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The market rebounded in May as trade tensions eased, and the overall economy remained stable. Specifically, the MSCI China rose 2.4%, the CSI 300 rose 1.8%, and the Hang Seng Index recorded a 5.3% gain. Biopharmaceuticals and energy sectors performed well. Real estate and semiconductors names underperformed.

The external environment remains highly uncertain

Over the past month, the US has continued its trade policy of “raising the stick high but striking lightly”: on the one hand, it has continued to threaten higher tariffs on China, the EU, and other countries, while on the other hand, it has repeatedly postponed substantive negotiations. In addition, talks between the top leaders of China and the US helped ease trade tensions, but the demands of the two sides remain widely divergent, and the trade war is expected to enter a period of repeated tug-of-war. This repeated game of brinkmanship will lead to continued external turmoil.

The trend of short-term slowdown and medium-term improvement continues.

Affected by the trade war, the overall economic data for April was weak. Except for exports (up 8.1% year-on-year) and industrial added value (up 6.4% year-on-year), which exceeded expectations due to companies stockpiling in advance, all other major economic indicators fell short of expectations. Looking ahead, the economy is expected to remain under pressure. First, the manufacturing PMI for May remained in contraction territory, and the service PMI was also below the average for the same period over the past decade. Second, April credit data showed that corporate and household credit demand declined significantly amid an unstable environment. In addition, recent weak real estate sales and intensifying price wars in the new energy vehicle sector reflect that the current situation of oversupply will continue for some time. The slow response of policymakers also means that there will be no effective catalysts for the economy in the short term. However, compared with the same period last year, policy accumulation has begun to show results, and systemic risks in real estate and local government debt have been basically resolved. At the same time, policy tools are abundant and capable of responding to external uncertainties and weak domestic demand. It is worth noting that the trends of oversupply and deteriorating corporate profitability are gradually improving. For example, the investment intensity of all A-share listed companies is declining, and free cash flow (FCF) has begun to gradually rebound.

Short-term economic slowdown and reasonable valuations are expected to maintain a volatile market pattern

The macroeconomic landscape of insufficient domestic demand, fluctuating external demand, and supply excess has not fundamentally changed, while market valuations have approached the average level of the past decade and are in a relatively reasonable range. Against the backdrop of limited changes in expectations, the market may maintain a volatile trend in the short term. In the medium to long term, the trend of economic improvement remains unchanged, and the market is expected to continue its upward momentum. Downside risks such as real estate and local government debt have been well controlled, industrial development continues to advance, and breakthroughs are being made in areas such as artificial intelligence, high-end manufacturing, and biopharmaceuticals, with corporate earnings also beginning to recover. We remain optimistic about the medium-term outlook for the market.

Repeated tug-of-war triggers short-term economic pressure, prompting a more balanced portfolio allocation

The economy is expected to slow down in the short term, while market valuations are relatively reasonable. We emphasize a more balanced allocation to cope with short-term slowdown pressure. In terms of specific industry selection:

1. Consistent and stable cash returns will become an increasingly important indicator as the economy enters a stage of medium-to-high-speed development. Some industries are entering a mature phase with stable market structures and strong competitiveness, capable of generating stable cash flow and dividend payments. We are focusing on high-dividend companies in sectors such as telecommunications, financials, and utilities.
2. Policy support is expected to intensify, and AI commercialization has not stalled. The internet sector remains under close watch. Meanwhile, the gradually stabilizing economy and recovering demand make certain consumption sub-sectors worth watching.
3. On one hand, China’s manufacturing advantages are being consolidated, while on the other hand, breakthroughs in core technologies are ongoing. We are bullish on high-end manufacturing and hard technology-related targets.
4. The adverse impact of China’s healthcare policies is diminishing, while the industry’s competitiveness is continuously strengthening in global markets. We are actively seizing growth opportunities in the biopharmaceutical sector.
5. The real estate sector is expected to stabilize after a decline, and we are actively participating in the turnaround of the real estate sector and its supply chain.
6. Strengthened supply-side constraints and cost advantages are driving improved profit prospects for the chemical and raw materials sectors, and we are actively participating in these sectors.

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^{Sources: Value Partners, Bloomberg, MSCI, WIND, data as at 6 Jun 2025.
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