Chinese equities are going through a difficult period in the run-up to the Third Plenum of the Communist Party. The domestic economy under pressure, sluggish corporate earnings and geopolitical tensions are the main influencing factors. Winnie Wu, Chinese equity strategist at BofA Securities, recommends reducing holdings in state-owned enterprises (SOEs) and investing in quality beta stocks.

Despite a promising start to the year, with GDP forecasts revised upwards, consumer confidence and retail sales are declining. Dividend-based strategies are becoming less attractive, as many SOEs, having paid their dividends mid-year, will not distribute new ones until the following year.

According to Winnie Wu, the energy and telecoms sectors, while performing well, may not announce further dividend payments any time soon. Investors should concentrate on quality stocks, particularly in the Internet and consumer sectors, where valuations are more attractive.

On the other hand, earnings forecasts are being revised downwards, and the approach of the US election season could further intensify uncertainties.
Investors exposed to China are awaiting measures to revitalize the real estate market, employment and consumer confidence. On the international front, how China tackles trade tensions and overcapacity issues is equally crucial.

On the monetary front, China is likely to avoid major stimulus measures in order to preserve the stability of its currency and keep monetary policy tools in reserve, in anticipation of uncertainties linked to the US elections. Chinese markets are therefore at a crossroads, with investors looking for reassuring economic policy signals.

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