Recent market weakness and a noticeable sense of caution among investors can be attributed to a series of unresolved uncertainties both domestically and internationally. Key factors include the Federal Reserve's interest rate decision, the clearing of tech sector positioning, the return of incremental capital, and the potential introduction of supportive policies. Consequently, we anticipate that the current narrow trading range will likely continue, and we advise investors to exercise patience and position themselves at lower levels once pessimistic expectations are fully priced in. A three-tier balanced allocation structure is recommended, with high-growth offensive positions in AI computing power, AI applications, innovative drugs, and industrial metals; dividend-paying core holdings in shipping, non-bank financials, and banks; and low-valuation rebalancing positions in petrochemicals, basic chemicals, coal, and agriculture.
What is the market waiting for, and when might a turning point arrive?
A potential turning point could occur with the conclusion of the Federal Reserve's September meeting. Current data does not provide clear direction on whether the Fed will raise rates in September, making next week's inflation data particularly crucial. The market is deeply divided on this prospect, with some funds preferring to await the final decision before making their moves. Should the Fed choose to hold rates steady and maintain its easing cycle, the A-share market could benefit from a rebound in global growth stock valuations and a boost in risk appetite driven by improved domestic liquidity and policy expectations.
The market also awaits the full clearing of tech sector positioning. Reflecting on the semiconductor rally of 2020-2021, the tech sector may experience a downward adjustment lasting approximately one quarter, followed by a period of underperformance relative to overseas tech stocks for about three quarters. In the long term, if industry momentum remains robust and earnings delivery re-emerges as the dominant factor, a fully adjusted tech sector could see a return to fundamentals-based pricing.
Another key factor is the re-entry of incremental capital. The current market lacks fresh capital, characterized by intense competition among existing players. One possible window for incremental capital to return is within the next two weeks, ahead of the national leader's visit to the US on September 24th. Another potential trigger point could be if the broader market or the All-A shares index approaches the lows seen in late July, where national teams and long-term insurance funds might step in to accumulate positions and provide market support.
Additionally, the market is awaiting fundamental verification or substantial policy measures. In late October, if third-quarter GDP growth is revised downward, it could pressure the annual target, fueling expectations for policy reinforcement. Key events include the late-October NPC Standing Committee meeting, a critical fiscal variable, and the late-October Politburo meeting. Another possible timing is in December, with the early-December Politburo meeting and the mid-December Central Economic Work Conference, which could outline economic plans for the coming year and serve as a potential launchpad for stimulus. However, given the upcoming new political cycle next year, current market expectations for such stimulus are relatively muted.
Why has the A-share market been weak recently, and when might the turning point come?
This week, the A-share market declined overall, with the Shanghai Composite, Wind All-A, and ChiNext indices falling 0.56%, 1.79%, and 4.03%, respectively. Trading volume also shrank notably, with the All-A market turnover dropping to just RMB 1.78 trillion on Thursday and falling below RMB 2 trillion for two consecutive days, highlighting a strong wait-and-see attitude. The market is awaiting clarity on several fronts, including the Fed's September meeting, the clearing of tech positioning, the return of incremental capital, and the verification of fundamentals or policy catalysts.
Awaiting the Fed's September meeting
In mid-August, rising US long-term bond yields pressured global tech valuations, transmitting risk-off sentiment to the A-share market and causing tech declines. By late August, hawkish remarks from central bank officials at the Jackson Hole symposium significantly increased the probability of a September rate hike. According to the US Labor Department's September 4th report, August non-farm payrolls increased by 162,000, far exceeding the expected 56,000. Additionally, prior months were revised upward by a combined 55,000, with July turning positive. Following this data, market expectations for a September rate hike rose to 59.4%, with January expectations at 89.2%. The US unemployment rate held at 4.1%, and while average hourly earnings year-over-year growth slowed to 3.1%—below the 3.4% CPI rate—this suggests real wage growth has turned negative, indicating no wage-price spiral is forming. Fed Governor Waller noted that recent data finally shows signs of inflation cooling, and if this trend continues, he would lean toward maintaining rates in the current 3.50%-3.75% range. However, the decision largely depends on next week's August inflation data; hotter data could sway him toward supporting a hike. Therefore, the path forward hinges on upcoming inflation figures. We believe clarity on the September rate decision may not emerge until the August CPI release on September 12th, or potentially not until the Fed meeting concludes on September 17th. If the Fed holds rates and maintains its easing cycle, the A-share market could benefit from improved global risk sentiment and domestic policy expectations. Conversely, if the Fed hikes, two scenarios could unfold: one where the RMB remains strong against the dollar, avoiding depreciation pressures, allowing the A-share market to maintain a range-bound pattern; another where depreciation concerns emerge, potentially leading to capital outflows and downward pressure on the market.
Awaiting the clearing of tech sector positioning
The tech sector's recent weakness stems partly from unsettled positioning and heavy overhead supply. In our prior strategy notes, we detailed that the A-share tech recovery has lagged overseas, not due to a reversal in industry trends, but because of differences in trading rhythms and capital structures. Overseas tech leaders entered corrections earlier, while A-share tech continued to rally, accumulating congestion and margin financing pressure. Regulatory cooling measures have necessitated a longer digestion period for these positions. Additionally, after interim earnings reports, the bar for earnings delivery has been raised. While tech revenues and net profits surged 25.5% and 225.5% year-over-year, respectively, the narrative is shifting from long-term potential to mid-term delivery, naturally compressing valuations. The TMT sector's share of total market turnover has declined from a peak of 45% to around 40%, but remains elevated, indicating persistent crowding. Our interactions with institutional investors suggest some have significantly reduced tech positions, while others remain bullish and have even increased holdings. Thus, the clearing process appears incomplete in the near term. Historically, as seen in the 2020-2021 semiconductor cycle, such adjustments can last about one quarter, followed by underperformance for roughly three quarters, before industry fundamentals reassert themselves.
