China Securities Co., Ltd. has released a research report indicating that A-share market sentiment is warming, buoyed by overseas rebounds. However, internal capital flows remain in a rebalancing phase, suggesting the pace of recovery may be moderate, with the market bottoming out and poised for future gains.
Overseas, the Federal Reserve's cautious, hawkish stance, reaffirming its unwavering 2% inflation target, poses short-term pressure on global risk assets. Yet, its explicit commitment to stabilizing long-term rates and flattening the yield curve could mitigate tail risks associated with overly tight financial conditions. Meanwhile, Nvidia's robust earnings and guidance have significantly exceeded expectations, confirming the resilience of AI capital expenditure and computing demand, which underpins the medium-to-long-term fundamentals of the tech sector.
In terms of allocation, the strategy is to use "rebalancing" to enhance portfolios' adaptability to fluctuating markets. This involves retaining positions in sectors with proven momentum while also incorporating defensive holdings and undervalued areas poised for a catch-up rally. The focus is on identifying inflection points where "cheap valuations, low institutional ownership, and improving fundamentals" converge. Key sectors to watch include AI computing power, non-ferrous metals, innovative drugs, banks, non-bank financials, oil, coal, steel, and agriculture.
Market Outlook: Consolidation with Short-Term Rebound
China Securities' primary view is that the A-share market remains in a phase of "overall consolidation with short-term recovery." As emphasized previously, the core reason for this adjustment is not fundamental deterioration but rather overcrowded trading and pressure from concentrated shareholdings, leading to a pullback in the absence of incremental capital. In the short term, market sentiment has improved due to overseas rallies, and negative factors have been largely priced in. However, internal capital flow rebalancing is still underway, indicating a steady recovery pace as the market solidifies its base.
Global Influences: Fed's Hawkish Tone and Tech Resilience
In a recent speech, Fed official Waller explicitly reiterated that the 2% inflation target is non-negotiable. Recent favorable PCE and CPI data are insufficient to prove a substantive improvement in underlying inflation trends, hinting that further rate hikes may still be necessary if inflation does not improve adequately. This hawkish stance from the Fed exerts short-term pressure on global risk assets. In the medium term, if Waller's comments effectively stabilize long-term rate expectations and flatten the yield curve, they could alleviate tail-risk concerns about excessively tight financial conditions, creating conditions for a medium-term recovery in equity markets. Nvidia's strong earnings and optimistic outlook, both significantly surpassing expectations, further confirm the resilience of AI capital spending and computing demand, dispelling fears of an AI demand peak and providing robust support for the tech and AI sectors' long-term fundamentals. Jensen Huang asserted that "AI has reached an inflection point" and "computing power is converting into revenue."
Strategic Approach: Enhancing Adaptability Through Rebalancing
Given the current market's "ceiling above, floor below" dynamics, characterized by stock-parking trading and the need for stronger catalysts for upward index breaks, the core approach to sector allocation is to use "rebalancing" to enhance portfolio adaptability. This strategy avoids over-committing to a single high-growth direction while not abandoning core themes due to short-term pullbacks. It advises retaining positions in sectors with persistently validated growth, particularly those with the highest earnings certainty like AI computing hardware, non-ferrous metals, innovative drugs, and select export-oriented manufacturing. Simultaneously, moderate allocations to defensive holdings and undervalued catch-up sectors create a balanced portfolio that dynamically rebalances between high growth and low volatility. Recent trends show heightened capital dispersion and rebalancing, with institutional funds diversifying from single sectors to a more balanced multi-sector allocation. The focus should be on increasing weight in low-priced, under-owned sectors to identify inflection points where "cheap valuations, low institutional holdings, and improving fundamentals" align.
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