A-shares poised for steady higher-quality growth

Recent swings in global markets have reflected the unwinding of crowded AI trades and persistent geopolitical uncertainty. Though China's technology sector is connected to global AI sentiment, the A-share market has shown remarkable resilience, with implied volatility remaining relatively stable.

In our view, the recent pullbacks are indicative of profit-booking and short-term momentum adjustment rather than a change in fundamentals.

Looking ahead, China's A-share market has the potential to sustain a measured upward trend and develop into a steadier and more mature "slow bull" market.

A sustained earnings recovery underpins this outlook. Under our base scenario, total A-share earnings growth is expected to rise to 11 percent in 2026, up from 3.9 percent in 2025.

This momentum was evident in the first quarter of 2026, when non-financial A-share earnings increased 11.8 percent year-on-year, or 12.3 percent excluding oil, petrochemicals and basic chemicals.

Earnings on the ChiNext and STAR Board rose 23 percent and 205 percent in the first quarter, respectively, highlighting the growing role of technological innovation and new quality productive forces.

Profitability has also strengthened, with first-quarter gross and net margins for non-financial A-shares reaching their highest levels since 2023, up 0.6 percentage points and 0.3 percentage points year-on-year respectively.

A-share earnings growth is likely to accelerate further in the second quarter and the rest of 2026, supported by faster industrial profit growth in the first five months of the year.

From a macro perspective, normalized inflation should support nominal revenue growth. As Chinese companies expand globally, overseas revenue exposure among non-financial A-share firms has risen from 9.5 percent in 2010 to 18.7 percent in 2025.

We expect overseas revenue to contribute 25 percent of total revenue for non-financial A-shares by 2030. Rising overseas exposure may also support medium-term margin expansion, especially where overseas businesses deliver higher gross margins.

Consensus earnings forecasts have recently moved higher, with the strongest upgrades in information technology, basic materials and energy.

Liquidity conditions are another important source of support.

A more balanced flow of capital is emerging from household asset allocation, exchange-traded funds, actively managed mutual funds, margin financing, private funds and renewed participation by global investors.

This broadening investor base is essential for improving market depth and supporting long-term stability.

Household asset reallocation could become a gradual but significant liquidity source.

Since the second half of 2025, deposits have shown signs of shifting toward equities. The household deposit-to-A-share market-capitalization ratio declined to its historical average in June 2026, though it remains above levels seen in previous bull markets.

Future inflows may increasingly enter the market through indirect channels such as insurance products, bank wealth-management products and fixed income-plus strategies, helping to foster a more patient capital base.

Institutional products are also evolving. While overall mutual fund issuance remains below the peak reached in 2021, sector and thematic ETFs, especially technology-focused products, have become a stronger source of market liquidity. By mid-July 2026, assets under management in A-share sector and thematic ETFs had expanded sharply from late 2024 levels.

Technology-focused ETFs and actively managed technology funds have attracted growing interest from investors seeking exposure to innovation, advanced manufacturing and digital transformation.

Margin financing and private funds have further supported risk appetite. As of July 22, 2026, A-share margin financing balance accounted for 5.3 percent of the A-share free-float market, still well below the 2015 peak.

This suggests that leverage remains more measured than during previous market cycles. Private securities funds have also added meaningful demand, reflecting stronger professional investor participation in the equity market.

Global interest in Chinese equities has increased in recent years.

Foreign investors held A-shares worth 3.71 trillion yuan at the end of the first quarter of 2026, which was 7.4 percent of the free-float market capitalization, while the value of offshore holdings reportedly exceeded 4 trillion yuan by the end of May.

Stabilization in tier-one city property markets, progress in addressing excessive price competition, easing deflationary pressure, stronger Chinese technology companies and a more supportive investment environment could help attract additional foreign inflows in the second half of 2026.

In the long run, the A-share market holds strategic significance for China's economic transformation.

As the country shifts from a property-centered wealth model toward one more closely linked to productive capital, innovation and corporate value creation, the equity market can play a larger role in household wealth management, industrial upgrading and the development of new quality productive forces.

A steady equity market can also help strengthen confidence among private enterprises and support broader goals of common prosperity.

Policy and market reforms remain central to this process. Measures that improve investor returns, including dividends, share buybacks, information disclosure and market-capitalization management, can help attract long-term capital.

Reforms that support mergers and acquisitions can help competitive companies grow stronger, while deeper State-owned enterprise reform may improve valuations and capital efficiency.

At the same time, better regulation of initial public offerings and major shareholder reductions, together with efforts to introduce long-term institutional funds, can improve market liquidity and stability.

China's A-share market is entering a stage in which quality growth, patient capital and structural reform may reinforce one another.

The author is head of research at UBS Securities.

The views don't necessarily reflect those of China Daily.