China Galaxy Securities (CGS) stated in a research report that the recent sharp fluctuations in the A-share market do not signify a trend reversal but are rather a short-term release of sentiment driven by external pressures. The medium to long-term upward trend for the market remains intact. Policy support and fundamental earnings are expected to take over from valuation concerns as the market's primary focus. The firm is optimistic about three main investment themes. The first theme centers on short-term certainty, focusing on price increases and safe-haven assets. These include oil and gas, petrochemicals, coal, non-ferrous metals, and shipping ports. The second theme involves sectors with improving supply-demand dynamics and earnings recovery potential, alongside dividend-yielding assets with valuation safety margins. Attention is recommended on basic chemicals, steel, building materials, and finance. The third theme is the new quality productive forces, highlighting key areas for the 15th Five-Year Plan period such as data storage, computing power, consumer electronics, communication equipment, communication services, semiconductors, and defense. For the consumer sector, focus is advised on segments with strong expectations for both domestic and external demand, including light industry, textiles and apparel, home appliances, and agriculture. The core views from CGS are as follows. Recent market volatility has been characterized by significant sector divergence, primarily driven by three factors: geopolitical risk shocks, market structure differentiation, and capital flows. This has manifested as wide index fluctuations, extreme sector performance gaps, and continuously expanding trading volume. Has the fundamental investment environment for A-shares changed? It can be said that external conditions have shifted, but the endogenous factors of the A-share market have not reversed; the market continues to evolve based on its own logic. Firstly, geopolitical factors strongly disrupt the market. Conflicts such as those between the US and Iran may push the US dollar index to fluctuate upwards in the short term, pressuring global markets. Secondly, regarding liquidity, expectations for a proactive appreciation of the Renminbi have increased this year, and the medium to long-term expectation for a stronger Renminbi remains unchanged. Thirdly, on the policy front, with the "Two Sessions" approaching, policy-driven market momentum may see a comprehensive uplift. The core logic behind the recent sharp A-share fluctuations is not driven by a single factor but results from the combined effect of external geopolitical shocks and internal market structure differentiation. The immediate cause of short-term volatility is external shocks and adjustments in trading structures, while the medium to long-term trend is still dominated by domestic economic fundamentals and policy direction, maintaining the logic of a fluctuating upward trajectory. The recent escalation of geopolitical tensions in the Middle East served as a direct trigger for short-term A-share volatility. Intensified market structure differentiation has led to accelerated style rotation. The market has shifted from a broad index rebound driven by "sentiment repair and risk premium compression" to a structural行情 driven by "earnings structure and capital structure." The A-share market's strengths include its internal logic, featuring policy support and the confidence for an "independent market performance." As the market enters the "Two Sessions" period, a warm policy tone is highly probable. Against the backdrop of global order restructuring, international capital is seeking safe-haven anchors. The Renminbi maintains a relatively strong trajectory, enhancing the attractiveness of Chinese equity assets. The fundamental logic is that earnings are expected to take over from valuations as the market's focus. The outlook for A-share investment opportunities suggests that the recent intense volatility is a short-term emotional release under external pressure, not a trend reversal. The medium to long-term positive trend remains unchanged. Subsequently, the market is expected to gradually transition from being "emotion-driven" back to being "fundamentally-driven," presenting an operational pattern of "volatility digestion, momentum improvement, and structural focus." Firstly, policy support continues to intensify, with policy dividends likely to be concentrated during the Two Sessions, providing clear thematic direction for the market. Secondly, the foundation for domestic economic recovery is gradually solidifying, with corporate earnings expected to continue improving, offering fundamental support. Thirdly, current A-share valuations remain at reasonable levels, and long-term capital is gradually entering the market, indicating a clear medium to long-term positive trend. For allocation opportunities, it is recommended to focus on: Theme One, short-term certainty regarding price increases and safe-havens. If geopolitical conflicts are difficult to resolve quickly, global physical assets are undergoing a revaluation. Tensions in the Strait of Hormuz directly drive stronger demand for energy and alternatives. This includes oil and gas, petrochemicals, coal, non-ferrous metals, and shipping ports. Theme Two focuses on sectors with improving supply-demand dynamics and earnings recovery logic, plus dividend assets with valuation safety margins. Attention is advised on basic chemicals, steel, building materials, and finance. Theme Three involves the underlying shift in China's economic logic towards new quality productive forces. Key areas for the 15th Five-Year Plan period, such as data storage, computing power, consumer electronics, communication equipment, communication services, semiconductors, and defense, are noteworthy. Additionally, for the consumer sector, focus on segments with strong domestic and external demand expectations, such as light industry, textiles and apparel, home appliances, and agriculture. Risks include external uncertainties, policy outcomes falling short of expectations, and unstable market sentiment coupled with ongoing liquidity adjustments.
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