A-share sentiment rebounds, but short-term allocation still prioritizes Hong Kong stocks

Overview

The report uses Morgan Stanley's A-share Sentiment Indicator, MSASI, to assess market risk appetite. Improved global risk sentiment drove a recovery in turnover, pushing weighted MSASI up to 40% this week, while the one-month moving average still fell to 47%. The report believes A-shares still face short-term uncertainties including global-cycle linkage, oil prices and the Middle East situation, the Federal Reserve policy path, and liquidity absorption by major IPOs, so it continues to tactically prefer Hong Kong stocks. On the macro front, the July manufacturing PMI fell to 49.2, showing that domestic demand, consumption, and construction activity remain weak, while exports are still the main support. Over the long term, the earnings growth outlook for A-share technology innovation and hard tech remains attractive.

Core views

First, short-term A-share sentiment has recovered from previous lows, mainly driven by improved global risk appetite and higher equity turnover, but the smoothed medium-term indicator has not yet confirmed a sustained uptrend. Second, Hong Kong stocks have a relatively independent market cycle, lower exposure to globally crowded AI trades, earnings that are approaching a bottom, and gradually stabilizing liquidity, giving them a better short-term risk-reward profile than A-shares. Third, this round of A-shares is highly correlated with the global cycle, and geopolitics, oil prices, Fed policy, and a potential Unitree IPO may cause continued volatility. Fourth, China's domestic demand remains weak and fiscal stimulus has not yet accelerated meaningfully, but faster infrastructure and AI-related spending in the second half, as well as further policy easing, may provide support. Fifth, remain positive on A-share technology and innovation over the medium to long term, especially hard-tech industries with accelerating earnings growth.

Analysis framework

The report applies 100-day rolling min-max normalization to 12 indicators including turnover, margin financing, technical indicators, derivatives, fund flows, and earnings expectations, then determines weights based on each indicator's single-factor regression R² relative to the CSI 300 trend to construct weighted MSASI; it then scales the composite indicator to 0–100 based on historical highs and lows since 2024 and calculates a one-month moving average to identify medium-term sentiment trends.

Methodology notes

• Market sentiment quantification100-day rolling min-max normalization

  Convert sentiment indicators with different dimensions and frequencies into a unified 0–100 range.

  The normalized value equals the latest value minus the minimum value over the past 100 days, divided by the difference between the maximum and minimum values over the past 100 days; the higher the value, the stronger the sentiment or market activity.

• Factor weightingR²-based explanatory-power weighting

  Allocate weights according to each indicator's historical explanatory power for CSI 300 market performance.

  Weights are derived from the single-factor regression R² between an individual indicator's position relative to its 100-day rolling range and the CSI 300's performance relative to its 100-day moving average; indicators with stronger historical explanatory power receive higher weights.

• Composite indicatorMSASI (weighted)

  Combine 12 market sentiment and trading activity indicators to form an overall A-share sentiment measure.

  The weighted result is then scaled to 0–100 based on historical highs and lows since 2024; higher readings represent stronger investor enthusiasm, while lower readings represent weaker sentiment or risk aversion.

• Trend smoothingWeighted MSASI one-month moving average

  Reduce short-term high-frequency volatility and observe medium-term sentiment changes.

  Apply a one-month moving average to weighted MSASI to improve trend interpretability in tactical and strategic analysis.

• Multi-factor sentiment monitoringMSASI twelve-indicator framework

  Cover sentiment dimensions including turnover, leverage, technicals, derivatives, fund flows, and earnings expectations.

  Indicators include ChiNext turnover, A-share turnover, equity index futures turnover, northbound turnover, margin financing balance, new SSE accounts, 30-day RSI of the CSI 300, number of limit-up stocks, CSI 300 futures discount, call-put ratio, one-month moving average of offshore passive fund inflows into the CSI 300, and three-month moving average of the breadth of A-share earnings forecast revisions.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• A-shares

  Core research subject; relatively cautious for short-term tactical allocation, while maintaining a constructive long-term view.

  Strengths

  Turnover and risk appetite have recovered; earnings growth in technology innovation and hard tech is expected to accelerate.

  Weaknesses

  High correlation with the global cycle, medium-term sentiment indicators have not yet confirmed strengthening, and domestic demand and breadth of earnings forecast revisions remain weak.

  Comparison

  Short-term risk-reward is weaker than Hong Kong stocks, but long-term technology growth potential stands out.

  Risks

  Global cyclical downturn, geopolitical and oil price volatility, Federal Reserve policy uncertainty, and liquidity disruption caused by major IPOs.

• Hong Kong stocks

  Morgan Stanley's preferred market for short-term tactical allocation.

