 We see more opportunities in the A-share market coming from investing in styles + sectors in 2Q21; expect a mix of value and growth to outperform and a bias towards mid-caps  We upgrade Cons Disc to overweight and downgrade Cons Staples and Healthcare to neutral; highlight 7 sub-sectors  Present 10 mid-cap stocks with low PEG ratios + 12 bottomup ideas from IT, high-end manufacturing and consumption With the key A-share indices having fallen 6-13% since the highs reached in February, we address four major concerns from A-share investors: 1. What’s the impact of rising US yields? While higher Treasury yields have pressured the A-share market recently, we expect the impact to lessen going forward. Having said that, we reiterate our view that large index gains aren’t the opportunities we look for. Instead, we see more opportunities coming from styles and sectors in 2Q21. Our analysis shows that during periods of rising US Treasury yields, growth stocks underperform in the short term, but outperform in the long term, as the bullish outlook for growth offsets worries about high valuations. Indeed, we see investors favoring growth stocks given China’s economy and policies are normalizing post the pandemic, while the 14th Five-year Plan provides optimism for high-growth sectors.

2. Will funds rotate from large-caps to mid-caps? We see the earnings growth recovery as the key driver for the outperformance of the mid-cap sector. We think improving profits will reassure investors, so the valuation premium that big caps have benefited from due to their high earnings visibility will shrink. Currently, the consensus earnings growth (2020/2021 CAGR) of mid/small caps is set to beat large caps. As a result, we see investors increasingly turning to mid/small caps. However, we are cautious on small caps given an increasing supply due to the revamped IPO system, which could dent the sector’s valuation. Therefore, we prefer mid-cap stocks.

3. Outperforming sectors? We upgrade Consumer Discretionary to overweight, and downgrade Consumer Staples and Healthcare to neutral. We also highlight our seven preferred sub-sectors: chemicals, machinery equipment, electric apparatuses, electronics, light industrial, autos and transportation.

4. Stock ideas. We see the performance of stocks heavily held by institutional investors as only being driven higher by earnings growth, since their valuations are already quite rich. We also screen for 10 mid-cap stocks with the lowest PEGs and present 12 bottom-up stocks ideas from the IT, high-end manufacturing and consumption sectors.