mentioning that perhaps because they are optimistic about the bottom rebound of military stocks, some institutional investors used no less than 400 million yuan to buy 235 million shares of Huaxia Industry Upgrading Fund in the second quarter of this year. As of the end of June, the shares of Huaxia Industry Upgrading Fund held by relevant institutional investors accounted for more than 16%. This shows that some institutional investors have begun to bet on oversold military theme funds in their fund product selection.

Star fund managers increase their holdings

In addition to the above-mentioned military industry theme funds, many non-military industry theme funds have also begun to allocate large amounts of funds to the military industry sector, including products managed by star fund managers.

Many funds managed by star fund manager Li Xiaoxing have significantly increased their allocation to military stocks in the second quarter of this year. Taking the Yinhua Small and Medium-cap Mixed Fund managed by him as an example, the number of military stocks held by the fund in the second quarter increased from 3 in the previous period to 5. The holdings information disclosed by the Harvest Innovation Growth Fund shows that as of the end of June, the top ten holdings of the fund all pointed to the military track, among which Tunan Shares and Western Superconducting, which are related to aviation engine alloy materials, ranked first and second in the fund. The A-share fund products managed by Li Yaozhu, the 2023 public offering market performance champion, also took a fancy to military stocks in the second quarter. A number of leading military stocks including AVIC Optronics, Tunan Shares, and AVIC Xi'an Aircraft entered the heavy holdings list of this star fund manager.

In addition, Cui Chenlong, a star fund manager who focuses on new energy as his main investment track, managed his famous Qianhai Kaiyuan New Economy Fund. The biggest change in its holdings in the second quarter was that he included military stocks, which he had never been involved in before, into the top ten holdings. The largest holding of this fund product focusing on the new energy track was also replaced by the military leader Aero Engine Corporation of China, and two of the top three holdings are now occupied by military stocks.

Not only stock funds, but also bond funds with lower risk appetite have been attracted by military stocks. The second quarter holdings disclosed by Harvest Double Profit Bond Fund show that the fund has significantly increased its military stocks in stock positions, and aviation material suppliers such as Tunan Shares and Feilihua have entered the top ten holdings. In addition, a number of bond fund products such as Huaan Tianli Bond, Penghua Changxiang Bond, Huaxia Dingli Bond, and Changjiang Yield Enhanced Bond have increased their military stock positions in stock strategies.

Expected to usher in valuation switching market

Regarding investment opportunities in military stocks, many fund managers expect that the long-term growth potential of military equipment is expected to drive valuation switching.

Zheng Xiaoxi, manager of the Southern Military Industry Reform Flexible Fund, believes that the correction of the military industry sector, which has lasted for nearly two years, may be coming to an end. From the perspective of contract liabilities, the orders on hand calculated based on the proportion of advance payments are not enough for some companies to support one year's revenue, and orders are expected to recover. With the demand for national defense and security construction, even with the improvement of the technological maturity of the industrial chain, high quality and low cost have become the trend, but the growth in quantity and the recovery of performance are still worth looking forward to. After the adjustment, the leading companies have improved their technological maturity, cost control capabilities, new quality productivity, and maintenance and support response speed. At the same time, with the inclusion of the digital economy, low-altitude economy, commercial aerospace, and high-end manufacturing in strategic emerging industries, the policy space for the expansion of core technologies and products to civilian products has also been opened.

Zheng Xiaoxi emphasized that considering that all market funds have already underweight the military industry in the early stage, the 2024 profit forecast shows that the valuations of some core military industry chains with a relatively high supporting position have returned to the normal level of the manufacturing industry, and the growth rate is highly matched with the valuation.

Weng Yuping, manager of the Great Wall Jiuyuan Flexible Allocation Fund, believes that although the military industry track is highly volatile, after continuous prudent research and tracking, it is judged that the military industry is still in a prosperous upward stage and can last for a long time. In this process, there is a chance that a group of companies that continue to grow bigger and stronger will emerge. These high-quality targets are worthy of key exploration and investment, especially the mainstream investment targets in the military sector. In the short term, due to the slowdown in performance growth and the vacuum period of orders, the performance of some mainstream companies is lower than market expectations, and their stock prices have experienced a relatively large correction. The valuations of mainstream companies have fallen below the lower limit of the reasonable valuation range, resulting in poor overall performance of the sector. As military orders gradually come into being, it is expected that market expectations for the military industry will improve significantly, and we are expected to usher in a wave of valuation repair and valuation switching.

He Chongkai, manager of the E Fund Active Growth Fund, said that the valuations of most high-quality military industry blue-chip stocks are currently at a relatively low level, and the industry's price-to-book ratio is also at the historical bottom range. He is optimistic about the excess return performance of the military industry in the later period of the "14th Five-Year Plan", including the military electronics sector that benefits from the acceleration of informatization and the requirements of independent control, and the engine industry chain that benefits from the transfer of military aircraft production capacity. At the same time, we will pay attention to the high-precision, low-cost intelligent missile industry chain, as well as advanced military materials sectors such as titanium alloys, carbon fiber, high-temperature alloys, and stealth materials.