Market Review Globally, equity assets faced overall pressure in the first quarter, while crude oil prices surged significantly. In Q1 2026, both domestic and international equity markets experienced broad downward pressure. Among domestic equity indices, the STAR Market 100 and CSI 1000 posted minor gains, whereas the Hang Seng Tech Index fell by 15%. Internationally, the TOPIX index saw a slight increase, while the Nasdaq index declined considerably. Domestic bond markets achieved modest positive returns. In commodities, crude oil rose by nearly 80%, aluminum increased by 15%, copper experienced a slight decline, and precious metals, after a significant rally, saw substantial pullbacks but still ended the quarter with positive returns.
Regarding A-shares, the first quarter saw an initial rise followed by a decline, with cyclical sectors and advanced manufacturing leading the gains. In terms of market styles, cyclical and advanced manufacturing sectors significantly outperformed, while financials and real estate lagged. At the industry level, coal, petroleum and petrochemicals, utilities, and building materials were top performers, whereas non-bank financials, retail trade, and beauty and personal care sectors underperformed.
Market Trading Logic and Q2 Focus Points Since March, the primary trading logic for major global asset classes has revolved around developments in the US-Iran conflict. Current overseas inflation and liquidity expectations have deteriorated noticeably compared to the start of the year. Domestically, initiatives against involution and advancements in the global AI industry remain generally positive but have had a less pronounced impact on market direction compared to 2025.
Key focal points for the second quarter are expected to include: the resilience of the domestic economy and corporate profits, both overall and structurally, amid geopolitical turmoil; potential changes in overseas liquidity expectations; developments in the AI industry regarding computing power and applications; and progress in domestic anti-involution efforts.
Macro Analysis Overseas Growth: Geopolitically induced tightening of financial conditions is suppressing the recovery of US manufacturing, although major global central banks maintain a medium-term accommodative stance, supporting growth resilience. The US-Iran conflict triggered a sharp rise in oil prices, boosting inflation expectations and leading to rapid increases in US Treasury yields and the US dollar. This tightening of financial conditions has interrupted the manufacturing recovery that followed the Fed's consecutive rate cuts late last year. Given that geopolitical tensions have not yet subsided, and oil prices and supply chains are unlikely to quickly return to pre-conflict states, US growth may face lagged pressure from Q1's financial tightening in the coming quarter, leading to a marginal slowdown. However, the geopolitical shock has not entirely overturned the medium-term accommodative stance of the Fed and other global central banks. Rate hikes remain distant, and overseas growth should maintain some resilience.
Overseas Inflation: Beginning in Q2 2026, the impact of the oil price surge will manifest in US inflation data. An oil price center of $90/barrel corresponds to a CPI peak of around 3.5%. Prior to the US-Iran conflict, the US CPI year-on-year trajectory for this year was expected to rebound in the first half, peak at 2.8%-2.9% around mid-year, and then decline. Core CPI was forecast to follow a similar pattern, peaking at 2.5%-2.6%. Post-conflict, markets have broadly raised inflation expectations for US Q2-Q3 2026, with the Q2 CPI peak potentially nearing 3.5%. The impact of oil prices on US CPI is estimated at approximately a 0.2% increase in CPI for every 10% rise in oil prices.
Overseas Liquidity: USD liquidity remains relatively tight, but the US Treasury market has largely priced in a prolonged conflict. Conditions may ease somewhat in the next quarter. Since the 21st century, technological advancement and globalization have allowed the US to enjoy a long period of low inflation. The Fed's paradigm for addressing inflation risk shifted from the 1970s-90s approach of "acting preemptively based on inflation expectations" to "waiting to see sustained inflation increases before hiking rates." This pattern persists. Thus, although the current US-Iran conflict will significantly boost US inflation in Q2 2026 and carries some risk of prolongation, the Fed is likely inclined to pause rate cuts initially, awaiting greater clarity before deciding. The March FOMC rate projections and dot plot indicated most voters favor one more rate cut this year. However, market pricing suggests almost no cuts in 2026-2027, and sharp rises in 10Y/30Y Treasury yields and the USD indicate substantial market pricing for a prolonged war. If the conflict intensity does not exceed expectations further in Q2 2026, support for additional USD liquidity tightening may wane, potentially leading to stabilization or slight easing in the next quarter.
Domestic Growth: Economic activity is expected to remain stable. Industrial output growth for January-February exceeded December's level. Inventory replenishment against a backdrop of rising exports and PPI is conducive to sustaining activity for a period. While some bulk consumer goods face headwinds from subsidy payback, overall consumer confidence remains favorable, and employment conditions are sound. The positive performance of travel-related sectors during the Spring Festival is unlikely to be fleeting, with further policy support expected for service consumption. Survey indicators suggest industrial investment enthusiasm may increase; however, overall fixed asset investment growth is likely to remain relatively low.
Preliminary Assessment of Recent Oil Shock Impact Based on some oil sector research estimates, with the Strait of Hormuz open only to Iran and a few other countries, recent production cuts in the Gulf region are around 7.5-13 million barrels per day, representing approximately 10% of global oil demand. Given the uncertainty of the conflict itself, if oil transportation and production in the Gulf region suffer further damage, the scale of production cuts could increase further. Uncertainty remains high at the start of Q2, but clarity may improve over time. China possesses significant particularities. It will indeed face higher oil prices but is less susceptible to scenarios where "money cannot buy crude oil." Additionally, demand for some petrochemical products previously exported from the Middle East might partially shift to China. Based on March data, signs of impairment to domestic growth momentum are not evident, and the RMB exchange rate against a basket of currencies has remained stable.
