In recent market activity, a notable rotation of funds within the A-share market has become apparent. Capital is shifting away from technology sectors that had seen significant prior gains and is moving towards previously underperforming areas like the biotech and innovative drug sector.
Given this shift, is the long-dormant innovative drug sector poised for a strong comeback? Great Wall Fund manager Liang Furui suggests the current rebound is primarily driven by short covering. He views the recent volatility and consolidation as a normal process for digesting short-term gains. Investors are advised to be patient, suggesting that if the sector experiences a pullback, it could present an opportunity to selectively invest in high-quality companies with solid fundamentals, positioning for a potential second wave of upward movement.
In early July, the innovative drug sector experienced a strong recovery, rallying quickly after a low opening. Many leading stocks reached new highs for the period, attracting substantial new capital with their impressive returns. However, after this rapid surge, the sector has recently entered another phase of consolidation.
Liang Furui analyzes that, overall, only investors who entered at low levels were able to successfully realize profits from this rally. Subsequent incoming capital has found it difficult to establish a stable holding environment. From a capital flow perspective, this round of broad sector gains stemmed more from concentrated short covering. The criteria for stock selection by this capital were relatively broad, with many individual stock rises not supported by robust fundamentals. The characteristics of fast capital inflows and outflows were prominent. Subsequently, the sector may see a rebalancing and differentiation in valuations and stock selection. In his view, a healthier upward trajectory would involve a moderate pullback after breaking through highs to consolidate strength, followed by a steady climb to new peaks based on fundamentals. After a round of adjustment, capital is likely to refocus on leading companies with strong earnings, potentially leading to a more stable pace for the sector's performance.
Discussing the core logic that continues to attract capital to the innovative drug sector, Liang Furui stated that the logic behind the capital outflow from the tech sector is fragile. Investing in upstream technology is essentially about capturing new industry development logic and the certainty of earnings growth. In contrast, the innovative drug sector possesses unique industrial support, and its investment thesis is equally clear. The narrative for innovative drugs also includes stories about Business Development deals, with drugs developed for overseas markets nearing regulatory submission and generating royalty cash flows. This represents substantive progress towards global market penetration and profitability. Furthermore, numerous platform-based collaborations are advancing, and the earnings stability of leading innovative drug companies continues to improve, providing a solid foundation for the sector's medium- to long-term allocation value.
Looking ahead, Liang Furui believes investors need not be overly pessimistic or anxious about short-term volatility in the innovative drug sector. He recommends continuously monitoring the overall trends in the innovative drug industry while paying close attention to opportunities that may arise after capital-driven pullbacks.