China Merchants Securities has released a research report stating that the A-share market has currently entered an upward phase driven by corporate earnings. It is anticipated that the index will exhibit a pattern of "volatile ascent with higher peaks" in June. Externally, the retreat of oil prices from highs has alleviated imported inflationary pressures. Should the uncertainty surrounding Federal Reserve policy dissipate, market focus is expected to shift back to the primary domestic earnings narrative. AI has become a variable possessing dual attributes of both industrial growth and volatility amplification. While its prosperity has not yet peaked, high trading concentration and large-scale IPOs may exacerbate market fluctuations. Consequently, the market in June will continue to validate the logic of prosperity, with excess returns stemming from performance, supply-demand dynamics, and price-increase chains. Allocations should focus on areas with stronger earnings certainty, such as resource products, the AI computing power chain, and export manufacturing. The key viewpoints of China Merchants Securities are outlined below:
1. Market Trend Assessment and Core Logic: Looking ahead to June, it is judged that A-shares remain in the third upward stage driven by earnings. The year-on-year non-financial profit growth rate, validated by first-quarter reports, has bottomed out and rebounded, showing a distinct K-shaped divergence characteristic. Prosperity elasticity is concentrated in upstream resource products, TMT semiconductors, and certain mid-to-high-end export manufacturing sectors, while consumption and the real estate chain are still grinding at the bottom. Externally, the easing of U.S.-Iran tensions has contributed to a decline in oil prices. Coupled with the "hawkish expectations" surrounding the new Federal Reserve Chair's first interest rate meeting being largely priced in, global liquidity pressures have marginally eased and do not constitute a trend disturbance. On the industrial front, AI has transitioned from a narrative centered on a computing power arms race to an acceleration of commercial implementation. Signals such as DeepSeek V4's adaptation to domestic computing power and overseas cloud providers' capital expenditures expanding into storage/interconnection segments support the sustainability of the main theme's prosperity. Although liquidity faces periodic disruptions from continued ETF net outflows and large-scale hard-tech IPOs like ChangXin, the steady inflow of margin financing balances and the unchanged structural incremental characteristics merely promote survival of the fittest within the main theme rather than a trend reversal.
2. Style and Industry Allocation Strategy: At the style level, it is expected that June will see a shift from value to growth initially, followed by a temporary equilibrium between growth and value styles. Recommended index combinations include CSI 1000, ChiNext Index, CSI Dividend, Value 100, and CSI 800 Materials, among others. From a long-cycle perspective, conditions are not currently ripe for a major style switch between growth and value. At the industry selection level, as A-shares experience volatile upward movement, the pattern of structural differentiation is anticipated to persist in June. Industry allocation is advised to focus on three clues: the technology main theme, high-export prosperity, and recovery at the capacity-clearing inflection point. 1) Prosperity in the technology sector continues at high levels, with diffusion across sub-sectors. Key areas to focus on include memory chips, optical communication, semiconductor equipment/materials, advanced packaging, and commercial aerospace. 2) In the export sector, high-end manufacturing contributes the main incremental growth, demonstrating resilience exceeding expectations. Key areas include optical communication and electronic components, machine tool equipment, photovoltaic energy storage, and aviation manufacturing. 3) Sectors at the capacity-clearing inflection point possess characteristics of "low valuation, high elasticity, and strong reversal," serving as an important allocation direction to balance high volatility in technology. Key areas include basic chemicals, industrial metals, photovoltaic equipment, batteries, and marine equipment.
3. Liquidity and Capital Supply-Demand: Incremental capital supply and demand in June may continue to show net inflows, with margin financing funds expected to remain the main source of incremental capital. Regarding macro liquidity, overall conditions in May were characterized as stable with a slight easing bias, marginal convergence, and a gentle return towards policy interest rates. Attention is needed on the alignment between the acceleration of government bond issuance in June and the central bank's counter-cyclical adjustment efforts. Concerning external liquidity, monetary policy has entered a period of observation and waiting. Subsequent focus should be on oil price trends, upcoming PCE data, and further guidance from Federal Reserve Chair Waller's policy orientation regarding the possibility of interest rate hikes. In terms of stock market capital supply and demand, on the supply side, the scale of newly issued equity-oriented funds continued to increase compared to April, providing important market support; net inflows from margin financing offset net outflows from ETFs. On the demand side, net reduction by major shareholders continued to expand; IPO issuance scale declined while refinancing scale increased, keeping the overall capital demand size stable. In May, margin financing funds became the main incremental capital in the market.
4. Meso-Prosperity and Industry Recommendations: Corporate profits are marginally recovering, with accelerated improvement in profitability within the TMT and resource product sectors. Regarding corporate earnings, first-quarter results exceeded expectations for growth. Industries with accelerating performance are mainly concentrated in certain resource products and high-tech manufacturing, such as industrial metals, precious metals, semiconductors, consumer electronics, wind power equipment, and marine equipment. Industries at an inflection point of optimized supply-demand structures and capacity clearing are mainly in certain consumer healthcare, chemical raw materials, decoration/building materials, and batteries. Considering industrial enterprise profits from January to April, TMT and resource products are still experiencing accelerated profit improvement, while the decline in profits in the consumption sector has narrowed, showing a trend of bottoming out and improvement. In terms of prosperity, areas with higher prosperity in May were mainly concentrated in information technology and financial/real estate sectors. Within the resource products segment, prices of most metals and chemical products declined month-on-month. In midstream manufacturing, excavator sales improved. Prices across most of the new energy industry chain declined. In consumer services, profitability in hog farming continued to decline. In financial real estate, stock market trading activity increased. In utilities, natural gas prices rose. Overall, for June, it is recommended to focus allocations around the technology main theme, high-export prosperity, and recovery at the capacity-clearing inflection point. Key areas include: 1) Sectors with sustained high prosperity along the technology main theme, such as Electronics (semiconductors) and Machinery & Equipment (automation equipment). 2) High-end manufacturing sectors with export advantages, such as Power Equipment (batteries, grid equipment) and National Defense & Military Industry (marine equipment, aviation equipment). 3) Sectors at the capacity-clearing inflection point for recovery, such as Nonferrous Metals (industrial metals, new metal materials) and Basic Chemicals (chemical products, chemical raw materials).
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