The A-share market experienced a weak performance in July. Externally, concerns over a U.S. Federal Reserve rate hike resurfaced, and recurring U.S.-Iran conflicts intensified competition for control of the Strait of Hormuz, leading to a short-term rebound in oil prices. The Fed kept its policy rate unchanged in July, with the 10-year U.S. Treasury yield rising to 4.75% and the U.S. dollar index oscillating at elevated levels. Domestically, cumulative gains and crowding in hot themes from June surged briefly, making the market sensitive to liquidity expectations.

During the market adjustment, AI-related sectors like semiconductors, electronic hardware, and communication equipment broadly declined. After the correction, capital rebalanced toward industries with better performance fundamentals, including non-ferrous metals, chemicals, new energy, electric power, grid equipment, engineering machinery, pharmaceuticals, and high-dividend stocks. Since late July, the index has been in a period of consolidation, potentially entering a recovery phase following a sharp downturn.

The Politburo meeting on July 30 maintained a positive stance on macro liquidity and the stock market, proposing "moderately accommodative monetary policy" and "enhancing capital market resilience and confidence." In a report released on July 20, the firm argued that factors triggering the adjustment are mostly short-term and have been largely digested. The A-share market currently has several favorable conditions—such as support from mid-year earnings reports, valuations at low levels compared to global markets, and the entry of long-term funds—with short-term liquidity risks clearing, warranting no pessimism on the A-share outlook. From a medium-term perspective, the firm firmly believes the A-share market will continue its volatile upward trend since September 24. A report from last year noted that the resonance between international order restructuring and China's industrial innovation trends is the core driver of this rally and the revaluation of Chinese assets. These two conditions remain unchanged and will continue to support Chinese asset performance.

Since July 20, the Shanghai Composite Index has oscillated at key levels, with clear style divergence. High-dividend sectors have shown relative strength. Given the current internal and external environment, the market may enter a recovery phase in August after a significant correction.

Sector Performance: Energy and Basic Materials

Commodity prices showed divergence by the end of July. Recurring U.S.-Iran conflicts caused crude oil (up 22%) and related chemical indices (up 6%) to rebound. Factors like Strait traffic and oil inventories suggest high oil prices may become the norm for some time. Markets are adopting a wait-and-see attitude toward Fed policy, with the 10-year Treasury yield rising to 4.75%. Gold (up 1%), base metals like copper (up 3%), aluminum (up 3%), and zinc (up 2%) saw minor increases, while small metals like tungsten (down 17%), antimony (down 23%), and cobalt (down 7%) fell. Domestic real estate-related commodities such as coking coal (down 8%), coke (down 10%), rebar (down 2%), iron ore (down 4%), cement price index (down 3%), and Nanhua glass index (down 9%) continued their downtrend.

Sector Performance: Industrial Goods

Export resilience supports demand. External demand growth outpaces domestic demand, with China's exports rising 18% year-on-year in the first half of the year. The "new three" exports grew 52%, contributing over 30% to export growth. In June, exports of lithium-ion batteries, electric vehicles, and solar cells grew 24%, 109%, and fell 17% year-on-year, respectively. In machinery, domestic and overseas sales of engineering machinery maintained high growth, with excavator domestic sales up 20% and export sales up 34% in June. In power equipment, due to a high base from pre-installation rush before May 31, 2025, new installed capacity fell 46% in the first half. In June, declines in new wind and solar capacity narrowed, and photovoltaic prices were flat month-on-month in July, with demand stabilizing marginally. Auto sales in June saw domestic fuel vehicles and new energy vehicles decline 34% and 7% year-on-year, respectively.

