How should investors interpret the prevailing market consensus and key divergences as the year draws to a close? The core viewpoints are outlined below.
Consensus One: The commodities sector is underpinned by solid logic and is undergoing rapid revaluation. The commodity market has demonstrated notable strength recently, primarily driven by a dual rationale. Firstly, there is a revaluation of monetary attributes; the weakening credibility of the US dollar is causing the long-term narrative logic of gold to spread to other commodities. The gold price ratios for most commodities remain at low levels, suggesting room for ratio correction. Secondly, fundamental commodity attributes provide support; the global economy may maintain resilience next year, favoring genuine improvements in demand. Looking ahead, while some commodities have risen too rapidly due to short-term factors like geopolitics and crowded capital flows—advising accumulation on dips rather than chasing rallies—from an equity perspective, despite A-shares and Hong Kong-listed cyclical sectors appearing relatively overvalued globally, segments like coal, oil, and chemicals still offer relative value.
Consensus Two: Domestic demand is experiencing a weak recovery, positioning the consumer sector for left-side allocation. From an institutional behavior standpoint, the recent "high-to-low switch" allocation into the consumer sector via the Stock Connect scheme reflects a defensive rebalancing need. Sector performance is constrained by weak domestic demand data, with lingering market concerns about the strength of next year's property market recovery and the tapering of subsidy programs like trade-in schemes, creating weak expectations and opportunities for left-side positioning. Structurally, focus should first be on structural alpha opportunities, particularly in sub-sectors with historically low valuations like consumer services and retail; travel-related chains (hotels, airlines, leading OTAs) benefiting from supply-demand optimization; and areas with potential policy or industry catalysts, such as automobiles.
Divergence One: Should the US market trade reacceleration or stagflation? Since the third quarter, numerous US economic data releases have been delayed, increasingly noisy, and divergent, leaving investors divided on whether next year's economy will reaccelerate or enter a stagflationary environment. While last week's strong Q3 GDP growth of 4.3% exceeded expectations, it hasn't fully dispelled stagflation concerns. The logic behind this divergence stems from two points: 1) A significant slowdown in AI investment or a sharp decline in major tech stocks could potentially drag the overall economy into recession. 2) Constraints on monetary and fiscal policy, coupled with limited effectiveness, may hinder their ability to provide adequate support. These differing viewpoints essentially debate whether the high-growth upper segment and the lower segment of the K-shaped economy can successfully achieve a growth handoff. We believe the US economy may reaccelerate in 2026, with US equities remaining in a benign environment in the first half, albeit with a trend towards style balance, recommending a focus on leading tech companies with earnings visibility while increasing allocation to US pro-cyclical sectors like consumer staples.
Divergence Two: Is AI still worth overweighting? While AI investment appears to be a market consensus, trading has shown some unwinding, with positions held more for momentum than conviction, which is why we categorize it as a divergence. Since late October, global AI-related trading has diverged: overseas leading AI hardware and software vendors have retreated (MAG7 down 1.27%, Global X AI Infrastructure ETF down 1.12%), while upstream components like copper, driven by AI power demand narratives, surged 12.4%. While US AI momentum has stalled, domestic allocations to overseas computing power remain concentrated, with the CSI AI ETF up 3.5% since October. Globally, this indicates overseas investors now demand higher earnings visibility from AI investments, not just capex-driven expectations. The domestic situation is more complex, with AI becoming an unavoidable allocation in a structured market. Strategically, investing in AI requires weighing opportunity costs. As mentioned, rebalancing from tech to consumer sectors appears smoother in US markets, where this trade has already advanced. However, for Chinese assets, the visibility for large-cap sectors like consumption to absorb AI-related fund flows remains low. As noted in our annual outlook, before the 2026 earnings season, expectations for overseas monetary easing may intensify, combined with the earnings vacuum period and spring躁动catalysts, potentially creating steep growth trajectories. In the second half, as global fundamentals recover, easing-driven trades may give way to fundamental repair, warranting timely increases in cyclical allocations. Besides these overweight sectors, we also advise left-side positioning in "true value" stocks for risk diversification and slope hedging, focusing on large-caps with low valuations, strong profitability, cyclical bottoms, and balanced characteristics, primarily in finance and mass consumption sectors like F&B and travel.
Divergence Three: Is RMB appreciation sustainable or transient? Last week, offshore RMB broke through 7.0, yet significant divergence remains regarding its sustainability. We reiterate our forecast for USD/CNY at 6.82 by end-2026. The apparent disconnect between the current exchange rate and fundamentals is partly because the central parity rate was adjusted conservatively before October, primarily converging towards the closing price, with accelerated appreciation since November drawing attention. The perceived divergence with the stock market is also misleading; such timing differences are common, with the more market-sensitive equity market revaluing first. We argue the conventional wisdom that appreciation increases export pressure may not hold entirely, and a slow, expected appreciation could be beneficial overall.
Divergence Four: Can the profitability from overseas operations be sustained? The Wind Overseas Focus Index is up 45% YTD with 10% alpha, leading investors to question the sustainability of the "earning overseas" theme and how to participate. We believe negative impacts from RMB appreciation and Sino-US tensions are limited. Next year, external demand could improve supported by overseas monetary/fiscal easing and the diffusion of AI-related capex into China's competitive areas. Trade relations may also see positive developments. Medium-to-long term, Chinese companies have substantial room to increase their overseas revenue share. Currently, sectors like the power chain, components, and optoelectronics are worth watching. Risks include policy effectiveness falling short of expectations and unobservable leverage trading scales in certain hot areas like commodities.
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