Outlook for the A-share Market
Market Analysis
Domestically, the national economy is operating steadily, characterized by improving production, relatively weak domestic demand, and diverging performance between old and new growth drivers. Multiple macro indicators for May and the January-May period of 2026 show that on the production side, the value-added of industrial enterprises above designated size increased by 4.5% year-on-year in May. Within this, high-tech manufacturing led with a 15.1% year-on-year increase, while output of new growth products like new energy vehicles, integrated circuits, and industrial robots saw significant gains. Power generation accelerated, with thermal power slowing and hydropower, solar, nuclear, and wind power showing recovery. Output of raw coal and processed crude oil declined. On the consumption side, divergence is evident. Total retail sales of consumer goods from January to May rose 1.4% year-on-year, but May alone saw a 0.6% year-on-year decrease. Catering services posted slight growth, while major consumption items like automobiles, home appliances, and furniture declined. Online sales of goods and services maintained relatively rapid growth. The investment side is generally under pressure. Fixed asset investment from January to May fell 4.1% year-on-year. Real estate development investment, floor space sold, and completed floor space all declined significantly. Housing prices across 70 major cities were generally weak, with only a few cities like Shanghai and Hangzhou seeing new home price increases. Infrastructure investment grew modestly, while investment in high-tech industries and intellectual property-related sectors performed strongly. The service sector is steadily recovering, and foreign trade shows resilience, with May import and export growth accelerating notably year-on-year. Prices rose moderately, with the May CPI up 1.2% year-on-year and PPI growth expanding. Employment remained generally stable, with the May surveyed urban unemployment rate at 5.1%. Overall, China's new quality productive forces continue to strengthen, but real estate adjustments and insufficient domestic demand remain prominent pressures, requiring consolidation of the foundation for economic stabilization.
Internationally, the United States presents a picture of regional divergence in manufacturing and rising imported inflation, compounded by the FOMC meeting releasing strongly hawkish signals that have completely reversed market expectations for rate cuts. Data-wise, industrial and regional manufacturing data show clear divergence. U.S. industrial production grew 0.1% month-on-month in May, indicating marginal improvement, but the June Empire State Manufacturing Index from the New York Fed was only 5.7, a sharp drop from the previous 19.6, signaling a significant cooling in manufacturing activity in the eastern region. Inflation data heated up again, with the U.S. May Import Price Index surging 1.9% month-on-month, driven largely by a sharp rise in energy prices, leading to a rebound in imported inflation and highlighting persistent inflationary pressures. The Federal Reserve kept its benchmark rate unchanged at 3.50%-3.75% as expected, but the latest dot plot turned significantly more hawkish. Half of the policymakers anticipate at least one rate hike within 2026. Simultaneously, the Fed raised its inflation forecast and lowered its GDP growth projection, establishing a core policy stance of "higher for longer" interest rates. The EIA reported that crude oil inventories for the week ending June 12 fell by 8.263 million barrels, far exceeding expectations, marking the tenth consecutive weekly decline and reaching multi-decade lows. Overall, the combination of recovering industrial production and rebounding imported inflation corroborates the resilience of the U.S. economy and the stubborn nature of inflation, leading to a significant postponement of market rate cut expectations and simultaneous strengthening of U.S. Treasury yields and the U.S. dollar.
Investment Strategy
Looking ahead: 1) Despite the hawkish tilt of the Fed's June meeting dot plot, which has led to a repricing of rate hike risks for the year, the phased easing of U.S.-Iran relations and the signing of a memorandum of understanding to end the conflict provide a temporary respite from global geopolitical pressures. 2) July will usher in the intensive disclosure window for interim performance forecasts, where business momentum is likely to be a core pricing factor. We anticipate that the key growth themes for the 2026 interim reports may primarily focus on three areas: the AI hardware industry chain, upstream cyclical commodities, and midstream manufacturing with advantages in overseas expansion. Key areas to watch include AI hardware, new energy, industrial metals, and chemicals.
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