In the past month, the A-share market initially declined before rebounding. Against the backdrop of decisive progress in US-Iran talks and the continued spread of price increases across the AI industrial chain, sectors like electronics, building materials, and communications, involving materials and hardware experiencing price hikes, have shown sustained strength.

Looking ahead to July, at the macro level, the economy exhibits characteristics of "marginal weakening in aggregate demand, widening divergence between domestic and external conditions, and ongoing differentiation between old and new growth drivers." The price center for oil has retreated from its highs, and a Federal Reserve interest rate hike appears highly unlikely.

At the meso level, the key recommendation for sector allocation revolves around areas where interim earnings are expected to show sustained high growth or improvement. By integrating multiple dimensions such as meso-level industry trends, profitability, shareholding distribution, valuation, trading activity, cyclical stage, and sector value, the focus for this period is recommended on electronics (semiconductors, components), electrical equipment (batteries, grid equipment), machinery (industrial automation equipment, general machinery), non-ferrous metals (new metal materials, industrial metals, minor metals), basic chemicals (non-metallic materials, chemical products), and non-bank financials (securities).

Key Areas for This Period

Which sectors are anticipated to see high growth or improvement in interim earnings?

Market Performance Review

Over the past month, the overall A-share market displayed a "decline followed by a rebound, V-shaped fluctuation" pattern. Growth sectors regained strength after experiencing sharp volatility, while defensive dividend sectors temporarily outperformed before ceding ground again. The specific market movements can be divided into two phases.

From May 24th to June 8th, the market fluctuated downward, influenced by a combination of fluctuating US-Iran negotiations, a sudden surge in expectations for tighter overseas liquidity, and profit-taking in tech stocks. Defensive sectors like coal and banking attracted safe-haven capital inflows, leading gains alongside the communications sector.

From June 8th to June 30th, following decisive progress on a US-Iran peace agreement, the introduction of significant domestic policy measures by the central bank, and price hikes by TSMC, the market initially experienced a global liquidity panic sell-off before rebounding. Risk appetite recovered, with sectors like electronics and building materials leading the gains.

Overall, since late May, gains have been limited across Shenwan's primary industry sectors, with electronics, building materials, and communications among the top performers, while sectors like automobiles, petroleum & petrochemicals, and retail trade have lagged.

Looking Forward to July

Sector allocation recommendations for July primarily focus on areas where interim earnings are expected to show sustained high growth or improvement.

Macro-economically, the core features are marginal weakening in aggregate demand, a widening gap between domestic and external conditions, and persistent differentiation between old and new growth drivers. On exports, the current cycle is not driven by traditional low-end manufacturing but is strongly linked to sustained high demand from North American AI and is closely tied to technological upgrades and the expansion of high-end manufacturing overseas.

Domestic demand recovery remains insufficient, with the growth differential between exports and domestic demand at historically high levels. Regarding government expenditure, fiscal spending has tightened marginally since April, and the pace of government bond issuance has slowed. On the production side, the divergence between old and new growth drivers has intensified, with the "ballast" effect of the technology sector becoming more prominent while traditional drivers remain under pressure. At the price level, structural contradictions in price transmission have deepened.

Regarding external factors, with the US-Iran negotiations and agreement, international oil prices have returned to a center around $70. The exogenous cost shocks that previously troubled midstream manufacturing are beginning to fade. Some midstream manufacturing sectors highly sensitive to costs, or manufacturing chains previously suppressed by high costs but now showing marginal improvement in supply and demand, are likely to benefit.

A Federal Reserve rate hike is highly improbable. The factors suppressing technology and growth are easing. Coupled with the strong profit support still present in the AI and semiconductor chains, the technology theme has not yet peaked.

Meso-Level Analysis

Historically, sectors performing well in July are primarily concentrated in areas with high interim earnings growth rates, while stocks lacking earnings support may face significant adjustment risks. Based on historical industrial enterprise profit data and second-quarter meso-level industry trends, interim earnings are expected to continue an improving trend, with growth rates continuing to diverge across sectors.

Sectors where interim earnings are expected to improve or sustain high growth are likely concentrated in: 1) TMT price hike chain: semiconductors, components, communication equipment, glass fiber, minor metals, new metal materials, electronic chemicals; 2) Export boom/overseas expansion areas: batteries, industrial automation equipment, construction machinery, ships, wind power, ground military equipment, chemical pharmaceuticals, etc.; 3) Resource products with improving supply-demand dynamics: industrial/energy metals, coal, agrochemicals, chemical raw materials, chemical fibers, non-metallic materials, etc.

Risk Warning

Risks include industry support falling short of expectations and macroeconomic fluctuations.