GVIA Perspective | China’s A-Share Market H1: A Value Review of the "Ice and Fire" Divergence

The A-share market has officially wrapped up the first half of 2026 with a deeply polarized performance. The STAR 50 Index surged 64.25% over the period, and the ChiNext Index gained more than 35% — yet the median return of individual stocks came in at -14.0%, with over 70% of all listed names closing lower. "AI exposure determines winners and losers" emerged as the sharpest summary of H1 dynamics.

A more under-the-radar structural signal lies in record-breaking trading volume. Total market turnover in H1 hit 317.53 trillion yuan, a new half-year all-time high, with average daily turnover of 2.74 trillion yuan nearly doubling year-on-year. Of the 41 trading days in history with daily turnover exceeding 3 trillion yuan, 37 took place in the first half of this year. Capital was abundant, but flowed almost entirely in one direction: electronics, communications, power equipment, machinery and non-ferrous metals formed the tech and high-end manufacturing mainline, with the electronics sector alone notching turnover of over 70 trillion yuan.

I. The Tech Frenzy: Beyond Semiconductors, a Full "Optics-Chips-Boards-Memory" Chain

In H1, the hard tech mainline centered on AI computing power became the primary destination for market liquidity. The A-share semiconductor sector’s market capitalization reached a historic 14.14 trillion yuan, doubling in six months and surpassing large state-owned banks (6.25 trillion yuan) for the first time to top all Shenwan Level 2 industries — a landmark event marking a shift in pricing power across China’s capital markets.

• CPO / Optical Transceivers: The sharpest outperforming sub-sector. The CPO index rose 91.98% in H1, and the optical fiber concept gained 82.27%. Lianxun Instruments surged nearly 3,400% from its IPO price at its peak just over two months after listing, briefly claiming the "top gainer" title. Innolight’s market cap exceeded 1.5 trillion yuan, with its H1 turnover of 2.83 trillion yuan ranking first market-wide. Source Photonics, Hengtong Optic-Electric, Accelink Technologies and Robo-Technik all posted peak gains of over 200% year-to-date.

• PCB (Printed Circuit Boards): Aside from Honghe Technology and Jinan Guoji both surging over 600%, the sector as a whole climbed 76.60%, driven primarily by the rising value of high-speed boards for AI servers.

• Memory / HBM & Advanced Packaging: The copper clad laminates index jumped 220.6%, semiconductor equipment 170.9%, glass fiber 159.4%, and electronic chemicals 134% — a stellar rally fueled by upstream "material inflation".

• Semiconductor Materials: China Ship Special Gas led all gainers with a 766.85% surge, followed by Puya Semiconductor (+502.8%), Oulai New Materials (+489%) and Jinhaitong (+419%).

He Mingxiao, fund manager at Harvest Fund, noted that this rally stems from AI evolving from consumer chat software into a B2B productivity tool, combined with a wave of price hikes driven by supply-demand gaps and the rise of domestic supply chains.

From a value investment perspective, however, valuations have reached a level that warrants caution. As of June 26, the trailing twelve-month P/E of the STAR 50 Index hit 239x, sitting at the 100th percentile historically. China Ship Special Gas once saw its forward P/E surge to 457x, prompting multiple company warnings that its share price had deviated from fundamentals. Senior investors have cautioned that share prices of some popular AI stocks have severely discounted future earnings, and may face sharp pullbacks ahead. Soochow Securities also noted that the market is at a critical inflection point shifting from valuation-driven to earnings-validated performance.

II. The Laggard Consumer Sector: The Full Picture of "Old-Economy Stalwarts"

In stark contrast to red-hot tech stocks, the broader consumer sector stayed weak, with declines stretching across the entire industrial chain:

• The Baijiu II Index fell 21.82% in H1; per Wind data, the baijiu sector as a whole dropped 31.19%, with Gujing Distillery down nearly 40%, Wuliangye down 30.15%, and even Kweichow Moutai sliding 11.88%.

• Food & beverage: -19.52%; general retail: -29.42%; beauty & personal care: -24.86%; agriculture, forestry, animal husbandry & fishery: -25.26%

• Pharmaceuticals & biotech: -10.26%; home appliances: -9.25%; real estate: -16.44%; non-bank financials: -15.26%; banks: -12.27%

A clear picture emerges: consumer, real estate, financial, pharmaceutical and home appliance stocks — long seen by retail investors as "ballast assets" — collectively became a test of patience with steady declines in H1.

