Last week saw a choppy yet recovering market, with small and mid-cap stocks showing relative strength. Across the Shenwan primary industry indices, agriculture, coal, and non-bank financials outperformed, while communications, power equipment, and pharmaceuticals lagged.
Macro Perspective: Industrial Profit Growth Shifting Toward Midstream Sectors
On the domestic front, the National Bureau of Statistics released industrial enterprise profit data for July 2026. Monthly profits grew 11.2% year-on-year (down from 15.1% previously), while cumulative growth for the January-July period stood at 17.6% (down from 18.7% earlier). A high comparison base and softer revenue growth weighed on the monthly figure, although the cumulative growth rate remains at elevated levels for the year.
Breaking it down, the profit structure is increasingly shifting toward midstream industries. The midstream share of profits climbed to 61.3%, setting a new high for the year, while upstream edged lower but largely stabilized, and downstream lost ground. Sector-wise, electronics and coal mining maintained strong momentum, but steel, chemicals, pharmaceuticals, and autos weakened. Inventory growth continued hitting fresh highs, keeping destocking pressures intact, and the sustainability of earnings growth going forward will hinge on how quickly terminal demand absorbs the elevated stockpiles.
Overseas Developments: Hawkish Tone at Jackson Hole
Abroad, at the Jackson Hole Global Central Bank Symposium on the evening of August 28, Federal Reserve Chair Warsh delivered a hawkish address that walked back what he called the 'mistake' made at the July FOMC meeting. He acknowledged that inflation remains elevated, reaffirmed that interest rates are still the primary policy tool, and signaled readiness to 'act as conditions warrant.' Citing economic resilience, stable employment, and accommodative financial conditions, he argued that current policy risks are tilted toward inflation. He also attributed the 65-month period of above-target inflation to the central bank itself, correcting the vague stance that had 'let the market act on the Fed's behalf' in July.
Overall, Warsh's strong comments on economic growth, his emphasis on slow disinflation progress, and the 'pace' of that decline have significantly raised the odds of a near-term rate hike. Looking ahead, the market broadly interprets this hawkish stance as a corrective step for communication missteps at the July meeting, with the actual path of rates this year still dependent on upcoming growth and inflation data.
Investment Strategy: Prioritizing Balance, Focusing on Tech, Manufacturing, and Financials
With the August period of overseas macro headwinds coming to a close, the focus can shift to sectors with strong earnings performance. On one hand, first-half 2026 profit growth for the broader A-share market was substantial, providing a firm fundamental anchor for Chinese assets as earnings stabilize and rise. On the other hand, as September enters an earnings vacuum period, market pricing power is likely to tilt toward macro policy and industry narratives. The unwinding of short-term overseas risk, coupled with active macroeconomic policies and supportive capital market measures in China, should help stabilize sentiment and boost trading activity.
Specifically, several factors support this view. First, previous panic triggers—such as rising US Treasury yields and Middle East conflicts—have not worsened further, and although the Jackson Hole meeting opened a window for rate hike policy, any shift in rate expectations still depends on subsequent macro data, so overall short-term risk has been contained. Second, recent property policy changes are reshaping China's real estate development model. By reasonably constraining the expansion capacity of credit vehicles in the property sector and limiting the boundaries of risk contagion, these measures help repair the risk premium in capital markets. Third, the CSRC's swift approval of 16 ETFs focused on ChiNext computing power and fintech reflects a regulatory stance that supports the capital market. Fourth, ahead of the summit between Chinese and US leaders, maintaining stability in capital markets is also a priority.
In terms of direction, with sector rotation accelerating, a balanced approach is advisable by focusing on emerging tech, competitive manufacturing, and large financials. (1) Emerging tech and materials: Accelerating AI adoption by enterprises, alongside improvements in domestic open-source model capabilities, is creating a long runway for AI industry and computing power investment. Key areas include semiconductor equipment, domestic chips, communications equipment, non-ferrous metals, and new non-metallic materials. (2) Competitive manufacturing: Chinese companies addressing global demand and competing internationally are generating new growth momentum and competitive advantages. Focus areas include power equipment, machinery, and pharmaceuticals. (3) Financials and high dividends: Stable return expectations carry significant weight, making brokerages, banks, and high-dividend sectors worth attention.
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