The rapid evolution of the TMT (Technology, Media, and Telecommunications) sector has become a focal point in the market over the past two years since the explosion of AI industry. Investors and analysts have meticulously observed the transaction density in this sector, especially noting that historically, when the TMT's transaction volume approaches the significant threshold of 40% of the total market, a noticeable phase of correction in excess returns typically follows. However, a remarkable shift in market dynamics occurred around the Spring Festival in 2025, as TMT's transaction share surged past 40%, continuing to maintain a high level above this barrier. This threshold, which was previously treated as a hidden constraint, appears to have lost its power in the current rally. As of now, the TMT transaction share has climbed to 44%. Drawing upon historical experiences and making comparisons with matured markets, it can be inferred that the TMT transaction share could potentially peak at a range of 45% to 50%.
Does this signal continued upside potential for the TMT sector? While it is noteworthy that each major cycle in the technology industry tends to elevate the median transaction share of TMT, bolstered by factors such as an increase in constituent stock counts and market capitalizations alongside improving fundamental expectations from investors, the TMT sector is now sitting at an all-time high, having witnessed a streak of gains. Taking some representative technology stocks as examples, there has been significant upward movement in their share prices over the past period, accompanied by a corresponding increase in valuations. From a valuation perspective, certain TMT stocks have seen their price-to-earnings (P/E) ratios far exceed historical averages, indicating that market expectations for future growth within the TMT sector could be overstretching. If these lofty expectations do not materialize, the risk of a price correction could substantially heighten.
Meanwhile, within this high position of the TMT sector, the market is actively exploring a strategy known as "high cut low," where smart money seems to be escaping the high-flying TMT stocks in search of new investment opportunities. Recent liquidity trends indicate net outflows from TMT sectors, with a notable 32.526 billion yuan leaving the computer industry on the 24th alone, which is the most massive outflow recorded for that day. The sectors facing the largest net outflows encompass computer, electronics, media, pharmaceuticals, and communications, while the most significant inflows occurred in traditional sectors such as construction decoration, automotive, real estate, construction materials, and national defense. This behavior suggests that astute investors are withdrawing from the now high-flying TMT lots, pivoting their capital towards new prospective opportunities.
In this evolving landscape marked by strategic shifts away from the tech-heavy TMT sector, a focus on free cash flow (FCF) will likely emerge as a more attractive investment approach. What exactly is free cash flow? Free cash flow refers to the net cash flow produced by a company's operating activities after accounting for capital expenditures. It serves as a direct measure of a company's ability to generate cash that can be returned to shareholders. In simpler terms, free cash flow is the cash that remains after a company meets its reinvestment needs, signifying the maximum cash available for distribution to capital providers without jeopardizing its ongoing viability.
Why has the free cash flow strategy gained such critical importance now? First and foremost, companies with substantial free cash flow demonstrate strong profitability and solid financial health. These firms can utilize their free cash to pay down debts, develop new products, repurchase their own stock, or increase dividend payouts, ultimately generating greater value for their shareholders. In times of market uncertainty, steady cash flow functions as a “safety net” for companies, enabling them to withstand risks.
Secondly, from an investment perspective, free cash flow serves as a vital metric for shareholders to evaluate company value. In comparison to net profit and other indicators, free cash flow provides a more accurate picture of a company's actual operating performance. Net profits may be influenced by accounting policies or extraordinary items, presenting potential manipulation opportunities. However, free cash flow is grounded in the actual cash received or paid based on the cash basis of accounting, rendering it a better reflection of a company's ability to generate genuine cash.
To illustrate, consider the leading enterprises within traditional industries. While they may not exhibit growth expectations comparable to TMT firms, they benefit from stable free cash flows. Such companies possess significant market share and brand power within their respective sectors, producing consistently stable cash inflows from operations, with capital expenditures being relatively reasonable, thereby ensuring the ongoing generation of positive free cash flow. During this high-low shift in the market, the true value of these businesses is more likely to be recognized, turning them into a refuge for funds seeking safety.
One standout product in the market is the Free Cash Flow ETF (159201), which is not only among the first ETFs focused on the free cash flow strategy but also the sole ETF tracking the National Zhen Free Cash Flow Index. This index has exhibited impressive long-term performance, exemplified by its total return index—factoring in dividend earnings—which has accumulated a staggering increase of 604.85% since 2013, achieving an annualized rate exceeding 18%. This growth has outpaced major A-share total return indices over the same period, maintaining a six-year streak of positive returns from 2019 to 2024.
As an innovative value investment strategy, the free cash flow approach further extends the dividend-focused strategy. The index governing the National Zhen Free Cash Flow has carefully omitted entities classified under financial or real estate sectors, distinguishing it significantly from other indices like the CICC dividends and low volatility indices. Moreover, the index methodology proactively applies negative screenings based on ROE stability, free cash flow levels, and operational profit margins to enhance overall stock quality while circumventing inclusion of firms with poor operational continuity or deteriorating fundamentals. By emphasizing long-term developmental potential and the sustainability of cash flow rather than merely looking at short-term dividend payouts, the free cash flow strategy mandates that a company must not only possess ample cash flow but also demonstrate a consistent growth capability, aimed at identifying assets poised for longer-term cash flow advancement.
In conclusion, with the TMT technology realm currently soaring to historic highs and the trend towards high-low market dynamics gaining traction, adopting a free cash flow strategy is becoming an increasingly appealing investment choice. Investors should remain vigilant to shifts within the market, adjusting their investment strategies promptly, while also considering the integration of free cash flow strategies into their long-term investment allocations.