Where to begin

The A-share market experienced a volatile week, driven by shifts in risk appetite. A notable pullback occurred, with most major broad-based indices posting declines. The ChiNext Index was the standout performer, rising 1.8%, while the STAR 50 lagged, falling 1.5%. The valuation of the Wind All-A Index currently sits at the 92.3rd percentile of readings since 2010.

Sector performance was mixed across the Shenwan primary industries. Conglomerates, Communications, and Pharmaceuticals & Biotech were relative outperformers, posting gains of 7.2%, 5.1%, and 1.9%, respectively. In contrast, sectors like Non-ferrous Metals, Beauty & Personal Care, and Non-bank Financials underperformed, with losses of 3.7%, 1.7%, and 1.6%, respectively.

Key events shaping the week

On the policy front, the People's Bank of China (PBOC) released its second-quarter monetary policy implementation report, reaffirming its commitment to a moderately accommodative stance. It stated that the integrated effect of existing and incremental policies will be leveraged to create a suitable monetary and financial environment for solidifying the economy's stable and improving trend. Separately, Beijing optimized its housing purchase restrictions, introducing seven measures across three areas: easing purchase rules, refining property gifting policies, and increasing support from the housing provident fund.

On the economic data front, China's July inflation data was released, alongside the US July CPI report. China's July CPI rose 0.5% year-on-year, compared to 1.0% in June and a market expectation of 0.8%. The PPI increased 3.5% year-on-year, down from 4.1% in June and below the forecast of 4.0%. The US July CPI came in at 3.4% year-on-year, matching expectations and slowing from 3.5% in June. Core CPI rose 2.5% year-on-year, in line with forecasts and down from 2.6% in June, with a month-on-month increase of 0.2%, meeting expectations.

In industry news, Unitree Robotics began its subscription period on the STAR Market. Nvidia led a consortium to raise $500 billion for a "chip loan" initiative. DeepSeek significantly adjusted its API pricing, introducing a peak-valley pricing model where off-peak prices are half of peak-hour rates, encouraging users to schedule tasks based on actual usage. Honor held a product launch in Guangzhou, unveiling the world's first "robot phone," the Honor Robot Phone.

Outlook: A market poised for recovery, with a focus on earnings

The market is expected to stage a volatile recovery. For one, the balance of margin financing (liang rong) has notably fallen from its peak back to levels seen in March and April of this year, with recent signs of stabilization. This suggests a healthier market position, providing a solid funding base for a potential recovery. Additionally, market turnover has dropped to a relatively low level since the "September 24 rally," significantly easing trading congestion. Furthermore, the cooling US July CPI data has tempered expectations for further rate hikes in the US, marginally easing concerns about global liquidity tightening. This alleviates pressure on the valuations of growth stocks and the potential for capital repatriation.

Investment focus: Three key earnings themes

For asset allocation, three primary earnings-driven themes are identified. First, Tech Hardware (including Semiconductors, AI Computing, and Storage). The tech sector remains the strongest area for earnings improvement, with over 80% of companies providing positive pre-announcements for the interim results. Second, Price-inflation Chains (including Non-ferrous Metals, Chemicals, and Coal). These sectors benefit from the sustained high year-on-year growth in PPI, offering high certainty for earnings delivery. Third, Export Manufacturing (including Energy Storage, Power Equipment, and Automobiles). Benefiting from the global restocking of manufacturing inventories and supply chain advantages, this sector has room for further earnings improvement in the third quarter. Other specific sub-sectors include Non-bank Financials (mainly Securities firms), Pharmaceuticals/CRO (focusing on innovative drug exports), and Defense (benefiting from an order recovery).

Risk analysis

Key risks include: overseas risk disturbances exceeding expectations; the failure of historical patterns to hold; and a significant decline in market sentiment.