Last week, major Chinese stock indexes showed mixed results, with the ChiNext Index and the STAR 50 Index declining. In the Shenwan first-level industry classification, Media, Social Services, and Retail Trade performed well, while Communications, Electronics, and Machinery & Equipment showed relatively weaker performance.
On the macro front, US inflation expectations are expected to rise further. Domestically, China's manufacturing Purchasing Managers' Index (PMI) for July came in at 49.2%, a decline of 1.1 percentage points from the previous month, reflecting a drop in business sentiment. This was primarily due to high base effects, seasonal off-peak factors, extreme weather conditions, and subdued domestic demand. From an industry structure perspective, high-end manufacturing showed improving sentiment, while the real estate and cyclical sectors remained under pressure. External demand indicators weakened marginally, but high-end demand still found support. Pressures on domestic demand led to a pullback in price and inventory indices, which to some extent constrained profit recovery. On the policy front, the July meeting of the Politburo clearly stated an increase in counter-cyclical adjustment, timely planning of incremental policies, accelerating fiscal expenditure, and making timely adjustments on the monetary side. Policies to expand domestic demand proposed a combination of tiered consumption strategies and the construction of a "six-network" system. Industrial layout balances new forms of the intelligent economy, breakthroughs in frontier technologies, and the transformation and upgrading of traditional industries. Risk mitigation focuses on stabilizing the real estate market, advancing a package of debt resolution measures, and "reducing quantity and improving quality" of small and medium-sized financial institutions. Capital market reforms aim to enhance resilience and confidence. Overseas, the US Federal Reserve announced on the 29th that it would keep the target range for the federal funds rate unchanged at 3.5% to 3.75%, the fifth consecutive hold. However, the rate decision vote was 9-3, with three regional Fed presidents dissenting and advocating for a 25 basis point rate hike, indicating significantly increased internal divergence. Inflation trends remain key to the Fed's future policy direction. Market expectations for a September rate hike are currently rising, but we believe short-term geopolitical conflicts have a significant impact on these expectations, which could subsequently reverse. The November midterm elections are also an important constraint. We will watch the August US employment and inflation data, as well as the speech by Fed Chair Walsh at the Jackson Hole Symposium in late August. Preliminary data released by the US Commerce Department on the 30th showed that US real GDP grew at an annualized rate of 1.5% quarter-on-quarter in the second quarter, slowing from 2.1% in the first quarter and below market expectations. The slowdown in growth was mainly due to non-core factors, including AI investment coupled with traditional industry recovery leading to a surge in import demand and a further widening of the trade deficit. However, core GDP readings suggest that the underlying momentum of the US economy remains strong, and inflation expectations still have room to rise. The "core GDP" (excluding imports, exports, inventory changes, and government spending) annualized quarter-on-quarter growth rate for the second quarter rose sharply to 3.9% (from 1.7% previously). Inflation expectations have rebounded from low levels, and it is still too early to conclude that inflation pressure has peaked.
In terms of investment strategy, we are optimistic about the rebound in technology stocks and the recovery opportunities in manufacturing and financials. In July, major stock indexes, especially growth stocks, experienced historically significant declines, spreading pessimistic market sentiment. From the perspective of our timing framework, a rebound from oversold levels is likely to be the market's main theme. We believe that the negative feedback loop for capital is nearing its end, and overseas technology stocks are gradually stabilizing. We are now at an attractive entry point for the technology sector, and the market is expected to stabilize, recover, and structurally broaden out. Specifically, the market bottom appears to be forming, potentially entering the "batting zone." On July 19th, China Guoxin and China Chengtong again announced large-scale counter-cyclical purchases, providing support at the bottom. The July Politburo meeting made it clear to "deepen comprehensive reforms of capital market investment and financing to enhance capital market resilience and confidence," emphasizing the construction of the capital market system and its ability to withstand shocks. Combined with the recent intensive roundtable meetings initiated by the China Securities Regulatory Commission to guide expectations, investment-side reforms remain the focus of capital market reform, firming market confidence. Structurally, we favor a rebound in technology stocks, and manufacturing and financials may also present opportunities. The current market landscape is broadening, but from a fundamental pricing perspective, the market has not fully priced in the improvement for some non-tech sectors. Market style is expected to balance out, and there is room for recovery in manufacturing and financials. (1) Emerging Technology: The global AI industry inflection point has not yet arrived, but domestic AI, under the "hardware + model" system-level innovation, boasts outstanding input-output efficiency advantages. The pace of capital expenditure and downstream application iteration is likely to accelerate. We recommend focusing on Electronics/Communications/Media, etc. (2) Advantage Manufacturing: Chinese companies with competitive industrial advantages are going global and may accelerate market share expansion amid geopolitical challenges. We recommend focusing on innovative drugs/Machinery, etc. (3) Financials and New Infrastructure: After the micro-transactional structure clears out, financial stocks have the power to stabilize the market. We recommend focusing on Non-bank Financials/Banks, etc. The physical workload of new infrastructure is expected to accelerate in the second half of the year, hedging against external uncertainties. We recommend focusing on Power Grids/Building Materials & Construction, etc.
Comments