Growth to outperform value: China’s A-share market has traded sideways so far in 2021, held back by concerns over liquidity, US-China relations and fears that consensus earnings may fall. Our view is all these factors will ease in 3Q21e, allowing the markets to head c6-7% higher to our unchanged year-end targets. Our other big picture view is that growth should now outperform value. We are half way through the recovery while falling 10-year Treasury yield shows investors expect moderating inflation and economic growth. Hence, we favour growth stocks and raise consumer staples to overweight while continuing to favour IT and industrials. In the value space, we lower telecoms to underweight, raise real estate to neutral and continue to underweight materials and utilities (Exhibit 1). We present 12 bottom-up stock ideas in Exhibit 2. Key risks: a liquidity crunch, more credit defaults, and COVID-19 variants spreading further.

Liquidity to remain supportive: The most important driver for A-shares is liquidity. We launch our A-share liquidity indicator in this report. It shows that liquidity hit a threeyear low in 2Q21 but should improve as China’s economic growth moderates and the central bank turns away from tightening. We also believe investors are overly concerned about a potential US ‘taper tantrum’ and the impact on A-shares.

US-China relations matter for sectors, not indexes. With the US committing more resources to shoring up its leading position in cutting-edge technologies, we believe China will continue its quest for greater technological self-sufficiency. We don’t expect an across-the-board worsening in trade relations in our base-case analysis, but we conduct a scenario analysis for investors to understand the potential downside risks. While this issue may stay as a headline risk, we believe its impact matters most to sectors rather than the overall index.

Consensus earnings shouldn’t fall much: We acknowledge that there could be some downgrades to consensus earnings for A-share indices given continued COVID-19 cases flaring up in China’s key export markets. However, our view is any cuts would be small. Our top-down model forecasts 44% aggregate net profit growth for A-share non-financials in 2021e, while our bottom-up model forecasts 50% growth. These figures compare to 51% growth based on Wind consensus estimates.