Sector Performance: Consumer Goods

Consumer endogenous momentum needs improvement. Due to high bases from last year's trade-in policy and weak internal momentum, Q2 consumption data was poor. Entering Q3, the high base effect from trade-ins may weaken marginally, but subsequent consumption trends need monitoring. Sales of washing machines, refrigerators, and air conditioners fell 10%, 3%, and 21% year-on-year in June, respectively. Catering income and retail sales in social retail grew 1.2% and 0.9% year-on-year. By July, Moutai's ex-factory and wholesale prices were flat and up 5% month-on-month, respectively, indicating the baijiu industry is in a bottoming-out phase. The average hog purchase price was 12 yuan/kg, up 9% month-on-month, with hog supply at historically high levels. Long-term, China's large market, especially service consumption, has potential to increase its contribution to economic growth during the transition. The July 30 Politburo meeting emphasized "adapting to consumption needs of different groups to expand quality supply and tap service consumption potential." The State Council approved the "15th Five-Year Plan for Expanding Consumption" on July 13, the first national-level special plan in the consumption sector, proposing high-quality employment, multiple channels to increase residents' income, improving social security policies, and increasing public consumption reasonably.

Sector Performance: Technology

AI narratives are shifting toward applications. On July 9, OpenAI released the GPT-5.6 series, upgrading ChatGPT from a Q&A tool to an execution system. On July 30, OpenAI announced price cuts for its two latest large models, GPT-5.6 Terra and GPT-5.6 Luna, with the trend of lowering large model prices spreading globally, potentially driving AI applications into industrial, office, consumer, and financial sectors. Terminal demand saw domestic sales of mobile phones, laptops, and computer hardware/displays/peripherals fall 14%, 3%, and 23% year-on-year in June, respectively. The semiconductor sector remains strong, with global and Chinese semiconductor sales up 104% and 89% year-on-year in May.

Sector Performance: Financials

Stock market trading activity declined in July, but policies signaled stability. By June, insurance industry premium income grew 3% year-on-year, with total assets up 12%. In July, the average daily turnover of all A-shares was 2.7 trillion yuan, down 0.4 trillion yuan month-on-month. By month-end, margin balance was 2.6 trillion yuan, down 0.4 trillion yuan month-on-month. The July 30 Politburo meeting proposed "enhancing capital market resilience and confidence," maintaining a clear stance on stabilizing the capital market.

Sector Performance: Real Estate

The policy environment remains stable, with some top cities seeing supply clearing. In July, the sales area of commercial housing in 30 large and medium-sized cities was 6.57 million square meters, up 3% year-on-year but down 24% month-on-month. In June, the 70-city housing price index for new homes and second-hand homes fell 4% and 6% year-on-year, respectively. The July Politburo meeting proposed "stabilizing the real estate market." The firm's real estate team believes this endogenous recovery fundamentally stems from supply-side clearing in top cities. Short-term policy changes are unlikely, suggesting a focus on the natural evolution of industry fundamentals and macro-level domestic demand expansion policies.

Investment Strategy: Choices in the Recovery Phase

Given the rapid July market adjustment, attention should turn to two main themes: 1) Growth stocks still need careful selection: After a sharp tech-style correction, crowding has significantly decreased. Industries with high enough growth can offset valuation drag with earnings expansion. High-growth AI infrastructure links, such as optical communications and PCBs, have strong certainty this year. Semiconductor and computing sectors need matching fundamentals with valuations, and tech growth may show divergence. Innovative drug companies are entering clinical data validation stages, warranting bottom-up attention. 2) Cyclical recovery: Fundamentals in many areas are recovering from cycle bottoms. Consider geopolitical situations and production capacity cycles, focusing on sectors with improving earnings and supply-demand dynamics, such as grid equipment, petrochemicals, engineering machinery, and non-bank financials benefiting from capital market improvement. Precious metals are also worth attention after significant adjustments. Pure domestic demand industries are still slow in fundamental recovery and need further observation.

For August, overweight sectors include basic chemicals, communication equipment, power electrical equipment, machinery, and securities. Underweight sectors include construction and engineering, textiles and apparel, education, light industry and home furnishings, and retail.