A shares seen as promising despite pullback

While the A-share market underwent some adjustments on Thursday, experts are still upbeat on the A-share market performance in the following months, which is supported by China's continued industrial restructuring and economic recovery.

The benchmark Shanghai Composite Index shed 1.52 percent to close at 4177.92 points on Thursday, while the Shenzhen Component Index dropped 2.14 percent. Trading remained active, with total trading value of the three major exchanges topping 3 trillion yuan ($442 billion) for the seventh consecutive trading day.

Experts from China International Capital Corp Ltd said they are firmly confident of an upward trend in the A-share market in the mid-term, though fluctuations may be unavoidable. The country's stability amid global uncertainties and China's industrial innovation will serve as the core drivers, they said.

Xia Fanjie, a strategist at China Securities, said that a slow bull market driven by structural opportunities will typify A-share market performance in the second half.

Rising demand for computing power will be a major theme, as it is still too early to declare a bubble in the sector. Investors are recommended to look for opportunities in sectors of optical modules, printed circuit boards, advanced packaging, memory chips, liquid cooling and heat dissipation, data center power supply, computer power leasing and cloud services, Xia said.

Economic recovery is another major reason for a positive outlook on the A-share market in the coming months. The producer price index is expected to recover on a quarterly basis, while external demand will remain strong. In such a context, resource companies specializing in oil and gas production, coal, chemicals and nonferrous metals are the most likely to see their profitability improve. Opportunities can also be found among new energy manufacturers with global competitiveness, he said.

Morgan Stanley analysts said in a recent report that A-share company earnings will improve moderately in the following months.

Their optimism is supported by China's stronger exports amid an accelerating artificial intelligence and energy capex cycle, near-term reflation signs, Chinese currency appreciation against the US dollar, and a cooling down in large-cap platform companies' price competition amid strict government regulations.

The investment bank continues to prefer the A-share market over offshore alternatives mainly because of the higher concentration of high-end upstream manufacturing and hardcore tech companies in China. There is a high likelihood that A-share initial public offerings will trigger greater domestic investor participation, according to the report.

"We do believe that the sheer size of opportunities in China's equity market at the single stock and thematic level — fueled by solid fundamentals and promising themes such as tech localization and high-end manufacturing — should allow investors to construct a targeted Chinese portfolio that outperforms other peers," said Laura Wang, the investment bank's chief China equity strategist.

The tech-heavy ChiNext board in Shenzhen topped the 4000-point level on Wednesday to reach a record high. This has shown the market's recognition of China's ongoing industrial restructuring and upgrading, said Guo Yiming, head of investment advisory at Jufeng Investment.

Companies specializing in power equipment, communications, electronics, pharmaceuticals, biotech and computers — which make up most of the ChiNext's constituents — have fueled the recent rally. This is in line with the structural opportunities in the current A-share market, which is supported by the continued rising demand for AI computing power and the development of new energy industries, Guo said.

Amid ample market liquidity and continued policy support for emerging industries, the ChiNext is expected to receive a relatively high level of attention, he added.

But it should be noted that a structurally diverged performance is implied in ChiNext's recent bull. The index has been mainly propelled by the market leaders, as the index's top 10 heavyweights now take up 57 percent of the board's entire market cap.

Therefore, individual investors should avoid being overly affected by market sentiment, but rather focus on the prosperity and profitability of the companies they have chosen, said Guo.