Major market indices generally retreated last week, with only the Shanghai Composite Index managing a slight gain. Looking at the primary Shenwan industries, banking, non-bank finance, and non-ferrous metals performed relatively well, while media, computer, and coal sectors showed comparatively weaker performance.
From a macroeconomic perspective, Wang Li, a senior macro strategy researcher at Great Wall Fund, believes that domestically, the primary contradiction lies in demand pressures and structural divergence. Improving domestic demand still requires stronger support from macro policies. Internationally, U.S. core inflation pressure in May was relatively moderate, not further fueling market concerns about Federal Reserve rate hikes. It is anticipated that a repeat of the persistently higher-than-expected inflation scenario seen in 2021-2022 is unlikely for this year.
Looking ahead, Wang Li suggests that market liquidity pressure may remain significant in June, potentially creating headwinds for risk assets. However, the threshold for the Federal Reserve to implement a rate hike this year remains high, given internal Fed disagreements, inflation pressures not yet clearly translating, and political resistance to hikes in an election year. Close attention should be paid to the policy stance of Federal Reserve Chair Waller at the June FOMC meeting.
Key Factors for a Potential Market Upturn
Wang Li indicates that as uncertain factors ease, a new window for market ascent could open. The reasons include, firstly, a reduction in overseas uncertainty: the peak period for the sequential acceleration of U.S. inflation and tightening expectations may have already passed. With the de-escalation of conflict in the Middle East and improvements in shipping, inflation expectations are likely to be revised downward. Furthermore, the Federal Reserve's decision on interest rates is expected to be finalized before the Dragon Boat Festival.
Secondly, there is an upward revision in growth expectations: May's robust Chinese export data not only addresses market skepticism but also suggests potential improvement in the A-share interim reports. This reflects the massive demand from global AI capital expenditure and energy transition, as well as supply chain shortages.
Thirdly, there is a confluence of incremental capital entering the market: declining risk-free returns are creating sustained wealth management demand and stronger support for the Chinese market. Additionally, announcements of reduced share sales, accelerated private fund filings, and public fund approvals since June are expected to materialize into tangible incremental market entry capacity after the Dragon Boat Festival.
Recommended Investment Focus Areas
Regarding investment direction, Wang Li is particularly optimistic about the core themes of technology and manufacturing. He also advises seizing opportunities for a phased recovery in industrial metals and the rebound in traditional undervalued sectors. Specifically, four key investment areas are highlighted:
The first is emerging technology sectors. Current sustained increases in AI industry investments in both China and the U.S., coupled with industry capacity shortages and accelerating technological iteration, have not yet led to a downturn in core indicators like inventory-to-sales ratios and ROIC. Valuations of leading companies remain generally reasonable. Focus can be placed on sub-sectors such as integrated circuits, communication equipment, high-end equipment, and minor metals.
The second is advantaged manufacturing sectors. The global expansion of the AI industry and the wave of energy transition are creating new growth opportunities for the global development of China's high-quality manufacturing enterprises. Key attention can be given to sub-sectors with global competitiveness, such as power equipment and new energy, engineering machinery, and innovative pharmaceuticals.
The third is the industrial metals sector. This sector is expected to benefit from a potential easing of Federal Reserve rate hike expectations due to an oil price pullback and a marginal recovery in economic demand both domestically and internationally. Simultaneously, the sector has undergone significant prior adjustments, with valuations at low levels, increasing the likelihood of capital rotation into it.
The fourth is traditional recovery sectors, with a particular focus on undervalued sectors like banking, where micro-structure clearing has occurred and valuation advantages are prominent.
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