Market Review and Analysis
The A-share market experienced a volatile week, initially rising before giving back gains, with most major indices closing lower. Trading volume contracted, with average daily turnover around 2.98 trillion yuan. A rotation of funds triggered adjustments within the technology sector due to high internal crowding, with capital shifting towards dividend-paying sectors like coal and utilities, as well as pro-cyclical sectors, with relatively active buying at lower price levels.
Key Macro Events and Data for the Past Week
China's May manufacturing PMI fell to 50.0, down 0.3 percentage points and slightly below expectations. The production index remained in expansion at 51.2, while the new orders index dipped below the 50-point threshold to 49.9. This indicates resilient supply is offsetting weaker demand, continuing the trend of stronger supply relative to demand. By enterprise size, the PMI for large enterprises was 51.1, still in expansion, while for medium and small enterprises it was 48.6 and 48.5 respectively, indicating continued contraction and highlighting greater pressure on SMEs and traditional industries. On price components, the main raw material purchase price index (60.5) and the ex-factory price index (51.9) declined from the previous month but remained in expansionary territory for the fifth consecutive month. The characteristics of imported inflation and upstream strength relative to midstream and downstream sectors persist, with the cost-to-price transmission still underway, maintaining pressure on midstream and downstream industries. The non-manufacturing PMI rose to 50.1, with services at 50.3 and construction at 48.8, showing a slightly stronger recovery in services than construction activity. The structural pattern of "services > goods, external demand > domestic demand" remains unchanged.
The US released its May non-farm payrolls data. Non-farm payrolls increased by 172,000, significantly exceeding market expectations. The unemployment rate was 4.3%, and average hourly earnings grew 3.4% year-on-year, in line with expectations. Regarding employment, US job additions remained high in May, exceeding 100,000 for the third consecutive month. Goods-producing industries added 28,000 jobs, while within services, leisure and hospitality added 70,000 jobs and government added 52,000. The notable growth in leisure and hospitality may be significantly related to employment boosts ahead of the upcoming World Cup in the US. Additionally, seasonal adjustment factors may have contributed to a larger increase in local government employment. Both unemployment and wage data met expectations, suggesting that demand for long-term positions has not significantly improved, and real purchasing power has not increased amid high inflation. The stronger-than-expected payrolls data had a notable impact on capital markets. Market expectations for a 2026 Federal Reserve rate hike have now stabilized above 50%. Observers will watch for further upward movement in the US economy and inflation, as well as potential political intervention in Fed policy. In the short term, attention turns to the upcoming June FOMC meeting for insights on the future monetary policy path.
Market Outlook
Short-Term Perspective:
As crowding in the technology sector continues to increase, capital divergence is intensifying. Within this narrowing focus, high-crowding segments like computing power have experienced significant volatility and adjustment, while lower-priced pro-cyclical sectors have seen reverse capital inflows. The stronger-than-expected US jobs data triggered a simultaneous adjustment in overseas tech stocks, casting a shadow over sentiment for the sector. Looking ahead, the underlying fundamentals of the technology sector remain sound. However, with increasing pressure on the discount rate (denominator), short-term caution is warranted regarding potential negative feedback loops driven by liquidity factors in crowded trades. A degree of risk aversion is advisable, with increased short-term opportunities in value-oriented dividend stocks and micro-cap sectors. Market timing may be guided by signals from major events in June, such as large-scale IPOs in China and the US, and the Fed's policy meeting. From a medium-term perspective, the high growth trajectory of the technology sector remains its strongest support for being a market focal point. Lower-priced pro-cyclical sectors are more likely to see rebounds, but the fundamental conditions for a sustained shift from high-valuation to low-valuation stocks are still lacking.
