“After the sharp decline in early 2016, the [A-share] market has been range-bound in the past few months. We expect this to continue, as economic growth will likely remain soft, aggregate earnings growth minimal, and macro policies largely steady.”
The bank said it prefers steady-growth, defensive sectors, such as home appliances, food and beverages, and healthcare.
Further progress in supply-side reform may provide some support for A-shares. Near-term tactical opportunities could emerge in the overcapacity-plagued steel and coal sectors.
“We still believe tangible progress in supply-side reform will be an important catalyst for A-shares in the second half. Such progress would boost market confidence in the economy's mid-term prospects, driving an increase in overall risk appetite.”
On the other hand, downside risks may come from spillover effects of overseas events, such as Brexit and the US election and intensifying concerns over defaults on Chinese onshore bonds in sectors with overcapacity.
The upcoming Shenzhen-Hong Kong Stock Connect Programme remains a near-term theme, and global investors may prefer large- and mid-cap growth stocks traded in Shenzhen.
“A-shares' recent resilience is hardly surprising to us, given the extra room for domestic monetary easing created by the EU referendum. Looking ahead, A-shares could react if Europe's economy weakens and hurts Chinese exports, or if there is a major slowdown in China's economy on top of weak global markets.”
Strength in the Shenzhen Composite Index set the stage for the expected linkage between the Shenzhen and Hong Kong markets this year.
Source: FE Analytics