While big questions are being raised about China’s macroeconomic policy, some quarters are seeing the fundamentals shift in their favor. Gains are moving toward industrials, consumer discretionary and staples, and away from materials and energy, according to HSBC. That’s based on the firm’s analysis of the roughly 1,700 listed companies in mainland China that have posted earnings previews for the first half of the year. According to the report, one of the reasons for the change in profits is falling producer prices and their widening gap with consumer prices in China. That means upstream companies make less money, while costs go down for midstream and downstream companies. Drilling down further, HSBC analysts looked for subsectors with low inventory levels and strong demand momentum. Its screen found that the home appliance, media and software sectors were among those that met the requirements. The Producer Price Index has fallen for nine months in a row. The Consumer Price Index slowed to 0% in June. That raised concerns about deflation in China and further sluggishness in the world’s second-largest economy. But the worst can happen soon. The big event for the next seven days is an expected meeting of Chinese leaders, called the Politburo. “Everyone is looking forward to the [meeting] at the end of July,” said Ding Wenjie, investment strategist for global equity investment at China Asset Management Co. That’s according to a CNBC translation of his Mandarin-language comments. He noted that in addition to the decisions made at the meeting itself, other policy details may come out after it ends. There is no announced date, but last year in July, the Politburo met on the last Thursday of the month. On Thursday he spoke of the importance of helping the private sector, not the state. The markets are still waiting for an action. Confidence has been hit by a regulatory tightening that suspended Ant Group’s IPO days before its listing and forced Didi to suspend new user registrations days after its US IPO. JD.com is also planning listings of its industrial and property units. Meanwhile, regulators have signaled the shutdown by allowing Didi to resume new user registrations, and eventually issued a fine to Ant in July. Otherwise, policymakers have little room to act due to high debt levels in the economy, Ding said. She expects foreign markets to be an area of profit growth for Chinese companies, while the domestic recovery just needs a little more time. China has only reopened for six months, she said, noting that consumption may improve as the economy grows. Summer has already seen an increase in domestic travel. Goldman Sachs analysts said on Friday that implied demand for oil from domestic flights scheduled in July is expected to be above 2019 levels. Profit winners Looking ahead, UBS Securities China equity strategist Lei Meng counts on “moderate but not aggressive political stimulus” and likes sectors such as home appliances, food and beverage, computer software and insurance. Meng expects the first quarter to be the trough for earnings this year, with a gradual improvement the rest of the year, for 10% earnings-per-share growth in the CSI300 A-share index for the full year. The CSI 300, which includes Shanghai and Shenzhen-listed companies, is down slightly so far this year, while the Shanghai composite clings to gains. When it comes to individual stocks, HSBC looked for names where its estimates were further above consensus. “We continue to believe that fundamentals (such as earnings and valuations) will come back into focus and that stocks that outperform consensus estimates stand to benefit,” said Steven Sun, head of research at HSBC Qianhai Securities, and a team in a July 19 report. First on the list is software company 360 Security, whose HSBC earnings estimate for the year is double the consensus. Baosight, another software company, also made the top 10, as did home appliance company Sanhua. All three stocks are up double digits so far this year. But not all software stocks made the cut. Well-known tech company iFlytek made HSBC’s list of 10 stocks where analyst estimates are well below consensus, implying a miss. All four shares are listed in mainland China. The HSBC study only looked at names with a market capitalization greater than $10 billion and a three-month average daily trading volume of more than $10 million.