According to a research report, a combination of reduced uncertainty, upward revisions to growth forecasts, and the entry of fresh capital is set to open a new phase of market gains for Chinese stocks.
The report suggests that after a brief period of volatility, the Chinese market is poised for a strong performance in the third quarter, potentially reaching new highs. The technology sector remains the market's core theme, supported by solid fundamentals across liquidity, industry momentum, and valuation metrics. The focus is on technology, manufacturing, and securities/banking sectors, with some traditional industries also expected to see recovery.
The main points from the report are as follows:
Market Outlook: A New Window for Gains in Chinese Stocks
1) Decreasing Uncertainty: International oil prices fell to the $80-90 per barrel range in June, potentially marking the peak of the fastest acceleration in US inflation and monetary tightening expectations. With geopolitical tensions easing and shipping conditions improving, inflation expectations are likely to moderate.
2) Upward Revisions to Growth Forecasts: Strong Chinese export data for May not only addressed market skepticism but also signals potential improvements in the upcoming interim reports for A-share companies. This reflects substantial global demand from AI capital expenditure and the energy transition, coupled with supply chain shortages, presenting a historic opportunity for Chinese industrial innovation, catch-up, and global competition.
3) Resonance of New Capital Inflows: Declining risk-free returns are creating sustained wealth management demand and stronger support for the Chinese market. New reforms to enhance capital market inclusivity are imminent. Furthermore, since June, announcements of reduced share sell-downs, faster private fund filings, and accelerated public fund approvals are expected to translate into tangible new investment capacity after the Dragon Boat Festival. Additionally, absolute return equity allocations are likely to return around mid-year evaluations, aiding in market structure diversification and balance.
As the report's mid-term strategy anticipated, after a brief "shower," the Chinese market is expected to perform well in Q3 and potentially set new highs.
Market Dynamics: Effective Price Discovery and Structural Diversification
With uncertainty decreasing and micro-level selling pressure easing, the market's price discovery function is expected to work effectively, leading to a broader market structure.
1) Currently, global semiconductor sales are growing strongly with low inventory-to-sales ratios, and the latest AGI progress from US-based Anthropic is raising the boundaries of AI capabilities, which may further drive investment demand diffusion and supply-demand tightness across the industry chain. Historically, technology industry trends, due to their high growth, have shown lower sensitivity to rising US bond yields. Compared to past A-share technology bull markets, the forward valuation (PE-FY3) of current AI computing leaders remains relatively low (15-20x vs. a historical average of 30-40x). Therefore, the technology sector's logic remains solid from liquidity, momentum, and valuation perspectives and continues to be the market's main theme.
2) Profit expectations for manufacturing companies focused on overseas expansion and the financial sector were revised upwards in Q2. May's Chinese exports exceeded market expectations, with high growth not only from AI-related demand but also in exports of automobiles, ships, and lithium batteries. Average daily trading volume in the two exchanges rose 7.6% quarter-on-quarter in Q2. However, related sectors underperformed due to micro-level trading pressure. Subsequent improvements in market liquidity supply and the restoration of price discovery functions are expected to drive stock price recovery.
3) With easing geopolitical tensions and falling oil prices, some traditional industries that were on an improving fundamental trend but whose profits were constrained by high oil prices are also expected to recover: aviation, chemical pharmaceuticals, chemical products, building materials, etc.
Sector Comparison: Broad-Based Strength, Not a Single Standout
The outlook is positive for the main themes of technology and manufacturing, as well as securities firms and banks, with traditional sectors also seeing improvement.
1) Emerging Technology: AI investments in China and the US, capacity shortages, and accelerated technological iteration continue, with no turning point yet in inventory-to-sales ratios or ROIC, and valuations of core leading companies remain reasonable. Recommendations include: integrated circuits, communication equipment, high-end equipment, minor metals.
2) Competitive Manufacturing: Global AI investment and the energy transition are providing new historic growth opportunities for the globalization of Chinese enterprises. Recommendations include: power equipment and new energy, construction machinery, innovative drugs.
3) Traditional Sector Recovery: Positive on securities firms and banks where micro-structure clearing has occurred and valuation advantages are prominent. Improved cross-strait shipping also aids the recovery of some traditional sectors. Recommendations include: building materials, chemicals, as well as aviation and hotels.
Risk Warnings: Overseas economic and geopolitical risks, and the risk of individual companies' performance falling short of expectations.