In the second half of 2026, a cautious and selective approach is recommended for A-share market investments, with stability taking precedence over rapid gains.
The first half of 2026 saw the A-share market generally advance steadily. While geopolitical conflicts overseas caused short-term volatility, the market was ultimately led higher by robust industries, particularly the technology sector, with the All-Share Index recently reaching a new all-time high. Growth stocks, exemplified by the AI theme, led the gains, while some cyclical sectors also performed well. This overall market performance and style in H1 broadly aligns with earlier expectations.
Looking ahead to the second half of the year, the core drivers for the market uptrend and the revaluation of Chinese assets remain intact: the reshaping of the international order and China's industrial innovation trends. The current market environment is more conducive to long-term, stable progress compared to the past. In a climate of rising investor risk appetite and generally positive expectations, it will be crucial in H2 to monitor the external environment, global high-growth industries (especially AI trends), and the impact of market liquidity. While overall market valuations are reasonable, pockets of overvaluation exist, warranting vigilance against fragility and volatility risks in certain sectors.
Key considerations include: macroeconomic uncertainties persist globally; the AI boom is spreading widely but is not yet in a full bubble phase. Corporate earnings for A-shares are expected to improve overall in 2026, with structural differentiation; growth is projected around 6% for the All-Share Index and 10% for non-financials. Valuations for the A-share market as a whole are reasonable, but some high-valuation sectors require caution due to increased vulnerability to volatility.
In terms of allocation strategy, performance should be the guiding principle. Three main investment themes are suggested:
1) **A More Selective Approach Within the AI Industry Chain**: Following significant commercial breakthroughs, fundamentals have improved. Focus should be on infrastructure segments of the overseas supply chain, such as optical communication and electronic components, where valuations and supply-demand dynamics are favorable. In areas like computing power where valuations have risen faster than fundamentals, greater emphasis on matching earnings expectations is needed.
2) **Energy Constraints and Transition**: AI infrastructure and reindustrialization in some major countries will exacerbate global electricity shortages, while high oil prices are accelerating the energy transition. Beneficiaries in new energy include energy storage batteries, power grid equipment, and upstream energy metals and battery materials. Within traditional energy, sectors like coal chemicals and electrolytic aluminum are worth watching.
3) **Cyclical Reversals**: Based on the stage of the capacity cycle and recovering demand, attention should be paid to sectors approaching an inflection point in supply-demand improvement, such as construction machinery, specific chemical products, optical and photoelectronics, and some innovative drugs.
Additionally, the broad consumer sector may be near a bottom, awaiting signals of domestic demand recovery. High-dividend strategies are likely to remain a temporary, structural feature of the market.