On July 7th, the A-share market experienced a significant downturn, with close to 4,800 stocks closing lower. The Shanghai Composite Index fell 1.26%, losing the 4000-point level. The defense sector followed the broader market lower. The core defense asset, the Huabao Military ETF (512810), dropped 2.68%, closing below all its moving averages. However, the fund traded at a premium throughout the day, suggesting potential buying interest on the dip.

Among its constituent stocks, previously popular thematic plays like MLCC stocks suffered heavy losses. Xuguang Electronics and Torch Electron hit their daily 10% limit-down. The commercial aerospace concept also faced setbacks, with Space Universe and Tianyin Electromechanical falling over 6%. Major weighted stocks Aerospace Electronics and China Satellite declined more than 4%.

Trading volume in the A-share market shrank notably today, with full-day turnover at 2.6 trillion yuan, a reduction of over 500 billion yuan compared to the previous session. This marked the first time since June 12th that turnover has fallen below the 3 trillion yuan threshold. Volatility in overseas tech stocks spilled over to the A-share market. Coupled with the approaching interim earnings reporting season, funds are taking profits on technology-related holdings that have gained significantly, leading to a cautious market sentiment. The defense sector, characterized by its prominent growth style, was impacted.

Market Strategy at a Technical Breakpoint

Huachuang Securities pointed out that the commercial aerospace sector could see high activity in July. The test launch window for China's large-payload reusable rocket, the Long March 10B, might target the period between July 10th and 13th, aiming to validate the globally pioneering "sea-based net recovery" technology. Additionally, the Zhuque-3 Yao-2 rocket is expected to launch again from Jiuquan to test its land-based vertical recovery technology.

Statistics show that the underlying CSI Defense Index tracked by the Huabao Military ETF (512810) covers 61 commercial aerospace concept stocks, with a combined weight reaching 78.78%.

Regarding MLCCs, Guolian Minsheng Securities explicitly advised to "seize the opportunity to position during pullbacks." The institution noted that no inflection point is currently visible in MLCC supply and demand, suggesting the current upcycle may not have peaked. If further corrections occur, it could be an opportune time to actively position in anticipation of Q2 earnings validation and catalysts from the peak season in the second half of the year.

From a valuation timing perspective, the latest trailing P/E ratio for the CSI Defense Index, tracked by the Huabao Military ETF (512810), stands at 70.77 times. This places it at the 47.4th percentile over the past three years, meaning it has been lower over 50% of the time in that period. This may indicate attractive medium-to-long-term allocation value.

Underlying Investment Thesis for Defense

Returning to the fundamental investment logic for the defense sector, Changjiang Securities highlighted that military-to-civilian conversion and military exports are becoming key drivers for defense companies to transcend cyclicality and achieve value leaps. Looking towards the "15th Five-Year Plan" period, national planning explicitly supports strategic emerging industries such as aerospace, new energy, new materials, and the low-altitude economy. Defense companies' deep involvement in these areas is set to unlock long-term growth potential. Simultaneously, changes in the international security environment are reshaping the global arms trade landscape, presenting incremental opportunities for military export businesses. These factors collectively help the defense sector break through traditional growth bottlenecks, providing sustained earnings support.

Selecting the Right Defense Investment Vehicle

The Huabao Military ETF (512810), whose code contains the numbers "81" (a reference to China's Army Day), passively tracks the CSI Defense Index. It provides comprehensive exposure to popular themes including commercial aerospace, MLCCs, the low-altitude economy, large aircraft, military AI, and gas turbines. It is also eligible for margin trading and securities lending and is a Stock Connect security, making it an efficient tool for a one-click investment in core defense assets.

Note on "Commercial Aerospace Content": This refers to the combined weight of commercial aerospace concept stocks covered by the CSI Defense Index. Data source: FinD, as of July 2, 2026. The content percentage of the index is based on the Commercial Aerospace Index (886078).

Data sources include the Shanghai and Shenzhen Stock Exchanges and public information. Institutional views sourced from: Guolian Minsheng Securities report dated July 7, 2026, "MLCC View Update: Seize the Opportunity to Position During Pullbacks"; Huachuang Securities report dated July 6, 2026, "Major Event Commentary: Gauge the Pace, Commercial Aerospace May See High Activity in July"; Changjiang Securities report dated July 6, 2026, "Military & Aerospace Insights Issue 18: New Paths for Defense Companies to Advance – Civilian Conversion and Military Exports".

Note: When subscribing for or redeeming fund units, subscription/redemption agents may charge a commission of up to 0.5%, which includes related fees charged by stock exchanges and registration institutions.

Risk Warning: The Huabao Military ETF passively tracks the CSI Defense Index. The base date for this index is December 31, 2004, and it was published on December 26, 2013. Constituent stocks mentioned herein are for illustrative purposes only. Descriptions of individual stocks do not constitute investment advice in any form, nor do they represent the holdings information or trading动向 of any fund managed by the fund manager. The composition of the underlying index's constituents is adjusted according to its compilation rules. The fund manager assesses the risk rating of the Huabao Military ETF as R3-Medium Risk, suitable for investors with a Balanced (C3) or higher risk profile. Any information appearing in this article (including but not limited to individual stocks, commentary, forecasts, charts, indicators, theories, and any form of expression) is for reference only. Investors must be responsible for their own independent investment decisions. Furthermore, any views, analysis, or predictions in this article do not constitute investment advice of any kind to the reader, and no responsibility is accepted for any direct or indirect losses arising from the use of this content. Fund investment carries risks. The past performance of a fund does not represent its future performance. The performance of other funds managed by the fund manager does not guarantee the performance of this fund. Caution is advised in fund investment.