Equity Market Review: Overseas Volatility, Domestic Recovery Stalls

During the week from August 24 to 28, U.S. and A-share markets strengthened relative to the prior week, while Hong Kong-listed shares weakened. The Shanghai Composite Index and the STAR 50 Index rose by 1.2% and 0.5%, respectively, whereas the Shenzhen Component Index and the ChiNext Index fell by 1.0% and 3.4%. Trading volume and sentiment surrounding the AI supply chain remain the primary constraints on the height of the current A-share recovery. One notable difference compared to the April rebound is that volumes have continued to shrink since August 4, reflecting caution amid earnings season, geopolitical tensions, and monetary policy uncertainty. While there is evident willingness to add risk on a structural basis, short-term constraints are mainly at the sector level, particularly within the tech-manufacturing chain represented by AI. The current headwinds stem from several sources: first, the unwinding of crowded trades requires time; second, recent fluctuations in U.S. Treasury yields, geopolitical events, and monetary policy are pressuring valuations in the technology sector, with markets preferring low-volatility, stable assets; third, following the Jackson Hole central bank symposium, the baseline scenario for global asset pricing may be shifting from inflation expectations to expectations of further Federal Reserve rate hikes.

First-Half Earnings: Focus on Sectors with Upside Surprises

For the first half of 2026, aggregate revenue and net profit attributable to shareholders for all A-shares grew by 7.6% and 16.9% year-over-year, respectively, with growth rates accelerating by 2.3 and 10.2 percentage points compared to the first quarter of 2026. Excluding non-bank financials, net profit attributable to shareholders rose by 10.8% year-over-year in H1 2026, and by 3.2 percentage points quarter-over-quarter in Q2. Based on earnings expectations, some industries have delivered results exceeding already-high forecasts: tech manufacturing (electronics, defense, computers), cyclical sectors (petrochemicals, non-ferrous metals), and non-bank financials.

Sector Positioning Repair Still Needs Time

Trade concentration remains a key gauge for short-term market dynamics. As of August 21, the share of trading volume from the top 5% of stocks has declined from a high of around 50% to 47.5%, indicating a slow clearing process. Historically, a full unwinding of crowded positioning typically requires concentration to fall to the 40%-42% range to signal medium-term resolution. The market is likely to enter a phase of sustained fluctuation, gradually completing the rotation of holdings. While short-term rebounds are possible, investors should temper expectations for the scope and sustainability of any rally until trade concentration declines significantly.

Investment Strategy: Stay the Course on Rebalancing, Target Earnings Surprises

In the near term, as crowded trades continue to unwind and volatility may remain elevated, we advise continuing to position for rebalancing opportunities. Structurally: (1) We continue to strongly favor small-cap and micro-cap stocks, focusing on the CSI 2000 and Wind Micro-Cap indices. (2) Focus on sectors with net profit growth exceeding expectations: electronics, defense, computers, petrochemicals, non-ferrous metals, and non-bank financials. (3) In sector rebalancing, favor non-ferrous metals, basic chemicals, new energy, agriculture, healthcare, and selected midstream manufacturing such as shipbuilding. (4) High-dividend sectors like banks, utilities, and power offer attractive risk-reward profiles in a volatile market.

Over the medium term, the bull market thesis remains intact, but expectations for the slope of gains should be revised lower. Technology remains the core medium-term theme, though the potential for a broad-based rally has diminished. Future returns will increasingly derive from selective positioning within the tech space. We continue to seek intersections of 'secondary ignition' and 'narrative tension,' focusing on AI materials, domestic computing power chains, PCB and optical module upstream in overseas computing power chains, programming agents, enterprise-level agents, and other AI application directions, as well as new growth areas from tech spillovers such as power equipment, electricity, energy metals, and liquid cooling.

Risk Warnings:

Unexpected macroeconomic policy shifts; geopolitical risks beyond expectations; historical data does not guarantee future performance.