As the first quarter of the year concludes, publicly listed companies are gearing up to release their financial reports, and market analysts expect a clearer picture of performance trends to emergeThe Federal Reserve's interest rate hikes appear to be nearing their conclusion as early as May, coinciding with a potential strengthening of the Chinese yuanThis combination might lead foreign investors to re-enter the market aggressively, shifting the focus back to economic recovery—the timing of which seems to be drawing closer.

The economic landscape has started to show signs of warmth, particularly after the end of the pandemic-induced disruptions and the gradual effectiveness of growth-stabilizing policiesHowever, the recovery pace varies significantly across industriesAs we navigate through the first quarter, it becomes clear that domestic demand is recovering at a much better rate than external demand

The economic slowdown in Europe and the United States due to interest rate increases has put pressure on foreign demand, contributing to this disparity.

Service industries are witnessing a rapid recovery compared to manufacturing sectors, which have suffered the most during the pandemicAdditionally, the consumption of non-durable goods is outperforming that of durable goods; for instance, the reduction of car subsidies in China has placed strain on automotive sales during the first quarterThe real estate market is finally stabilizing, displaying stronger recovery trends in first- and second-tier cities compared to those in the third and fourth tiers, with second-hand housing transactions currently surpassing new home sales.

The economy's structural nature leads to a heightened sense of uncertainty in the market, resulting in pronounced sectoral divergence

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As of April 7, major stock indices have registered modest increases: the Shanghai Composite Index has risen by approximately 7.7% and the CSI 300 Index by 6.55%. Yet, within these indices, there's marked disparity; technology sectors such as computer, communication, and media have seen their stock prices soar by nearly 40%, while traditional sectors like retail and banking have faltered, registering declines of 6.5% and 2%, respectively.

Recent market behavior showcases strong thematic and conceptual characteristics with a tendency towards trend-driven trading, which appears mismatched with the structural nature of the economic recoveryObserving the market's segmentation raises questions about the underlying factors contributing to this phenomenonPost-Chinese New Year, there has been an uptick in overseas risks, fluctuating expectations regarding Federal Reserve interest rate hikes, and the Silicon Valley Bank incident has raised alarms about financial stability

As a result, the inflow of foreign investment has notably weakened since February compared to January, reflecting a temporary detachment of A-share pricing from foreign influences.

The uneven economic recovery also hampers market confidence in the future strength of this reboundAs companies release their annual reports, reflecting on past performance doesn't provide strong predictive insights into the futureHistorical data suggest that market movements in the first quarter are often driven by anticipationThe period surrounding the National People's Congress usually sees a dominance of policy-related expectationsStill, the anticipated policy shifts for 2023 haven’t introduced many surprising elements, resulting in a market pivot toward technology sectors like artificial intelligence and semiconductors.

Are we destined to continue witnessing this market division? Recently released data on credit growth and social financing for March have remained robust, with new renminbi loans reaching 3.89 trillion yuan, an increase of 749.7 billion yuan year-on-year

Similarly, social financing for March totaled 5.38 trillion yuan, outpacing expectations with a year-on-year increase of 707.9 billion yuanEven the typically underperforming category of household long-term loans has seen improvement, demonstrating a year-on-year increase of 261.3 billion yuan.

Credit often serves as a leading indicator for economic performanceThe certainty of recovery in the second quarter appears highGiven the low base from 2022 and the current momentum, second-quarter GDP growth could be expected to surpass 6%. As the quarterly reports of publicly listed companies start to emerge in April, the narrative surrounding corporate performance may crystalize furtherWith the Fed's interest rate hiking cycle expected to conclude in May, a probable strengthening of the yuan could entice foreign funds back into the market, marking a potential resurgence of focus on economic recovery.

Looking at the current economic climate, we're still in the initial stages of recovery, comparable to mid-2020. Differentiation in recovery is expected, as various sectors were impacted differently by the pandemic, and their elasticity in returning to pre-pandemic levels varies

The current characteristics of the economic recovery reveal noteworthy trends:

First, domestic demand recovery is significantly outperforming external demandThe misalignment of economic cycles between China and the U.Simplies that China's recovery in 2023 will be characterized by stronger domestic demand as the U.Scontinues its rapid interest rate hikes, causing downward pressure on its economyReports indicate a 6.8% year-on-year decline in China's exports (in dollar terms) during January and FebruaryThis downtick is a global trend; for example, in South Korea, a country sensitive to export shifts, six consecutive months of negative export growth have been noted.