Awaiting the return of incremental capital
The market currently suffers from a lack of incremental capital, with a clear stock-picking game among existing investors. Margin financing has been net selling for three consecutive weeks, and ETF inflows are insufficient. The divergent paths of these two main incremental capital sources have created a stalemate, leaving the index without clear directional bias. A possible inflection point could arrive within the next two weeks, ahead of the September 24th US visit. Historically, such events tend to boost risk appetite beforehand, which may fade after the news is digested. Another potential trigger could be the market approaching late-July lows, where national teams and long-term insurance funds may step in to provide support.
Awaiting fundamental verification or significant policy measures
The market is currently in a policy and data vacuum. The economic fundamentals show a K-shaped recovery, with strong exports and tech, but weak domestic demand and investment. Economic data is not robust enough to drive a rally, nor weak enough to prompt policy action. With the recent Politburo meeting and property sector measures already implemented, policy expectations are relatively low. Potential catalysts could emerge in late October with the release of third-quarter GDP data and the National People's Congress Standing Committee meeting, possibly leading to fiscal adjustments. December also presents a window with the Politburo meeting and the Central Economic Work Conference, which could outline next year's economic policies. However, expectations for significant stimulus remain subdued given the upcoming political cycle.
In summary, we maintain our view that the A-share market will continue to trade in a volatile range. The current weakness reflects unresolved uncertainties, including the Fed's rate decision, tech positioning clearing, incremental capital flows, and policy direction. We expect the narrow range to persist, with potential turning points possible in September and October. We advise investors to remain patient and position at lower levels once pessimistic expectations are fully priced in.
Balanced allocation with flexible adjustments to navigate the market
In a volatile market, the probability of a unilateral index breakout is limited, and systemic downside risk is also controllable. The market is likely to maintain a "top and bottom" range-bound pattern with intense stock-picking. The core contradiction lies in market structure rather than the index itself: overly crowded hot sectors offer poor risk-reward for chasing gains, while low-valuation sectors await catalysts for catch-up. Therefore, industry allocation should avoid betting on a single track, instead using a balanced portfolio to capture rotational returns. The recommended three-tier structure is: first, retain high-growth offensive positions focusing on AI computing power, AI applications, innovative drugs, and industrial metals; second, maintain dividend-paying core holdings in shipping, non-bank financials, and banks to hedge volatility; third, reserve low-valuation rebalancing positions in petrochemicals, basic chemicals, coal, and agriculture. Adjustments should be flexible, rebalancing based on earnings, positioning, and catalysts.
High-growth offensive positions
In AI computing power, the focus is shifting from price increases to volume growth. Pricing power is gradually moving downstream, potentially benefiting applications over hardware. The slope of price increases is peaking, while shipment volumes are accelerating with capex and order visibility. Chips such as optical modules, PCB/CCL, AI servers, advanced packaging, and domestic AI chips are showing accelerating logic. Position clearing in AI hardware is still pending, making late September a potential entry point. AI applications are experiencing explosive growth, with daily token calls surging significantly. Companies like Zhipu and Kingsoft Office are beginning to deliver earnings, yet valuations and positioning remain misaligned, with upstream hardware heavily overweight and downstream applications underowned. This presents an attractive opportunity. For innovative drugs and industrial metals, we retain positions. Innovative drugs are benefiting from internationalization, technological breakthroughs, and earnings delivery. Industrial metals face supply-demand mismatches with demand from AI data centers, grid upgrades, and new energy vehicles supporting prices. However, these sectors are rate-sensitive, so exposure is calibrated lower within a balanced allocation.
Dividend core holdings
In addition to offensive positions, we have repeatedly emphasized increasing allocation to dividend assets. These provide a buffer against potential Fed rate hikes and market volatility. Shipping, non-bank financials, and banks are preferred. Container and crude oil freight rates have surged recently, likely boosting shipping earnings and dividends. The financial sector trades at low valuations with significant institutional underweighting. Banks, with a price-to-book ratio of 0.52 times near decade lows and dividend yields exceeding 4%, are attractive to long-term capital. Non-bank financials, particularly insurance and brokerages, show strong earnings momentum. Should these sectors rally excessively and dividend yields lose appeal, we recommend realizing gains and rotating to other dividend names.
Low-valuation rebalancing positions
Market flows are increasingly diversifying away from single tracks. We seek sectors with "institutional underweight + cheap valuations + improving fundamentals." Petrochemicals benefit from high oil prices and solid upstream earnings. Basic chemicals are at an inflection point with reduced capex and improving margins. Coal offers high dividend yields and strategic security value. Agriculture is in a cyclical recovery phase. These sectors provide catch-up potential once catalysts emerge.
Risks
Downside risks include: (1) Domestic support policies underperforming expectations, prolonging economic weakness and pressuring markets. (2) Escalating Middle East geopolitical tensions, pushing oil prices higher and constraining central bank easing. (3) US market volatility exceeding expectations, spilling over to A-share sentiment.
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