When discussing the deleveraging process in A-shares, Meng Lei, China equity strategy analyst at UBS Securities, believes that phase has concluded. However, he agrees that the pace and rhythm of the market's rebound may trend toward being relatively moderate, largely because public funds had reached a historical peak in their allocation to the tech sector by the end of the second quarter, leaving limited room for further increases in tech holdings.

In terms of sectors, UBS anticipates that the scope of rising stocks in the A-share market will expand, as improving earnings are expected to drive a recovery in sectors such as mid- and upstream materials or agriculture. Additionally, the firm has heightened its focus on themes like overseas expansion, industrials, and high-dividend yields.

Despite this, Meng Lei emphasized that tech stocks remain the central theme and that growth stocks within A-shares are still viewed favorably. Looking ahead to the third quarter and beyond, however, global tech equities may experience some slowdown, given the growing debate surrounding the technology sector. Moreover, with the yield on the 10-year US Treasury trending upward, medium- to long-term investors might increase their bond allocations, reducing exposure to emerging market equities.

Meng Lei noted that A-shares this year are being driven more by earnings rather than valuation expansion. He projects overall A-share earnings growth of around 15% for the year, with an uptick in the Producer Price Index (PPI) helping to revive corporate revenue. Additionally, the active capital markets in the second quarter have boosted revenue for the financial sector, including brokerages and insurers.

There has been a very noticeable improvement in A-share profit margins, thanks to "anti-involution" and other supportive policies, as well as the continuously rising share of overseas revenue for mainland enterprises. Nevertheless, he acknowledges that A-share valuations remain suppressed and will closely monitor for any potential liquidity releases that could help lift long-term average valuations.

While household deposits in mainland China are expected to serve as a long-term source of funding supporting A-shares, Meng Lei candidly stated that this is not a "one-step process." Residents are unlikely to quickly shift all of their deposits into the stock market, primarily because their risk appetite remains low. They tend to favor stable returns with principal protection, and therefore often show a greater preference for insurance products and wealth management products.