In contrast, domestic demand is likely to rebound owing to the lifting of pandemic restrictionsThe stabilization of the real estate market also signals potential growth for domestic consumption, which may be the most critical support for China's economic growth in 2023. The early part of the year has indicated varying levels of recovery across different domains of domestic consumption.

Secondly, recovery in the service sector is noticeably stronger than in manufacturing

While both sectors have shown signs of recovery since the start of the year, service industries are regaining momentum more rapidlyThe manufacturing PMI for March stands at 51.9%, reflecting a slight drop of 0.7 percentage points from February, while the Caixin Services PMI has surged to 57.8, marking a 2.8 percentage point increase and reaching its highest point since December 2020.

Manufacturing is closely tied to the export market, and the weakening of external demand is expected to hinder its recoveryIn that light, profits in the industrial sector, which was relatively robust in 2022, have already begun to decline in January and FebruaryConversely, the service sector, having been severely impacted during the pandemic, possesses a significant recovery momentum as the situation normalizes.

Thirdly, the consumer sector is rebounding, particularly contact-heavy consumption, such as dining out and leisure activities

For instance, restaurant revenues surged by 9.2% year-on-year during January and February, surpassing a significant 23.3 percentage point increase compared to December 2022. Despite this uptick, automotive consumption within durable goods has underperformed, which could exert downward pressure on overall salesPredictions from the China Passenger Car Association indicate a year-on-year decline of around 15% in car sales during the first quarter.

Previous trends reveal that automotive incentives and subsidies can boost short-term sales but often come at the cost of future demandAs these incentives diminish, car sales tend to fall off sharplyCurrently, China's automotive market is in a phase of low-speed growth, characterized more by the gradual replacement of traditional vehicles with electric ones rather than sharp sales rebounds, indicating that a near-term turnaround in automotive sales may be unlikely.

Fourthly, the stabilization of the real estate sector stands out as a highlight of the first quarter

In January and February, total sold housing area reached 15,133 million square meters, representing a year-on-year decrease of 3.6%, while sales revenue stayed steady at 15,449 billion yuan, only slightly down by 0.1%. Notably, the construction completion area grew by 8% year-on-year during the same period—a 23 percentage point increase compared to the entire year of 2022—indicating that with policy support, developers are ramping up construction effortsAccording to high-frequency data, the daily average area sold across 30 cities has risen to 570,000 square meters, marking a 77% increase compared to the same period in 2022.

Still, the recovery within the real estate market reflects notable disparities; first- and second-tier cities are experiencing quicker recoveries compared to third- and fourth-tier citiesTransactions in the second-hand housing market are outpacing those in new homes, with state-owned enterprises performing significantly better than private firms in this sector

Available resources and financial support for real estate are becoming increasingly concentrated in high-quality developers located in desirable areas.

Historically, market recoveries following economic downturns have tended to be broad-based, making it easier for investors to gauge the trajectory of funding flowsFor instance, during the second half of 2020 or between 2016 and 2017, comprehensive recovery rapidly propelled indices upwardToday's situation, however, presents a stark contrast with a more segmented economic recovery leading to considerable doubts regarding the slope and extent of future reboundLack of robust stimulus measures has meant that sectors primarily rely on their own capacities for recovery, inherently leading to disparities in the timing of rebounds across different industries.

Yet, this economic recovery appears not to be a fleeting moment but may gather strength in the coming quarters, with forecasts suggesting that GDP growth may reach 7.6% in the second quarter of 2023. The market's overarching valuations may not fully reflect the depth of economic recovery, remaining stuck around 3,300 points

Comparatively, the mid-2022 market—which merely enjoyed a brief revival—saw the Shanghai Composite reach up to 3,420 points.

Recent trading behavior has been overly concentrated within the realms of artificial intelligence and semiconductor industries, driven more by speculative trends and less by fundamental economic performance, indicating not only an excessive buildup of positions but also a potential vulnerabilityIn this early phase of economic recovery, markets generally drift toward tangible performances, which suggests that the focus will inevitably shift back to corporate earnings once the data-rich environment provided by quarterly reports unfolds.

Therefore, it can be reasonably anticipated that, as the quarterly reports start to become available in April, the fundamentals of publicly traded companies will regain their status as the primary focus of market participants