This week, the A-share market experienced volatile adjustments, with most major broad-based indices declining. The all-A index fell by 1.17%. Among the major indices, only the BSE 50 gained 4.42%, while the STAR 50 index dropped significantly by 4.74%.
In terms of market style, small-cap stocks performed relatively better this week. The CSI 1000 index, which fell 0.81%, outperformed the CSI 300 index, which declined 1.54%. All five major style indices recorded losses, with the consumer and stable styles dropping 3.10% and 2.57%, respectively.
Looking at sectors, gains were scarce among primary industries. The top performers were coal, communications, and machinery equipment. Conversely, power equipment, building materials, and the diversified sector were among the biggest decliners.
Market Activity and Capital Flows
Trading activity in the A-share market cooled slightly this week. The average daily turnover was 2,948.5 billion yuan, a decrease of 267.37 billion yuan from the previous week. The average daily turnover rate also fell to 1.969%, down 0.06 percentage points.
As of Thursday, the balance of margin trading and securities lending stood at 2,920.685 billion yuan, an increase of 8.294 billion yuan from the prior week.
Data from EPFR shows that from May 28 to June 3, global funds recorded a net outflow of $4.43 billion from A-shares, an improvement from the previous outflow of $6.374 billion. Within this, overseas funds saw a net outflow of $1.527 billion, compared to an outflow of $859 million previously.
Valuation Changes
As of June 5th, the trailing P/E ratio for the all-A index fell 1.09% from last week to 23.67 times, placing it at the 94.83rd percentile since 2010, indicating a historically high level. The price-to-book ratio based on the latest financials declined 0.94% to 1.89 times, sitting at the 53.12nd percentile, which is around the historical median.
The equity-bond yield spread for the all-A index was 2.5046%, positioned near -1.45 standard deviations from its 3-year rolling average of 3.2957%, and at the 43.73rd percentile since 2010.
Investment Outlook and Key Considerations
In the current phase of market rotation, investors should focus on three primary areas. First, external headwinds persist. The stronger-than-expected U.S. non-farm payrolls data has heightened market expectations for a Federal Reserve rate hike this year, leading to rising U.S. Treasury yields and weakness in overseas equity markets. These marginal changes in overseas liquidity are likely to cause periodic disruptions. Additionally, ongoing tensions in the Middle East continue to create volatility in global crude oil and commodity pricing.
Second, sector earnings expectations remain a crucial driver of rotation. Disappointing AI revenue guidance from Broadcom triggered a sell-off in U.S. semiconductor and AI computing stocks, compounded by Fed rate hike fears, causing the Philadelphia Semiconductor Index to drop over 10% in a single day. This sentiment propagated through the global supply chain to Asia-Pacific markets, accelerating the shift from high-valuation to low-valuation sectors and sector rotation. The sustainability of industrial prosperity and profit growth warrants close monitoring going forward.
Third, policy and regulatory direction are profoundly influencing capital allocation logic. Recent developments, including adjustments to public fund performance benchmarks, new policies to promote high-quality development in the private fund industry, and a crackdown on illegal cross-border securities activities, are working to cleanse the market environment. Capital allocation is expected to gradually tilt towards policy-supported real industries and high-quality sectors.
Allocation Strategy and Opportunities
A balanced strategy focusing on "technology rotation and defensive allocation" is recommended. Key areas to watch include sectors benefiting from product price increases and earnings recovery, such as basic chemicals, petrochemicals, non-ferrous metals (minor metals), building materials, and steel.
Investors should also recognize the value of defensive positions in sectors like coal, coal chemicals, finance (banks), utilities, and new energy.
While the long-term trend for technology remains intact, driven by industrial shifts and earnings support, certain segments with solid fundamentals may continue to benefit. However, risks of short-term trading concentration and external sentiment volatility require caution. As some high-flying themes diverge, internal rotation characteristics may emerge. Focus areas include semiconductors, other electronics, commercial aerospace, communication equipment, computing power, data storage, humanoid robots, and energy storage.
Risk Factors
Key risks include external uncertainties, policy measures falling short of expectations, unstable market sentiment, and ongoing liquidity adjustments.
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