A recent $950 billion semiconductor partnership between a South Korean company and a global tech giant failed to generate a sustained market rally. Instead, the KOSPI index began a continuous decline from July 27, and the volatility spilled over to China's A-share tech sector, causing sharp fluctuations.

Meanwhile, the previously overlooked free cash flow theme is quietly recovering. The CSI Free Cash Flow Index has shown signs of a rebound from its late-June low, gaining 8.07% since the start of July, with related ETFs attracting consistent capital inflows recently. According to data from Wind as of July 27, 2026, past performance does not guarantee future results. Zhang Leiyang, Assistant Fund Manager at the Quantitative & Index Investment Department of Great Wall Fund, believes the current market is in a "chaotic transition phase" where the industrial trend is clear, but the main investment theme is blurred. Capital is shifting from high-beta assets toward stable, traditional assets with stronger earnings certainty, solid cash flows, and more transparent valuations. The free cash flow asset class is a representative beneficiary of this trend.

This judgment is not unfounded. Several key data points support this view. First, the tech sector's trading congestion has reached extreme levels, with the TMT sector's turnover accounting for over 40% of total A-share market turnover since May. When capital becomes this concentrated, the market typically begins to reassess which sectors can truly deliver on earnings. Second, the free cash flow strategy itself has corrected to a "deep-value zone." The CSI Free Cash Flow Index fell from its March 13 high to its June 30 low, but has since shown a clear recovery, with capital flowing back in. Zhang notes that the largest drawdowns in the free cash flow strategy often coincide with peak market crowding, as seen in February 2021 and May-June 2026. Third, the relative valuation ratio between growth and stable styles has been rising. The ratio of the ChiNext Index to the CSI Free Cash Flow Index has climbed to a historically high level, indicating that the market's premium for "future growth" over "current cash generation ability" is now noteworthy.

These three signals point to a common theme: the market's pricing structure has become extreme. High-beta assets are fully priced, while cash-flow-stable assets have been relatively depressed due to style divergence. This is the backdrop for the free cash flow strategy's recent underperformance. However, extremes often set the stage for rebalancing. As capital begins to scrutinize earnings delivery and valuation alignment, the pricing pendulum has a natural tendency to swing back. Zhang explains that the current market is essentially in a "mid-stage" of tech investment driven by AI trends, a period of growth chaos. On one hand, the long-term direction of AI remains clear, with significant room for development in computing infrastructure, core hardware, and application ecosystems. On the other hand, after a period of valuation expansion and capital concentration, the tech sector is beginning to see clear differentiation. The market's demands for earnings delivery, valuation alignment, and industrial sustainability are increasing.

In this chaotic investment environment, the allocation advantages of free cash flow assets are becoming more prominent. The first reason is that it seeks a dynamic balance between offense and defense. The free cash flow metric itself measures the cash a company can freely distribute after covering daily operations and necessary capital expenditures. Companies selected by this strategy typically have stable operations, mature business models, and strong self-sustaining cash generation. When market risk appetite declines, their solid earnings make them more resilient. When risk appetite returns and valuations recover, these real profits are unlikely to be left behind. This "offensive and defensive" characteristic aligns well with the current market's desire to participate in equities while controlling volatility. The second reason is that it captures the timing of style rebalancing. Zhang believes that crowded trades are unsustainable. Once they loosen, market pricing shifts from "chasing high beta" to "valuing earnings delivery," and free cash flow assets often lead the recovery and may achieve excess returns.

From the index's own key metrics, value is also emerging. On the valuation front, the CSI Free Cash Flow Index has a trailing P/E (PE-TTM) of approximately 13.36 times, near its historical low. This valuation is not only significantly lower than growth-style indexes like the ChiNext Index but also offers a valuation advantage compared to core broad-market indexes. From a dividend yield perspective, the index's current dividend yield is at about the 84th percentile since its inception, meaning the current dividend level is higher than in most historical periods, providing a strong income foundation for the portfolio. Over the long term, its total return index (including dividends reinvested) has gained 690.26% since the base date (December 31, 2012), representing an annualized return of 16.99%. This contrasts sharply with the CSI 300 Total Return Index's 159.39% (annualized 7.50%) over the same period. The longer the time horizon, the more significant the contribution of dividend reinvestment to returns. Data as of July 27, 2026. Past performance does not guarantee future results.

Finally, it is important to note that no single strategy can consistently outperform in all market environments. The core value of the CSI Free Cash Flow Index lies in its long-term ability to screen for companies with strong cash flow generation, stable operations, and reasonable valuations. For investors focused on medium- to long-term allocation and seeking to add "quality" and "cash flow" factors to their equity portfolios, now may be a key window to re-evaluate this strategy. This communication is based on information from sources deemed reliable and personal judgment of the research team, but Great Wall Fund does not guarantee its accuracy or completeness. It is not a complete summary of any securities or markets, and opinions expressed are subject to change without notice. This communication should not be used as a substitute for independent judgment or investment decisions. Great Wall Fund, its affiliates, employees, or agents are not liable for any losses arising from the use of this information. Redistribution or reproduction without prior written permission from Great Wall Fund is prohibited. Investors should be aware of market risks and invest with caution.