The A-share market has shown a pattern of rising first and then falling this year. It started strong in the first quarter, supported by robust industrial activity and ample liquidity. However, the US-Iran conflict in March disrupted global energy supplies, leading to a decline in market risk appetite. As the market gradually absorbed the negative impact of the conflict, sectors like optical modules and new energy recently staged a strong rebound. Meanwhile, the bond market, influenced by shifting liquidity and risk sentiment, exhibited a pattern where short to medium-term bonds outperformed long-term bonds.
As we enter the second quarter, key questions arise regarding the pace of domestic and international economic recovery and the primary investment focuses. Invesco Great Wall's Q2 2026 investment strategy report expresses a positive outlook on the equity market for 2026. It suggests technology will likely remain a key theme, alongside selective opportunities in resources and pro-cyclical sectors, with high-dividend stocks acting as portfolio stabilizers. The bond market may experience narrow fluctuations, favoring short to medium-term instruments. For commodities, large industrial metals might face more significant macroeconomic headwinds, while the strategic importance of minor metals becomes more pronounced.
Macroeconomic fundamentals are stabilizing and improving, with stagflation emerging as the primary overseas uncertainty. Invesco Great Wall notes that the domestic economy in Q1 2026 showed signs of stabilization, characterized by moderate recovery in domestic demand, strong external demand, and steadily rising price levels. Production remained robust, driven by external demand, with fixed asset investment in manufacturing steadily increasing. Consumer recovery progressed steadily, with service consumption and new consumption models continuing to provide growth momentum. Overall price levels rose steadily, indicating ongoing improvement in macroeconomic fundamentals. Although international energy prices fluctuated in March due to overseas geopolitical conflicts, the impact on China was relatively manageable, given the dominance of coal in its energy structure and the increasing substitution effect of new energy.
Looking ahead to Q2, Invesco Great Wall believes that despite high uncertainty from geopolitical conflicts, the actual impact of rising oil prices on China is relatively controllable. This is due to coal's significantly larger share in China's energy system compared to crude oil, coupled with rapid new energy development substituting for some oil demand. Should external demand weaken due to a prolonged blockade of the Strait of Hormuz, policies might more vigorously stimulate domestic demand. Furthermore, gradual improvements in household income and recovering consumer confidence increase the likelihood of a broad-based return to positive year-on-year price growth.
The core variable in the overseas macroeconomic landscape is the stagflation risk potentially triggered by geopolitical conflict. Although US February inflation data met expectations, the Federal Reserve acknowledged high uncertainty regarding the economic impact of the Iran conflict. Revisions to the interest rate decision wording and forward guidance indicated heightened concerns about both the job market and inflation. The Fed Chair suggested that improvements in core goods inflation would likely begin to materialize around mid-year, while the impact of oil prices remains highly uncertain. The Fed signaled no consideration of rate cuts until further inflation improvement is seen, leaving open the possibility of further hikes. Invesco Great Wall points out that persistently high oil prices could further influence household inflation expectations, potentially feeding into core inflation and exacerbating the risk of the US economy sliding into stagflation.
For equities, short-term focus is on defense, while the medium to long term looks to earnings recovery momentum. With ongoing geopolitical risks dampening market sentiment, capital is tending towards safe-haven assets to avoid tail risks. Invesco Great Wall Fund analysis indicates the market's core macroeconomic assumption has shifted from recovery to stagflation. While this scenario is considered low probability, its validity remains to be seen. In this context, short-term strategy emphasizes defense, focusing on four key areas: new energy, technology, domestic demand, and innovative drugs.
The report analysis suggests that geopolitical conflicts have exposed risks in energy supply structures, which is expected to drive increased global investment in new energy over the medium to long term, creating favorable investment opportunities in lithium batteries, photovoltaics, wind power, and nuclear power. The pace of import substitution across various technology sectors is accelerating. After prolonged adjustments, related sectors are beginning to show attractive valuations, warranting consideration for gradual positioning. From a macro-hedging perspective, should geopolitical risks and the global economy deteriorate, domestic policy is expected to provide moderate counter-cyclical support, benefiting consumption and pro-cyclical sectors. Innovative drug stocks, after sustained previous corrections, have seen valuations sufficiently digest. Coupled with a still-positive industry trend, select individual stocks have the potential to deliver excess returns.
From a medium to long-term perspective, Invesco Great Wall maintains a positive judgment on the 2026 equity market. Underpinned by long-term structural tailwinds, the focus should be on the momentum of corporate earnings recovery. Regarding specific directions, the firm is optimistic about technology as a primary market theme. This is due to strong domestic and international computing power demand benefiting from AI inference needs, significant potential for semiconductor import substitution, improved competitive dynamics in the cloud computing industry driven by rapid growth in token consumption, memory manufacturers entering a phase of fundamental realization following price hikes, while consumer electronics awaits a turning point linked to stabilizing memory prices. Invesco Great Wall emphasizes that technology industry trends will not be altered by short-term fluctuations and will continue to explore opportunities within the AI, energy, and pharmaceuticals sectors, seeking areas with strong growth prospects and reasonable valuations.
Structural opportunities may exist in commodities and bond markets. Regarding commodities, the report highlights opportunities stemming from the repricing of industrial raw materials, major chemicals, and precious metals within the new global paradigm. Specifically, prolonged conflict could suppress demand expectations, putting short-term pressure on macro liquidity, yet creating potential structural opportunities in commodity markets. In energy, the Middle East conflict may push the oil price center higher than market expectations. Combined with quota reductions in Indonesia and potential domestic capacity exits, this improves the attractiveness of coal. Given ongoing Sino-US geopolitical competition, uncertainty around AI's impact on productivity and debt issues, and an unclear global economic recovery path, gold faces limited significant downside risk. Should liquidity issues emerge overseas, it could present a buying opportunity. Industrial metals show a divergent pattern: aluminum and minor metals are driven by widening supply-demand gaps, while copper and steel might be more burdened by macroeconomic factors. Additionally, during economic and social transformation, opportunities may arise from potential reversals in the property sector, non-bank financials, and new consumption areas, with high-dividend stocks serving as temporary portfolio stabilizers.
Concerning the bond market, the report analysis suggests that, given overseas geopolitical conflicts and potential stagflation risks from oil prices, domestic monetary policy lacks conditions for active tightening. Q2 monetary policy is likely to remain accommodative, with money market rates expected to stay low, thereby supporting stable or even declining short-end rates. Consequently, short to medium-term bonds offer relatively high allocation value, with adjustments potentially presenting buying opportunities. The trajectory of long-end and ultra-long-end bonds primarily hinges on how the market prices "inflation" risk and the impact of overseas conflicts on external demand, likely resulting in range-bound movement, with attention on tactical trading opportunities.
Specifically, for credit bonds, Invesco Great Wall anticipates the market will remain characterized by "low spreads, focus on coupon income, and strong differentiation." Generating returns will rely more on coupon income and structural trades rather than broad compression of credit spreads. Strategically, the focus should be on short to medium duration, high-grade bonds as a core holding, supplemented by moderate credit下沉 (down-the-quality-curve), emphasizing the coupon value of urban investment bonds and central/state-owned enterprise industrial bonds, while also paying attention to the relative value of instruments like bank Tier 2 and perpetual bonds. For convertible bonds, overall market valuation is at historically high levels, offering limited protection. A bottom-up approach is necessary to select bonds with sound underlying fundamentals and reasonable valuations and premium rates. Future focus should be on pro-cyclical sectors, new energy, semiconductors, and other growth areas.
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