Preface

This article restates the main conclusions of a recent strategy note by Yao Pei of HuaChuang Securities. It aims to present a clear, neutral English summary that preserves the original report’s central view: the bull market is not necessarily over if valuation normalization, earnings recovery, and sustained AI-driven investment continue. The following sections synthesize the note’s key points about near-term liquidity dynamics, drivers of growth into 2027, the durability of the AI cycle, and portfolio positioning outside AI. Emphasis is applied to critical ideas and evidence while removing promotional language, so readers can quickly grasp the reasoning and risks behind the firm’s outlook.

Lazy bag

Key takeaways: valuation has fallen significantly, earnings trends remain intact, and AI industry momentum continues. Near-term gains depend on a recovery in dollar liquidity and the arrival of incremental domestic policy. If policy measures appear in autumn, index breakthrough and a sustained earnings upswing for 2027 become more likely. Diversify: AI plus cyclical/resource plays, high-dividend stocks, and leading large caps for stability.

Main Body

The original strategy paper by Yao Pei assesses China equity markets in three time horizons: the remainder of 2026, the outlook for 2027, and the persistence of the AI-led cycle. It supports a cautiously optimistic view that a bull market can persist if three pillars hold: normalized valuations, improving corporate profits, and continued AI investment. Below, I present an objective, consolidated narrative of the evidence, logic, and portfolio implications.

1) Near-term dynamics (rest of 2026). The report documents micro-liquidity risks that have largely eased and attributes the market rebound to several observable indicators. Trading turnover and credit spreads have declined toward low levels seen in prior market troughs, while broad-based ETFs recorded large net inflows in mid- to late-July. Volume-weighted long-term moving averages show that benchmarks such as technology-heavy indexes remain near historical support levels. Importantly, the trajectory of U.S. dollar liquidity is a conditional determinant of further index gains: a renewed easing of Fed tightening expectations could ease global dollar liquidity and support risk assets. Recent U.S. data and central-bank commentary indicate a mixed picture — less urgency to tighten, but still cautious rhetoric — which has tempered the market’s rate-hike expectations for September.

2) Why the bull market may persist. The strategy emphasizes three reinforcing factors: (a) valuations have materially retreated year-to-date, providing a more attractive entry point after a compression from early-2026 highs; (b) aggregate profitability has not turned down — large industrial firms posted earnings acceleration and consensus net-profit upgrades have improved since May; and (c) the AI investment trend remains intact, with major cloud providers and large-cap AI participants maintaining elevated capital-expenditure plans to expand data-center capacity and compute power.

The report cautions that an index breakout above recent highs (for example, the May high referenced in the Chinese market context) hinges on whether corporate profit recovery is durable into 2027. A favorable scenario would include a concentrated set of incremental domestic policies — similar in timing or scale to the prior year’s measures — that materially support demand and corporate revenue momentum during the autumn months.

3) Sources of incremental capital in 2027. The note maps where new funds might come from: insurance companies (steady, medium-term flows focused on value and yield), foreign investors (strategic allocation shifts under improved external conditions), private funds (performance-driven, opportunistic inflows), leveraged margin funds (a measured and cautious expansion after recent de-leveraging), ETFs (both broad and thematic), household deposits migrating into risk assets as returns materialize, and public mutual funds restoring issuance when performance stabilizes. Each source has a different timing and reliability profile: insurance and foreign capital are more structural, while ETF, private fund, and household flows are more cyclical and performance-dependent.

4) Growth composition and risks. The report highlights that 2026 growth was fueled mainly by export strength and a rebound in producer prices (PPI), which raised both volumes and margins for certain sectors. Looking to 2027, the authors expect a rotation where internal demand, cyclical/resource sectors, and new-energy-related manufacturing could shift from being drags to drivers, while technology manufacturing may accelerate further. Conversely, an initiation of a global rate-tightening cycle could produce outsized drawdowns in liquidity-sensitive tech and high-growth segments.

5) Can the AI trend continue? The authors analyze three short-term concerns: (i) macro-financial spillovers from U.S. fiscal/credit stress into AI financing (given cloud capex is increasingly financed by debt); (ii) whether prior sector concentration in mutual-fund holdings (the so-called "crowding" or "tapeed positions") has eased sufficiently to remove a major overhang; and (iii) whether the current AI peak is a sharp single-top or a multi-peaked, sustained cycle ("M-top").

On financing, while the marginal cost of debt has risen, the report judges that cloud providers’ capex plans are unlikely to be sharply curtailed in the short term because capex remains primarily supported by large providers’ operating cash flow and because a combination of economic cooling and policy responses typically relieves acute financial stress. Regarding crowding, public-fund exposure to TMT/AI rose strongly during the May/June run but has already declined after July’s correction, lessening immediate forced-sell risk. On the shape of the top, AI exhibits features more consistent with an "M-top": technological progress, expanding application scenarios, and a wider set of participating capital sources support a high plateau rather than a narrow single peak.

6) Portfolio implications beyond AI. The note recommends diversification into: (a) cyclical resource sectors — where PPI normalization and constrained global supply suggest improving pricing power and profit recovery; (b) high-dividend, low-volatility stocks — to improve portfolio Sharpe ratios and provide defensive ballast during drawdowns; (c) leading large-cap companies — which tend to outperform during inflation normalization and profit-recovery phases due to stronger ROE resilience; and (d) consumption-linked names — as income and consumer confidence indicators show gradual recovery, supporting selective consumer exposure.

7) Risks and conditionality. The authors outline several downside scenarios: macro growth falling short of expectations, disruptive tariff or trade-policy changes, an adverse global policy shock that undermines liquidity, insufficient household risk-taking to sustain flows, or exogenous black-swan events (geopolitics, abrupt capital-market dislocations) that alter the pathway for incremental funds and earnings recovery. They stress the importance of monitoring policy timing, dollar liquidity, margin-finance trends, and earnings revisions as leading indicators for market direction.

In summary, the report presents a measured bullish case: valuations have corrected, earnings momentum is recovering, and AI-driven capital expenditure remains elevated. The probability of a sustained market advance increases if incremental domestic policy measures are deployed in the autumn and if dollar liquidity becomes more supportive. Portfolio construction should combine participation in the AI theme with allocations to cyclical/resource exposure, high-yield defensive names, and resilient market leaders to balance upside potential with drawdown protection.

Key Insights Table

Risk reminder: outcomes are conditional on policy actions, global liquidity, earnings revisions and investor flows. Historical patterns inform the view but do not guarantee future results.