Recent performance of the Shanghai Composite Index, marked by eight consecutive days of gains and active thematic movements, exhibits certain features of a seasonal spring rally. However, analysis of recent market dynamics reveals high sector rotation intensity, indicating that capital has yet to form a clear consensus on leading growth drivers.
For the current market rally to sustain and extend further, identifiable mid-tier thematic catalysts are essential. Unlike the Q3 2025 market conditions, the most significant marginal changes in fundamentals may not originate from the demand side, but rather from profitability margins. Despite limited recent marginal changes on the demand front, price increase trends driven by liquidity and supply-side factors are quietly spreading across various industries. With rising prices for multiple resources and the implementation of "anti-involution" policies in midstream and downstream sectors, the "price increase" narrative is expected to gain further traction. We categorize recent price-increasing varieties and their derived opportunities into three types:
The first category involves sectors with high demand growth and supply-demand mismatches, currently concentrated in the broad AI industry chain (e.g., memory, CCL, semiconductor manufacturing), the energy storage chain (e.g., LFP, separators, lithium carbonate), and precious metals. Price increases driven by demand-side factors demonstrate strong sustainability and elasticity. Particularly within the AI产业链, despite concerns about a slowdown in the second derivative of beta, the alpha opportunities for price increases spreading across the upstream and downstream产业链 under robust demand growth remain worthy of further exploration.
The second category comprises sectors with stable demand but supply disruptions, currently including industrial metals (copper/aluminum), fertilizers, and some minor metals (e.g., cobalt, tin). Areas characterized by low inventory growth rates and medium-to-high capacity utilization percentiles are most likely to experience price increases under supply disturbances. Based on Q3 2025 financial report data, subsequent attention can also be paid to molybdenum, chemical engineering, and cables.
The third category consists of sectors experiencing cost pass-through due to rising input costs, currently focused on chemicals (e.g., titanium dioxide, MDI), solar PV (modules, wafers), paper, shipping, and some midstream manufacturing (MLCC, analog chips, motors). However, it is important to note that for such varieties lacking demand-side support, the sustainability and elasticity of price increases may be relatively limited; profits here are more about capitalizing on low-position layouts and betting on turnaround scenarios. Looking ahead, varieties with historically low gross margins and bottoming capacity cycles are most likely to continue cost pass-through or initiate active price hikes. Combined with Q3 2025 financial data, sectors such as building materials (cement products, fiberglass, glass, waterproof materials), battery chemicals, metal products, comprehensive packaging, power transmission and transformation equipment, and instrumentation warrant attention.
Regarding market rhythm, the short-term trend of mild improvement in micro-liquidity is certain, which is why we highlighted the market entry period since the late November阶段性底部. On the other hand, considering liquidity structure and calendar effects, the market's subsequent trajectory may not be a straightforward strong advance and could experience fluctuations. Significant net inflows into A500 ETFs have recently improved the market's micro-liquidity environment and ignited bullish sentiment. Scrutinizing the reasons for this A500 ETF surge reveals two factors: firstly, historical precedent from the past four quarters shows a typical "volume push" phenomenon for this ETF category at quarter-end; secondly, market speculation suggests institutional funds are positioning ahead of anticipated new ETF option products next year. It is crucial to note that, referencing the past three quarters (Q2 2025-Q4 2025), following quarter-end surges, A500 ETFs have consistently shown signs of slowing net inflows or even net outflows early in the subsequent quarter. Concerns about a potential slowdown in incremental fund inflows after the New Year holiday, coupled with the approaching annual report earnings preview season, could introduce volatility and twists into the market's upward trajectory, necessitating preparatory strategies.
Key industry focuses include: Insurance, Non-ferrous Metals, Chemicals, Computing Power, Semiconductor Equipment, Aviation, New Energy, and Machinery Equipment. Key thematic focuses include: Robotics, Autonomous Driving, and Commercial Space.
Risk warnings: Domestic demand policy effectiveness falling short of expectations, significant further increases in tariff rates, potential errors in data statistics.
The rhythm, structure, and potential height of the "Spring Rally" warrant further discussion, especially given the recent eight-day winning streak of the Shanghai Composite Index, which occurs against a backdrop of rising global macro liquidity easing expectations and a significantly improved micro-liquidity environment.
Deconstructing the main drivers of the recent strong market performance, on one hand, strengthened expectations for global macro liquidity easing provide underlying support: cooling US inflation data and expectations regarding the announcement of a "dovish" slate of Fed chair candidates have increased the probability of Fed rate cuts in 2026, confirming a global liquidity easing cycle. On the other hand, substantial net inflows into A500 ETFs have improved the domestic micro-liquidity environment and fueled bullish sentiment. This week, domestic A500 ETFs continued to see high volumes, with net inflows reaching 48.17 billion yuan, accumulating to over 89.5 billion yuan since December 11th. This has noticeably boosted sentiment, with leveraged funds turning to net inflows—this week's net financing purchases reached 45.925 billion yuan (compared to net outflows of 7.589 billion last week). Simultaneously, with the commencement of insurance companies' "good start" campaigns, and guided by the policy framework suggesting "large state-owned insurers investing 30% of annual new premium income into A-shares starting from 2025," accelerated positioning at low levels by these institutions cannot be ruled out.
An evolutionary pattern is observable in Spring Rallies, transitioning from the calendar-effect stage pre-2017, to the front-running game stage from 2018-2023, and now entering a reflexivity stage in 2024-2025. The high market consensus on the Spring Rally, coupled with consistent expectations for front-running it, leads to partial consumption of bullish momentum in the early phases, creating vulnerability at high levels. The emergence of external negatives can easily trigger concentrated selling and short-term corrections. However, given the ongoing宽松 liquidity environment, combined with policy expectations and specific event drivers, subsequent rebounds tend to be more robust.
Concerning the rally's potential height and main characteristics, elevated valuations across many sectors coupled with limited recent incremental demand-side changes have resulted in high sector rotation intensity—currently near a three-month high—which acts as a latent constraint on the rally's upside potential. The market remains in a stage of searching for consensus on leading growth themes.
We believe that for this rally to be sustained, identifiable mid-tier thematic catalysts are indispensable. The most notable marginal fundamental changes likely lie not on the demand side, but in profitability margins. While recent demand-side marginal changes are indeed limited due to seasonal economic softness domestically and internationally, price increase trends driven by liquidity and supply-side factors are spreading across industries. With rising prices for various resources and the advancement of "anti-involution" policies, further development of the price increase theme is anticipated.
Risk analysis includes: 1) Domestic demand policies falling short of expectations, potentially pressuring the market if key economic indicators like property sales, investment, new starts, credit growth, infrastructure commencement, inflation, and consumption fail to recover, leading to downward revisions in corporate earnings and disproving economic recovery narratives. 2) Tariff hikes exceeding expectations significantly, alongside potential sanctions blocking Chinese products from the US market via rerouting, and further escalation including financial measures or forced delistings of Chinese ADRs, which could substantially negatively impact Chinese exports, economic growth, and financial markets, affecting A-share fundamentals and investor risk appetite. 3) Potential errors in data statistics.
Comments