In recent months, China's A-share market has captivated the attention of international investors, particularly as it finds itself within a historically low valuation rangeThis environment offers a compelling opportunity for foreign investors seeking to allocate capital judiciouslyWith signs indicating a potential acceleration in the recovery of corporate earnings, there is an ongoing influx of both northbound capital and medium to long-term institutional funds into the A-share marketThis scenario sets the stage for sustained upward momentum in the market.

From a funding flow perspective, since hitting rock bottom in February 2024, northbound funds have consistently recorded net inflows into A-shares for three consecutive months, amassing more than 80 billion yuanNotably, by the end of April, these northbound investments rebounded into net inflows, reversing earlier outflows

Just before the May Day holiday, foreign capital was net buyers for four straight days, accumulating purchases exceeding 38 billion yuanA standout day was April 26, when northbound funds saw a net buy amounting to 22.45 billion yuan, marking a record high since the establishment of the Hong Kong-Shenzhen Stock Connect.

According to statistics from First Capital Securities, instances of northbound funds surpassing a single-day net inflow of over 15 billion yuan have been exceptionally rare, occurring merely 18 times in historyA key instance was in November 2022, when continual net inflows from northbound funds significantly influenced a bullish trend in the indices.

When examining the value proposition of the A-share market, as of May 9, the average price-to-earnings (P/E) ratios for the Shanghai Composite Index and the ChiNext Board stood at 13.34 times and 31.01 times, respectively

• Positive Breakthrough! A-shares Approach 3000 Points!
• Projected Relief from Oil Oversupply
• Global Wave of Interest Rate Cuts
• Yen Under Pressure
• Energy Upgrades: Turning Liabilities into Assets

These figures are below the median levels observed over the past three years, suggesting that valuations remain appealingly low for medium to long-term investment.

First Capital Securities posits that in the current context of limited new capital entering the market, the actions of northbound investors are crucial in shaping indicesSince April, the correlation between the net inflow from northbound funds and the Shanghai Composite Index has surged to 0.91. Long-term, the attractive valuation of A-shares continues to draw considerable interest from foreign asset allocations, especially amidst fluctuations in overseas markets post-2024, which tend to boost the allocation ratio to A-shares.

On the macroeconomic front, the first quarter of 2024 saw China's GDP growth accelerating to 5.3%. This robust performance points to a steadily improving economic environment, driven by ongoing investment and production recovery, which in turn supports the fundamentals of the economy

Industry data reveals that from January to March 2024, industrial output for large-scale firms grew by 6.1% year-on-year, while profits from these industrial enterprises increased by 4.3%. The consistently improving demand in industry helps stabilize profit margins, bolstered further by steadfast growth policies that incorporate incentives for upgrading industrial equipment.

Moreover, fixed asset investment nationwide increased 4.5% on a year-over-year basis during the same period, reflecting a stabilization in economic activityRevenue figures from state-owned and controlled enterprises showed a total operational income of 19.8 trillion yuan from January to March, marking a 3.2% increase compared to the previous yearThe total profit for these enterprises rose by 2.8%, showcasing a healthy economic backdrop that supports market stability.

Furthermore, the Securities Firm Industrial Fund underscores that Chinese assets now offer an attractive risk-reward ratio

Initially, the overly pessimistic outlook at the start of the year is gradually being corrected, countering expectations shaped by prior economic data and policy adjustments—this trend stands in stark contrast to the surging markets experienced by the US, Europe, and Japan since 2023, where economic weakness has become more apparentIn comparison, Chinese assets, which remain at low levels while benefiting from marginal economic improvements and supportive policies, emerge as higher value propositions for global investors.

Given these conditions, the attractiveness of A-shares in the global context appears to bolster short-term inflows of northbound fundsAdditionally, analysts point toward a concrete possibility of earnings recovery among listed companies.

As of April 30, among the 5,325 A-share companies that disclosed their first-quarter financials for 2024, statistics reveal that profits are still stabilizing, with noticeable growth in downstream consumer sectors

Revenue growth for the overall A-share market, excluding financials and oil, in the first quarter registered a 0.5% year-on-year increaseHowever, there were declines in net profit, reflecting an anticipated recovery trajectory amid broader economic trends.

Based on data from the previous quarter, while upstream material sectors and midstream manufacturing reported significant net profit declines, downstream essentials and discretionary consumption sectors displayed marked year-on-year improvementsFinancials and real estate construction saw expanded drops, while the services sector enjoyed positive growth.

Reconciling these trends, Everbright Securities highlights that the ongoing adjustment in profit expectations largely mirrors anxiety about future profitabilityHowever, current data suggests an accelerating recovery process in profit margins across listed companies

In terms of return on equity (ROE), non-financial A-shares recorded an 8.1% TTM, indicating a slight improvement since the previous quarter.

In reviewing the performance of various indices, Guosen Securities notes that a notable share of companies within the CSI 300 index had their quarterly profits outperforming expectations, suggesting strong segment performances particularly in manufacturing, indicating a median profit growth rate of 6.71% and 4.71% for manufacturing and consumer sectors, respectively.

In terms of revenue contributions, the service, electronics, automotive, and home appliance sectors led the charge, while oil, automotive, and electronics significantly contributed to net profit growthThe trend toward a revival in these industries enhances the overall market outlook.

In a market ripe with potential, various sectors such as energy, semiconductors, aerospace, machinery, and more are highlighted for short-term investment opportunities.

Despite fluctuations in global market confidence, A-shares represent a sector where many analysts expect continued interest, particularly given the supportive policies in place that enhance corporate profitability.

The automotive sector remains a focal point, benefiting from March's growth in sales, especially in the burgeoning market for electric vehicles

The improving conditions—in conjunction with the low base from March 2023—create a promising landscape for robust profit growth in the automotive industry.

Equally noteworthy is the machinery equipment sector, which, due to recent policy announcements aimed at stimulating demand, is showing signs of recoverySales of various construction machinery models, such as excavators and loaders, are witnessing a narrowing of annual declines, with expectations of benefits from overseas replenishment cycles.

With northbound investments heavily favoring sectors such as automotive, machinery, non-bank financials, utilities, commodities, and transportation—all exceeding valuations of 60 billion yuan—there is a clear inclination toward industries that showcase strong performance and vast market potential