After three consecutive weeks of gains, the Shanghai Composite Index edged down 0.33% this week, with the market experiencing some divergence and volatility. For instance, among the STAR and ChiNext boards, the ChiNext Index posted positive returns this week, while the STAR 50 Index recorded negative performance, indicating differing views on future upward momentum and sector leadership. We believe the Shanghai Composite Index has already undergone a certain degree of recovery since the 3,741-point level. Going forward, patience is required, and an overly aggressive stance should be avoided. The focus should be on medium-term and value investing perspectives, with a sharper emphasis on uncovering structural opportunities.
We see that valuations in some sectors of the A-share market remain attractive. There is still a degree of "mispricing" between their earnings growth and expectations for this year and their corresponding sector index performance. Some sectors were even "overlooked and wrongly sold off" earlier, without sufficient recovery. We have constructed a simple and robust framework using consensus forecast data: earnings revision magnitude minus price return. If the difference is positive, it indicates the market has raised earnings forecasts for the sector during 2026, but the stock price has not kept pace (or if the stock price has actually fallen, it can be defined as an "overlooked" asset). This constitutes a quantifiable signal of mispricing.
Based on this indicator, the non-ferrous metals sector shows signs of being oversold. We believe that while the sector has been affected by rate hike concerns and fluctuations in US AI CAPEX growth, its medium-term logic remains intact. Concerns over the US debt problem and the long-term credibility of the US dollar support precious metals valuations. Meanwhile, supply constraints for industrial metals and structural expansion in demand from reindustrialization and new energy sources underpin industrial metal demand. The defense sector has fallen 15.9% year-to-date, yet earnings expectations have been modestly revised upward. This is likely suppressed by factors such as easing geopolitical tensions and the "capital drain effect" from the AI sector. Currently, valuations are at low levels with improving ROE. We believe it exhibits characteristics of an "overlooked asset" and has a foundation for recovery.
From a PB-ROE perspective based on "quality factors" rather than short-term growth rates, the non-bank financial sector presents attractive investment opportunities. Its earnings growth has been confirmed in the first-quarter reports, ROE is on a cyclical recovery path, yet the stock price decline diverges from earnings, with valuation percentiles falling to historically low levels. Additionally, traditional "quality factor" sectors like food and beverage and home appliances have underperformed this year and are currently at the bottom of their business cycles. We believe the performance of these sectors is being suppressed by market style, risk appetite, and subjective judgments on ROE trends, and they have the potential for subsequent recovery. Finally, as public funds' mid-year concentration in heavyweight holdings is at historically high levels, and recent trading congestion remains elevated, the market has experienced a broad rebound recently. After stabilizing, we believe most investors still need to consider rebalancing their portfolios. However, the process of rebalancing across the entire market may still require a certain amount of time. Key focus sectors: pharmaceuticals, non-ferrous metals, media, coal, new energy, brokerages, chemicals, defense, new consumption, internet, etc. Key focus themes: AI applications, commercial aerospace, humanoid robots, etc.
Risk Factors
1) Global AI bubble burst: The current AI industry chain is still in its early stages, lacking sufficient real commercial cash flow support. It is currently driven mainly by long-term industrial narratives, extreme capital concentration, and massive capital expenditure. It has already shown initial characteristics of a tech bubble. If adverse events like capital expenditure cuts occur, it could trigger a systemic revaluation of the entire industry chain, posing risks of a significant pullback, earnings disappointment, and a freeze in primary market financing.
2) US Federal Reserve policy uncertainty: Current US inflation data fluctuates, creating significant uncertainty regarding the Fed's policy path. If inflation rebounds, the Fed may delay the pace of rate cuts, deliver smaller-than-expected cuts, or even restart hikes. This would push up 10-year US Treasury yields and strengthen the US dollar. Global liquidity tightening would suppress valuations of high-valuation AI growth sectors, negatively impact dollar-denominated commodities like gold and industrial metals, and exacerbate northbound capital outflows, dampening overall A-share risk appetite. Combined with diverging dot-plots and weakened policy forward guidance, market interest rate expectations are prone to sharp reversals, causing significant volatility in stocks, commodities, and currencies. There is a risk of periodic pullbacks in sector valuations and commodity prices, requiring vigilance against asset price repricing shocks from a reversal in liquidity expectations.
3) Disappointment in domestic policies and economic recovery: The current domestic economy is still in a stabilizing and recovery phase, with weak endogenous momentum. Real estate sales and private investment recovery are slow. If the pace of economic recovery falters, it will further suppress market earnings expectations and risk appetite.
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