China’s A-Share Tech Rally: Second Wave Expected in Late October, Says Analyst
TREE NEWS reports: A-share markets have retreated to their lowest levels of the year, but a turning point may be near, chief strategist at Guotou Securities. In a strategy note published on October 11, Lin’s team argues that late October will be a critical window for a potential second wave of gains in Chinese technology stocks, driven by a confluence of domestic and international catalysts.
The Key Catalysts
The report identifies several events that could reignite the tech sector. Domestically, the third-quarter earnings season will kick off, and DeepSeek, a prominent AI firm, is preparing for a listing on the STAR Market. Internationally, US AI leaders such as Microsoft and Google will release their Q3 earnings and capital expenditure guidance, providing fresh insights into AI commercialization. Additionally, AMD and Nvidia will report in November, and Anthropic is expected to go public in late October.
Lin’s team believes that if long-term US Treasury yields decline due to cooling fiscal expectations, the second wave of the A-share tech rally will ‘undoubtedly’ begin. They characterize the current market as transitioning from a ‘third quadrant to a fourth quadrant’—a phase where domestic K-shaped economic divergence persists, but the pressure from US bond yields may ease, allowing AI tech to lead a valuation recovery.
Market Implications
The analysis suggests that the divergence between US and Chinese tech stocks since August—where the Philadelphia Semiconductor Index rose 11.15% while A-share AI hardware stocks fell—is due to a shift in pricing logic rather than a reversal in the AI industry trend. Factors include global capital concentrating in US AI leaders amid high yields, policy risks from proposed US legislation targeting Chinese optical modules, and high valuations needing time to digest. Lin notes that the ratio of value to growth indices has returned to early-year levels, indicating that previous risks in growth stocks have been largely absorbed, improving the risk-reward profile for investors.
The team outlines a two-stage outlook: a ‘big rebound driven by industry catalysts’ from late October to November, followed by potential volatility from November to December due to valuation switches and geopolitical risks. They emphasize three core assumptions: no global macro ‘black swans’ (e.g., aggressive Fed rate hikes or escalated US-Iran conflicts), AI tech earnings growth outpacing discount rate increases, and sentiment and trading congestion returning to median levels.
Policy Support and Investment Strategy
On the domestic front, the Ministry of Finance announced on October 9 the use of 550 billion yuan in local government debt quotas, an increase of 50 billion yuan from last year, with 250 billion yuan earmarked for digital infrastructure such as new power grids and computing networks. The central government also issued a directive on developing ‘new quality productive forces,’ covering technology R&D, industrialization, and financing mechanisms. Lin’s team believes these fiscal and industrial policies will bolster tech growth, particularly in digital infrastructure and power grids.
Using a four-quadrant framework based on domestic K-shaped divergence and US bond yields, the team currently recommends a ‘barbell strategy’: allocating to tech leaders with strong industry fundamentals and to cash-flow assets like dividends and resources. Once US yields show signs of easing, they expect a rotation toward a ‘tech M-top’ structure, where select high-growth tech assets repeatedly hit new highs.
Key Takeaways for Investors
- Late October is a pivotal window for a potential second wave in A-share tech, contingent on US Treasury yields declining and positive earnings from AI leaders.
- The recent underperformance of Chinese tech versus US tech is a pricing phenomenon, not an industry reversal; valuations have become more attractive.
- Fiscal and industrial policies support tech growth, with digital infrastructure and power grids as direct beneficiaries.
- Adopt a barbell strategy now, balancing tech leaders with dividend and resource stocks, and prepare to shift toward growth as yield pressures ease.
