The domestic A-share market experienced a volatile week, initially sliding in the first sessions before rebounding. At the start of the week, investor sentiment was dampened by weak macroeconomic data, overseas liquidity concerns, and pre-positioning ahead of the Federal Reserve's policy meeting, leading to cautious trading and an index pullback.
However, following the conclusion of the Fed's meeting, trading volume surged back to the 2 trillion yuan level on Friday, fueling a strong market rebound. On a structural level, the average daily turnover for the week declined to 1.81 trillion yuan, with market style clearly favoring growth over consumption, financials, and cyclical sectors in that order.
Domestically, August's economic data painted a picture of production outpacing demand. While industrial value-added grew by 5.2% year-on-year and exports continued their strong run, led by the AI supply chain, retail sales growth slowed to just 0.4%. Furthermore, the growth rate of outstanding social financing dipped to 7.2%, indicating that earnings elasticity remains limited under a weak recovery and that market momentum may need to rely on sector-specific prosperity.
On the international front, both the U.S. Federal Reserve and the Bank of Japan delivered widely expected 25 basis point rate hikes. While this removed near-term policy uncertainty, the Fed's dot plot suggests there is still room for another hike this year and has revised up its 2027 rate projections. This indicates that the previously feared liquidity constraints have not been lifted, and risk appetite will likely continue to fluctuate based on the scale of tightening, oil prices, and long-term yields.
Looking ahead, last week's rebound appears to be more of a tentative recovery driven by the resolution of macro uncertainties and the clearing of earlier positions, rather than a definitive trend reversal. Weighing on the market are persistently weak domestic demand and high overseas rates, suggesting that the near-term outlook is likely to be one of a volatile recovery. Key factors to monitor include whether core tech sectors can sustain their momentum amidst market disagreement and the durability of the rally's broadening.
Adding to the complexity, the approaching Mid-Autumn Festival and National Day holidays could trigger pre-holiday de-risking, influencing fund participation. This week, market attention will be on China-U.S. trade talks and high-level exchanges, the U.S. September flash PMI, and comments from Fed officials. Additionally, investors will track the impact of Middle East tensions on oil prices to assess whether the external environment can provide more sustained support for the ongoing recovery.
From a sector perspective, we maintain a balanced allocation stance, focusing on areas with strong earnings visibility and attractive valuations supported by industrial trends and improving supply-demand dynamics. In the tech sector, last week's recovery in risk appetite re-energized the AI chain and semiconductors. However, with high overseas rates still a factor, short-term consolidation is possible as market participants digest lingering disagreements. The medium-term continuation of this trend will hinge on industrial catalysts and the confirmation of earnings. Given this, we advise against chasing highs. Instead, opportunities may lie in core segments with stronger order books and earnings certainty that align with their valuations. This includes the overseas computing power chain within optical communications and PCBs, as well as the domestic chain focused on advanced process nodes and semiconductor equipment.
For value-oriented investments, we continue to favor sectors with low valuations, defensive attributes, and improving supply-demand fundamentals. Despite the Fed's rate hike, it signaled potential for further tightening, which could keep rate-sensitive areas like Hong Kong listed growth stocks and innovative pharma volatile. In commodities, a case-by-case approach is needed, filtering through the specific supply-demand landscapes and price movements. On the energy side, coal and chemical sectors face upside risks from factors such as prolonged conflicts, a potential return of Chinese restocking demand, and limited room for global inventory releases. As the September-October period typically marks the peak season, sectors with firm demand and supply contraction are well-positioned to benefit. Additionally, the non-bank financial sector may have room for valuation recovery, potentially catalyzed by improved risk appetite from market or tech rallies, which would boost trading volumes and investment returns.
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