Medium to Long-Term Perspective:
From a medium-term view, optimism for the technology sector remains (its industrial trends and growth momentum are not short-term phenomena). Furthermore, once macro disturbances subside or a new consensus is formed, the market will likely seek new narratives that can be extrapolated linearly. From the perspective of US and Chinese economic fundamentals, both sides have some room for monetary and fiscal policy maneuvering. Short-term fundamental shocks appear manageable, especially given China's already accommodative liquidity environment and ample market potential. Over a longer horizon, if global energy supply tightness persists, China's advantages in real-economy supply chains, new energy industries, and overseas expansion could create new market catalysts, potentially offering opportunities beyond technology. Additionally, domestic demand policies aimed at stimulating the economy could serve as a catalyst for a shift in market style.
In the long term, the trend of deepening strategic competition between the US and China continues. As the limits of US policy become clearer and deficits persist, international capital markets have begun to question US governance capabilities and institutional credibility. However, the US dollar's credit standing has not yet been fundamentally challenged, and US Treasury bonds do not currently pose a major risk. It is important to monitor changes in US capital markets and whether China might encounter a strategic opportunity. Currently, amid US economic uncertainty and within the Fed's rate-cutting cycle, the Renminbi has appreciated against the US dollar. Sustained foreign capital inflows, if they materialize, could provide support for China's equity market. Secondly, driven by multiple regulatory policies, trends towards passivization in public fund products and the long-term orientation of capital from insurers and securities firms' proprietary desks may further intensify (A-share listed insurers hold 2.7 trillion yuan in stocks, with an investment allocation ratio of 12.1%, a historical high; both stock and fund allocation ratios exceed 10%. Policies like lowering risk factors for insurers' stock holdings are expected to continue). From the household perspective, improved wealth effects in the equity market could facilitate the flow of excess household deposits into stocks (excess deposits are around 55 trillion yuan, with only about 22% of household financial assets currently allocated to funds and stocks). From a medium to long-term perspective, the market may still see inflows from allocation-oriented funds.
Sector Views
For more defensive, dividend-oriented sectors, a short-term increase in allocation is suggested, as deteriorating market sentiment could attract incremental funds.
Regarding more offensive sectors, continued focus is placed on technology (catalysts remain frequent, with earnings realization in computing hardware validating strong momentum, and inflation trading within the computing chain persisting. In the short term, maintain focus on thematic investment areas with dense catalysts like domestic computing, aerospace, and robotics, as well as high-growth overseas segments related to AI, power infrastructure, power equipment, and internal combustion engines).
Inflation and high-growth directions (global energy inflation, or even stagflation expectations, have not subsided. Related sectors like coal chemicals, oil tanker shipping, agriculture, new energy (wind, solar, storage), and coal may benefit sentiment-wise).
Sectors with independent logic (less affected by energy narratives but possessing their own catalysts or logic, such as innovative drugs with year-on-year growth in R&D spending, and service consumption where penetration rates are climbing further with policy support).
Views on Major Themes
Technology: Its strategic importance will be further reinforced in the upcoming Five-Year Plan period, with continuous domestic and international catalysts. Investment selection and timing should be anchored by both future narratives and current earnings. Focus on overseas AI computing and power chain, semiconductor memory, and key segments of domestic computing. Monitor overseas policies, investment guidance, and geopolitical uncertainties.
Property: Fundamentals have entered a bottoming phase, but risks remain, including persistently weak demand affecting investment and policy implementation falling short of expectations. Related stocks exhibit strong sensitivity to catalysts and could deliver outperformance when catalysts emerge.
Consumption: Fundamentals remain under pressure, with policy shifting from "short-term stimulus" to "long-term institutional building." The increasing penetration of service consumption with policy support is a key future focus. Areas to watch include duty-free, travel and tourism, wellness and leisure living, home services, and inbound consumption scenarios. Continued tracking of household income and confidence recovery is necessary.
Risk Disclosure
The information in this material is sourced from publicly available information, and no guarantee is made regarding its accuracy, completeness, or reliability. The views and analyses herein represent only the research team's perspective and under no circumstances constitute actual investment results, nor do they constitute investment advice or guarantees to any investor. No media, website, or individual may reproduce this material without authorization.
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