UBS Securities: A-share deleveraging has come to an end. The sector's rotating diffusion of technology stocks is still the main line

The Zhitong Finance App learned that when it comes to deleveraging A-shares, UBS Securities China stock strategy analyst Meng Lei believes it has come to an end, but agrees that the strength and pace of the A-share market rebound may be relatively flat. As the allocation of public funds to the technology sector reached a historical peak at the end of the second quarter, there is limited room for further increases in technology stocks. On the industry side, UBS expects the rising A-share sector to expand. As profit improvements help drive market recovery in the middle and upstream sectors, such as materials or agriculture, the bank is also paying more attention to topics related to overseas, industry, and high dividends.

Despite this, Meng Lei stressed that technology stocks are still the main line, and he is optimistic about growth stocks among A-shares. However, looking ahead to the third quarter, global technology stocks may slow down to a certain extent. After all, discussions on technology disputes are getting higher and higher, and interest rates on ten-year US bonds are rising, so medium- to long-term investors may increase their bond holdings and reduce their allocation to emerging market stocks.

Meng Lei said that A-shares this year were more driven by profit than by higher valuations. He predicts that the overall A-share profit forecast will increase by about 15% this year, and that the factory producer ex-factory price index (PPI) will rise, which will help drive corporate revenue recovery. Furthermore, the capital market was active in the second quarter, which also boosted revenue from financial sectors such as brokerage and insurance.

There has been a very clear improvement in A-share profit margins due to “anti-domestic rolls” and other support policies, and mainland companies' share of overseas revenue continues to rise. However, he agreed that the valuation of A-shares has been suppressed, and he will keep an eye on whether potential capital flows will be released to help increase its long-term average valuation.

Although deposits from mainland residents are expected to become a source of capital to support A-shares for a long time, Meng Lei admits that it is not an “overnight process” and that it is impossible for residents to quickly move all of their deposits out to the stock market. The main reason is that their risk appetite is not very high and they need stable income from some capital insurance, so they may generally prefer insurance products, wealth management products, etc.