CMSC has released a research report examining the outlook for the A-share market following the recent rebound. The analysis focuses on both external and internal factors that are shaping investor sentiment and market direction.
On the external front, tensions in the Middle East and a softer-than-expected US employment report have eased rate hike fears, boosting global risk appetite. Meanwhile, new US restrictions on Chinese technology products are seen as having limited long-term impact, as stock prices will ultimately revert to fundamentals. Sustained earnings growth is the fundamental path to absorbing risk premiums.
On the domestic side, last week saw a recovery in margin trading activity, while equity ETFs shifted to net outflows as market conditions improved. This signals a transition from ETF-driven support to margin-driven momentum, with leveraged funds expected to continue flowing in. The report recommends a balanced allocation across three themes: technology innovation, corporate overseas expansion, and traditional undervalued sectors. Key sectors to watch include electronics, electrical equipment, chemical pharmaceuticals, non-ferrous metals, coal, and non-bank financials.
Looking at the market structure, the rebound is supported by several factors. First, the previous overcrowding in tech stocks and margin pressures have significantly eased, attracting capital back to some oversold quality assets. Second, trading volumes have stabilized and increased, indicating stronger participation. Third, interim earnings expectations are becoming a market focus, with strong performances in tech, resources, and biopharma boosting confidence.
In terms of macro data, July integrated circuit export growth narrowed, while most metal prices rose. Sectors showing improvement include coal and most metals in the resource segment, sustained high momentum in TMT with rising DDRM prices, and a recovery in chick prices and national movie ticket prices.
From a capital flow perspective, ETF redemptions offset net margin inflows, and fund issuance declined. Margin funds saw a net inflow of 26.48 billion yuan over the first four trading days, while newly established equity public funds totaled 4.22 billion units, down 1.57 billion units from the prior period. ETFs saw net outflows of 74.44 billion yuan. Margin funds were net buyers of electronics, non-ferrous metals, and electrical equipment. The scale of net selling by major shareholders increased, while planned selling declined.
The report highlights the domestic semiconductor equipment sector as a key theme. This segment is one of the most technologically complex, strategically important, and ripe for domestic substitution in the semiconductor supply chain. External technology restrictions and supply chain security demands are driving local foundries to accelerate the validation of domestic equipment. Chinese equipment makers are transitioning from single-point breakthroughs to a new phase of category expansion, customer acquisition, and platform-based development.
Overall, the A-share valuation level rose last week, with the All-Share A Index PE (TTM) at 18.1, up 0.6 from the prior week, at the 72.1% percentile of historical levels. Sector valuations diverged, with electronics, building materials, and machinery posting the largest gains, while steel, food & beverage, and beauty & personal care saw the biggest declines.
Risk factors to monitor include economic data missing expectations, incomplete policy understanding, and overseas policy tightening exceeding expectations.
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