Key uncertainties are set to diminish ahead of the Dragon Boat Festival, paving the way for a new phase of market growth. This outlook is driven by a combination of reduced uncertainty, upward revisions to growth expectations, and the entry of new capital into the market. The focus is on technology, manufacturing, and financials, with potential recovery in some traditional sectors.

Market Outlook: A New Upward Phase

Market uncertainties are expected to resolve before the Dragon Boat Festival, opening a new window for gains in Chinese equities. In recent weeks, some investors have harbored concerns regarding US-Iran tensions, inflation trends, and potential Federal Reserve rate decisions. The firm remains a steadfast proponent of the Chinese market, anticipating that these uncertainties will clear ahead of the holiday, leading to a new market upswing. This view is based on three key factors. First, uncertainty is decreasing. International oil prices have retreated to the $80-$90 per barrel range, and the peak acceleration in US inflation and monetary tightening expectations may have been reached. With geopolitical tensions cooling and shipping conditions improving, inflation expectations are poised to moderate. Furthermore, the Federal Reserve's interest rate decision is also scheduled before the holiday. Second, growth expectations are being revised upward. 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 robust global demand from AI capital expenditure, energy transition, and supply chain shortages. Recent advancements in AGI by Anthropic also raise expectations for expanded AI capabilities and application demand, presenting a historic opportunity for Chinese industrial innovation and global competition. Third, new capital inflows are set to converge. 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. Additionally, since June, announcements of reduced share sales, faster private fund filings, and accelerated public fund approvals are expected to translate into tangible new investment capacity after the holiday. Around the mid-year review period, allocations to absolute return strategies are also likely to flow back into equities, aiding in market structure diversification and balance. As noted in the firm's mid-term strategy on June 3rd, following a brief "shower," the Chinese market is poised for solid performance in the third quarter, potentially reaching new highs.

Market Dynamics and Sector Diffusion

With reduced uncertainty and easing micro-level trading pressures, the market's price discovery function is expected to operate effectively, leading to broader sector participation. First, the technology sector remains on solid ground. Global semiconductor sales are growing strongly amid low inventory-to-sales ratios, and recent AGI progress is expanding AI capabilities, which may further drive investment demand and tighten supply in the industrial chain. Historically, high-growth tech trends have shown low sensitivity to rising US Treasury yields. Furthermore, compared to previous A-share tech bull markets, the forward valuation of leading AI computing companies remains relatively low. Therefore, the investment thesis for tech remains robust from liquidity, growth, and valuation perspectives, and it continues to be a market mainstay. Second, profit expectations for export-oriented manufacturing and financial sectors have been revised upward for Q2. China's May exports exceeded expectations, with strong growth not only from AI-related demand but also in autos, ships, and lithium batteries. Average daily trading volume in the market rose 7.6% quarter-over-quarter. However, these sectors have been constrained by micro-level trading pressures. As market liquidity supply improves and price discovery recovers, a share price recovery is anticipated. Third, with easing geopolitical tensions and a retreat in oil prices, some traditional industries that were on an improving fundamental trajectory but hampered by high oil costs are also poised for recovery. These include aviation, chemical pharmaceuticals, chemical products, and building materials.

Sector Comparison: Broad-Based Gains Expected

The outlook is not for a single standout sector but for multiple areas to perform well. The focus is on core technology and manufacturing sectors, along with securities firms and banks, with improvements also expected in traditional industries. First, in emerging technology, continued AI investment from both China and the US, coupled with capacity shortages and faster technological iteration, support the sector. Key metrics like inventory-to-sales ratios and ROIC show no signs of peaking, and valuations of core leading companies are not stretched. Recommended areas include integrated circuits, communication equipment, high-end equipment, and minor metals. Second, in advantaged manufacturing, global AI investment and the energy transition are providing new historic growth opportunities for Chinese companies' globalization. Recommended areas include power equipment and new energy, construction machinery, and innovative drugs. Third, regarding traditional sector recovery, securities firms and banks are favored due to improving micro-structures and attractive valuations. Improved shipping conditions also aid the recovery of some traditional sectors. Recommended areas include building materials, chemicals, as well as aviation and hotels.

Thematic Investment Recommendations

Several key themes are highlighted for investor consideration. The first is AI New Infrastructure. As domestic large models accelerate their global rollout and computing power network investments increase, domestic computing power, AI data centers, and semiconductor manufacturing are favored. The second is Robotics. Accelerated development in physical AI is expected to benefit sensors, dexterous hands, and lead screws. The third is Commercial Aerospace. SpaceX's accelerated expansion of Starlink and Starship production highlights opportunities in aerospace infrastructure and satellite payloads. The fourth is Xinjiang Revitalization. Efforts to build a modern industrial system with regional characteristics spotlight opportunities in clean energy development, port trade, and cultural tourism.

Key Risks to Monitor

Investors should be aware of potential risks, including a sharper-than-expected overseas economic downturn and ongoing global geopolitical uncertainties.