As China emerges from a period of economic darkness, signs of recovery are becoming evident in its GDP growth for the second quarter of the yearThis turnaround in economic performance is predominantly attributed to the ongoing structural reforms and infrastructural investments that the nation has been committed to since the pandemicBy June, the economic indicators reflected a smoothing path toward recovery, supported largely by resilient construction and manufacturing sectors.

Looking ahead into the latter half of the year, the economic landscape is expected to further evolve, coinciding with what is known as the "Pring" cycle, which signifies a recovery phase

Investment strategies in the equity markets need to be well thought out during this strategic periodHowever, investors should remain vigilant regarding certain variables, such as the implications of possibly escalating foreign interest rates and the anticipated economic downturn that might stem from them.

In terms of industry allocation, a strategic approach towards the pandemic recovery opportunities is recommendedThis involves assessing robust earnings from the second quarter, the expansive potential for recovery, and the ongoing marginal improvement of cost pressures in the sectors.

The overseas liquidity conditions are likely to remain tight in the second half of the year.

Global recession fears are gradually becoming more pronounced.

In the United States, there are emerging concerns regarding the wage-inflation spiral

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The labor market appears to maintain a tight balance, with a reported addition of 372,000 jobs in June—a stark contrast to the pre-pandemic average of about 178,000 jobs per month in 2018-2019. The demand for labor continues to showcase robust strengthConcurrently, participation in the labor force stands at 62.20%, indicating a persistent strain in labor supplyRecent inflation data reveals comprehensive upticks, with June witnessing a staggering CPI year-on-year growth of 9.1%, the highest ever recordedThis severity persists across various categories, particularly in energy prices, and while food prices stabilize above previous years, the core CPI excluding food and energy also accelerated marginally from 0.6% to 0.7% month-on-month.

Under this high-inflation and U.S

interest rate hike environment, the European Central Bank initiated its first rate increase since 2011 on July 21, 2022, increasing by 25 basis points—an adjustment surpassing market expectationsRecently, the International Monetary Fund revised its 2022 global economic growth forecast down to 3.2%, a reduction of 0.4 percentage points from April 2022 projections, while 2023’s outlook now anticipates only a 2.9% growth rate down by 0.7 percentage points from earlier predictionsThis tightening of global liquidity, paired with escalating recession expectations, presents critical warning signs for investors.

China's economy is entering the recovery phase of the Pring cycle.

Economic misalignments with overseas markets

Unlike the Merrill Lynch clock, which categorizes economic cycles solely on macroeconomic variables, the Pring cycle is defined by the performance of various asset classes

The Merrill Lynch framework divides economic cycles into four stages: recession, recovery, overheating, and stagflation, corresponding each stage to optimal asset returnsConversely, the Pring cycle elaborates on these phases into six segments, enhancing granularity for asset allocation and incorporating credit cycles for actionable strategies.

Typically, the Pring cycle theory effectively captures significant opportunities for class asset allocationWhen an economy slows down, inversely coordinated adjustments by governmental agencies result in negative yields across commodities, equities, and precious metals, with only bonds yielding positive returnsHowever, in the recovery stage, all asset classes, including stocks and precious metals, show commendable performance, particularly equities offering robust returns.

As China progresses from a counter-cyclical regime into the recovery phase denoted by the initial stage of the Pring cycle, the preferred asset class is shifting from bonds to equities

The second quarter GDP for China recorded a shocking seasonal decline of 2.6%, following a previous growth of 1.4%, marking its second occurrence of quarterly contraction since 2011. During a meeting on April 29, officials pledged to maintain pandemic control measures, stabilize the economy, and safeguard annual economic targetsThe effective pandemic control starting in May is expected to pave the way for clearer economic foundations.

Shifting economic goals are now squarely focused on stable employment and stable pricesDuring a global dialogue of entrepreneurs on July 19, the Prime Minister noted that economic maintenance lies within a reasonable range, with core supports being steady employment and price stability, asserting that macroeconomic policies are both precise and reasonable

In a statement from July 21, dialogue reinforced the importance of consolidating the recovery foundation by prioritizing steady employment and price objectives.

The third quarter represents a crucial window for economic stabilization and recovery, with ongoing reasonable policy support still necessary for recoveryThe Pring cycle is likely to be firmly in stage two, guiding investment angles.

A strategic bottom for A-shares is becoming evident

Seizing the opportunities within the window, focusing on three major investment lines

In considering investment strategies for the latter half of the year, we assert that the first focus must be on the entry point into the Pring cycle’s recovery phase which brings more opportunities to the equity market

Policies are poised for continued support of economic recoverySecondly, a strategic bottom for A-shares has become evidentAccording to forecasts, the PE ratio for the CSI 300, calculated alongside the yield rates of national development bonds, suggests an expected return of 6.32% -- reflecting remarkably high levels unseen since 2016, indicating an upward potential in the index gains for the upcoming year.

Additionally, market rhythms should be considered as social finance impulses are evident, reflecting overall incremental investments in stock marketsHistorically, the social finance pulse mirrored the stock market’s movements, particularly in 2020. The anticipated workflow in 2022 appears steadier than in 2020. While social finance issuance has materially advanced this year, regional governments are issuing special bonds predominantly, and resident long-term loans remain lackluster—a trend that must start reversing soon—indicating that future social finance pulses may stabilize more, with less steep gradients.

In terms of sector allocation, seizing pandemic recovery quadrants opportunities is advised, focusing on the lines of strong second-quarter earnings, swift recovery, and improved cost pressures

Firstly, industries exhibiting strong second-quarter earnings with continued robust prospects include national defense and military industry (less affected by the pandemic, costs improving with a decline in nickel prices, accelerating state reforms enhancing asset quality), photovoltaics (with strong domestic and international demand and continuing technological evolution), and CXO sectors (characterized by rapid growth with high certainty).

Secondly, segments facing pressure but showcasing recovery potential for the second half include pig farming (with a noticeable rise in pig prices and slow capacity reduction heralding improved profitability), and the automotive industry (where strong policy incentives could uplift demand across segments including chip manufacturing, automotive intelligence, parts, and vehicles).

Thirdly, sectors favorably impacted by recent easing of material cost pressures suggest possibilities within power batteries (due to declining nickel prices), wind energy (with reduced steel prices), home appliances (copper and aluminum prices dropping), and condiments (as soybean prices fall).

Lastly, sectors benefiting from growth-stabilizing policies stimulating demand include food and beverages (notably mid-range liquor, beer, and marinated products), cosmetics, synthetic diamonds in promotion, and construction materials, alongside infrastructural trends in hydropower, renewable energy projects, and the engineering machinery domain.