Dragon Boat Festival holiday sales were muted, and consumer spending has yet to recover. The baijiu sector has now fallen for six consecutive years, the longest losing streak in a decade. The food & beverage sector has weakened for five straight years and underperformed the broader market for four consecutive years. Yet their Q1 revenue and net profit growth actually ranked around the market median; the declines were driven more by multiple compression and sentiment-driven overselling. As of mid-June, the forward P/E of baijiu stocks had compressed to 18x, and the broader food & beverage sector to 20x.

From a valuation standpoint, the P/E ratio of the CSI Mainland Consumption Theme Index sits at the 10.59th percentile over the past five years. When the market grows extremely pessimistic about an asset class, it is often the moment value investors begin to take notice.

III. Other Key Sectors: Siphoned Dividends and Quiet Rotation into China-Specific Valuation Plays

• Dividend style under extreme pressure: From April 29 to June 29, 2026, the Wind All A Index rose 3.70%, while the CSI Dividend Index fell 10.63%, creating a 40-day return spread of -14.33% — an extremely low percentile over the past five years (historically, spreads below -10% occur on only about 15 trading days per year on average). Yet extreme divergence also signals improved risk-reward: the dividend yield of the CSI Dividend Index has climbed to 5.35%, forming an exceptionally wide 3.6 percentage point spread over the 10-year government bond yield of 1.717%. The CSI Dividend ETF (515080) saw 16.57 billion yuan in net inflows over 10 consecutive trading days.

• Capital rotation into China-specific valuation theme: Since late May, hundreds of billions in capital have rotated from elevated tech sectors into the China-specific valuation theme, concentrated in three tracks: banks, power and transportation. The Guangfa Power ETF drew 2.248 billion yuan in net inflows in a single month, and the Huabao Bank ETF nearly 1 billion yuan. Insurance funds increased their holdings of bank stocks by 3.474 billion shares, utility stocks by 1.04 billion shares, and transportation stocks by 490 million shares in Q1, forming a barbell structure of "high-dividend blue chips as the base, enhanced by new-quality productivity drivers". The catalyst was the Plan for Further Deepening SOE Reform (2026-2029) issued in late May, which imposed hard constraints on market value management assessments: companies trading below book value for 12 consecutive months must formulate valuation recovery plans. Bank stocks trade at just 0.64x P/B (vs. a historical median of 0.98x) with a 5.09% dividend yield, while power and transportation stocks also sit at historically low P/B levels.

Notably, divergence also exists within the China-specific valuation theme. 87.2% of net inflows were concentrated in three segments with real new orders: central SOE tech firms, new power equipment, and rail transit. Small-cap local SOEs with only conceptual appeal, by contrast, saw net outflows. This is not a uniform rally across all China-specific valuation names — it is a recovery for order-backed central SOEs.

IV. Lessons for Value Investors

The H1 market offers several key takeaways for value investors:

First, margin of safety is the cornerstone of investing. An index trading at 239x P/E means even strong earnings growth will take years to digest valuations. No matter how excellent a company is, an excessively high entry price can turn it into a value trap. While leading optical transceiver firm Innolight has been supported by solid earnings delivery (Q1 net profit up 260%), small-cap followers have no safety cushion left.

Second, contrarian thinking requires courage, and even more discipline. Consumer sector valuations are at historic lows, but "cheapness" alone is not a sufficient reason to buy. As brokerages have pointed out, low valuations only signal improved odds, not a trend reversal. A turning point requires additional signals such as earnings expectation recovery — and the stabilization seen in food & beverage stocks from late June to early July is only the first sign.

Third, a barbell strategy is more stable than one-sided positioning. In H1, portfolios purely chasing tech and portfolios purely holding consumer stocks both struggled. Yet the barbell structure of "tech growth + dividend-focused central SOEs" quietly built a 3.6 percentage point yield spread safety buffer on the dividend side during the peak of tech capital siphoning from April to June. This offers a useful reference for H2 allocation.

Fourth, style rotation will eventually arrive. Brokerage research notes that the outperformance of growth over value styles has reached an extreme, and Q4 may mark the inflection point for a growth-to-value rotation. Markets do not move in one direction forever. The H1 polarization — a "tech bull market where most investors lose money" — is itself a warning that style rebalancing is imminent.

The first half was a tech bull market, but also a bull market where most investors lost money. For value investors, this extreme market polarization aligns precisely with the value investment philosophy long advocated by the Global Value Investment Association: no matter how fervent or cold market sentiment becomes, adhering to scrutiny of fundamentals and margin of safety is the fundamental way to navigate cycles.