  Strengths

  Relatively independent market cycle, greater resilience to emerging-market volatility, earnings approaching a bottom, liquidity gradually stabilizing after IPO supply shocks, and the AI investment theme spreading to data centers and cloud services.

  Weaknesses

  Southbound inflows year-to-date are only 42% of the same period last year, indicating weaker funding support year-on-year.

  Comparison

  More defensive than A-shares in the short term and less exposed to globally crowded AI trades.

  Risks

  Deterioration in global risk appetite, subsequent IPO supply shocks, and earnings recovery falling short of expectations.

• A-share technology and innovation sectors

  Key medium- to long-term favored direction.

  Strengths

  Earnings growth in China's hard-tech industries is expected to continue accelerating, potentially driving a recovery in market leadership and forming a new cyclical high.

  Weaknesses

  Still affected in the short term by overall market liquidity and volatility in global technology trades.

  Comparison

  Stronger earnings growth outlook than traditional domestic-demand sectors.

  Risks

  Crowded valuations, correction in global AI trades, and policy and capex implementation slower than expected.

• China domestic-demand-related assets

  Short-term macro fundamental constraint.

  Strengths

  Fiscal implementation, infrastructure construction, and AI-related spending may accelerate in the second half, with room for further policy easing within the year.

  Weaknesses

  Consumption and construction activity continue to drag on growth, and the July manufacturing PMI fell into contraction territory.

  Comparison

  Currently weaker than export-related areas, as exports are still supported by the upcycle in Asian industrial activity and capital expenditure.

  Risks

  Slow transmission of fiscal stimulus, continued weakening of growth momentum, and insufficient policy easing.

Key data

• Weighted MSASI40%Up 9 percentage points from July 29, 2026.
• Weighted MSASI one-month moving average47%Down 6 percentage points over the same period, indicating the medium-term trend remains weak.
• ChiNext turnoverRMB620bnUp 22% from the previous observation period.
• A-share turnoverRMB2.353tnUp 12% from the previous observation period.
• Equity index futures turnoverRMB548bnDown 4% from the previous observation period.
• Margin financing balanceRMB2.582tnDown 3% from the previous observation period.
• 30-day RSI of the CSI 300Up 6 percentage pointsObservation period was July 29 to August 5, 2026.
• Southbound net inflowsUS$0.4bnJuly 30 to August 5, 2026; US$1.6bn month-to-date and US$48.1bn year-to-date, equivalent to 42% of the same period last year.
• July manufacturing PMI49.2Below consensus expectations of 50.1, reflecting weakness in manufacturing and domestic demand.

Impact & implications

At the asset allocation level, investors may relatively increase allocation to Hong Kong stocks in the short term and treat overall A-share beta cautiously, because A-shares are more sensitive to the global cycle and major IPOs may disrupt liquidity. If global risk appetite continues to improve and fiscal implementation accelerates, driving infrastructure and AI spending, A-share sentiment and earnings expectations may recover further; if shocks from geopolitics, oil prices, or Federal Reserve policy intensify, the current sentiment rebound may reverse. Medium- to long-term allocation can focus on opportunities from accelerating earnings in A-share technology innovation and hard tech, while also watching the benefits to Hong Kong-listed data centers, cloud services, and large Chinese internet platforms from the broadening of AI investment.

Risks

• The Middle East situation and changes in oil prices may depress global risk appetite.
• Uncertainty over the Federal Reserve policy path may amplify volatility in global markets and A-shares.
• A-shares' correlation with the global cycle has risen, potentially strengthening the transmission of external shocks.
• High-profile IPOs such as Unitree may cause short-term liquidity volatility in A-shares.
• China's consumption and construction activity remain weak, and fiscal stimulus has not yet accelerated meaningfully.
• The breadth of earnings forecast revisions remains negative, and the fundamental recovery is not yet solid.
• Some MSASI indicators have been affected by regulatory regime changes, and historical relationships may undergo structural changes.
• Morgan Stanley has potential business relationships with covered companies, and research conclusions may face conflict-of-interest risks.

What to watch

• Whether weighted MSASI can continue to rise, and whether the one-month moving average can stop falling and rebound.
• Whether turnover expansion in A-shares and ChiNext is sustainable, and whether the margin financing balance can resume growth.
• The issuance progress of Unitree's potential IPO and its impact on market liquidity.
• The impact of the Middle East situation, oil prices, and the Federal Reserve policy path on global risk appetite.
• The actual pace of implementation of fiscal spending, infrastructure, and AI-related expenditure in the second half.
• Whether consumption, construction activity, and manufacturing PMI can improve.
• Whether the breadth of A-share earnings forecast revisions can turn from negative to positive.
• Progress in Hong Kong stocks' earnings bottoming, liquidity stabilization, and the spread of AI investment to data centers and cloud services.