Domestic Inflation: Endogenous inflation continues to improve, while the push from rising oil prices will gradually become apparent. The trend of exiting low inflation has become increasingly clear since the start of the year. By February, core inflation had recovered to 1.8%, and the PPI decline narrowed to -0.9%. The upward pressure from rising oil prices is likely to manifest gradually thereafter.
Domestic Credit and Monetary Environment: Medium-term monetary easing expectations are likely to adjust, but financing conditions for private enterprises remain relatively accommodative. Considering changes in the inflation environment over the past year, medium-term monetary easing expectations are highly likely to be adjusted. The People's Bank of China has experience dealing with several supply shock-induced price surges in recent years. We believe the central bank's response to the recent oil price shock will be relatively cautious. According to the China Business Conditions Index released by the Cheung Kong Graduate School of Business, financing conditions for private enterprises remain relatively accommodative recently.
Domestic Fiscal Policy: The fiscal expansion impulse for 2026 is only slightly weaker than 2025. Fiscal conditions in January-February were favorable. Based on information from the "Two Sessions," considering the general public budget balance, transfers from other government funds, etc., the fiscal expansion impulse for 2026 is expected to be somewhat weaker than 2025. → Full-year 2025 data showed reduced resource transfers from the primary budget account to secondary accounts, likely related to strengthened budget discipline. The 2026 fiscal reform work priorities no longer emphasize "increasing financial supervision intensity" but rather "maintaining strict financial discipline." → The 2026 budget shows transfers from the state capital operation budget to the primary account have already reached 500 billion yuan, accounting for one-quarter of total transfers and use of carry-over balances in the primary account; five years ago, this proportion was 12%. → The Five-Year Plan outline requires maintaining stable macro tax burdens and setting reasonable government debt ratios.
Asset Analysis Bonds - Government Bonds: The impact of supply shocks is increasing. Amid the intense US-Iran conflict, the primary macroeconomic contradiction is shifting from demand shocks to supply shocks. Under aggregate demand shocks, stocks and bonds are negatively correlated; but under aggregate supply shocks, they often move in tandem. This means the safe-haven effectiveness of bonds has significantly diminished. The macro shock from the US-Iran conflict has become the core variable dominating markets recently. Only after this shock subsides will demand issues re-emerge as the market's primary concern, and bonds' safe-haven attributes will reappear. If oil prices rise beyond expectations, the initial impact is on inflation expectations, but it subsequently affects growth expectations and could even trigger short-term recession fears. If the Iran issue cannot be fully resolved, the systemic elevation of the oil price center could have profound global implications.
Short-to-Medium Term Relatively Certain: Market segmentation in the bond market has become notable. Short-end rates tend downward, the 10Y is generally stable, while the 30Y shows an upward trend. Currently, the sub-10Y segment benefits from central bank and major bank support, facing limited pressure under accommodative monetary policy. However, the 30Y segment, dominated by speculative trading, remains significantly influenced by oil prices and risk appetite fluctuations. Overall, the impact of the US-Iran conflict on China's economy is relatively controllable, so accommodative monetary policy is unlikely to be withdrawn imminently. Upside risks for China's short-to-medium term rates are limited, making these segments relatively certain. Conversely, long-term bonds are more susceptible to oil price and risk appetite volatility. They possess more trading value than allocation value. Subsequent trading opportunities may arise if recession expectations intensify following the oil price shock.
Bonds - Credit Bonds: Focus on coupon value in short-to-medium term segments; await clearer signals for long-end segments. Recently, credit spreads have moved inversely to credit bond yields, dominated by interest rate trends, and remain at low levels overall. Looking ahead to Q2, focus on the certainty of opportunities in short-to-medium term, high-coupon varieties, and the allocation value of medium-to-high grade 3-5Y bonds. Consider布局 on potential fluctuations and opportunistically participate in trading opportunities for long-end segments. Credit spreads for universal credit bonds have compressed to low levels, suggesting potential premium opportunities in specific sub-sectors. For secondary perpetual bonds and bank capital bonds, focus on roll-down returns and allocation at the 2-4 year curve convexity points, and opportunistically participate in swing trading in long-end segments. For urban investment bonds, use short-to-medium term bonds as core coupon-bearing assets, while continuously monitoring debt resolution policy developments. Monitor changes in geopolitical conflict dynamics and inflation concerns, shifts in market risk appetite amid equity market volatility, the scale of wealth management fund回流 post-quarter-end, potential impact from fixed-income+ fund redemption pressures, the scale of central bank government bond transactions and liquidity injections, and supply impacts following financial bond issuance approvals.
Bonds - Convertible Bonds: Emphasize defense and counterattack; structurally建议 using low-price, low-premium bonds as a base, utilizing valuation fluctuations for swing trading. Overall: After a significant retreat in March, the absolute price and valuation levels of the convertible bond market have fallen back to late-2025 levels. The volatile conflict, unexpected redemptions, and credit risk events continue to disturb the market, but supply-demand imbalances persist, leading to substantial two-way valuation fluctuations. Adopt a range-trading mindset for convertibles, utilizing valuation swings for波段 trading. The median price in the convertible bond market is currently 132.67 yuan, at the 96.6% percentile since 2017, while the average bond floor has slightly risen to around 106.86 yuan. Post-March adjustment, convertible valuations have retreated from their highs,接近 late-2025 levels. However, unlike late-2025, the current equity market remains disturbed by the Middle East conflict, suggesting lower bullish expectations. The April-May earnings season, ST risks, and annual report inquiries pressure weaker bonds, while equity-like issues face redemption expectation uncertainties. In this context, if equity markets decline, high valuations could face significant compression. Conversely, market shrinkage intensifies, and supply-demand矛盾 could lead to strong valuation elasticity during rebounds. With large two-way valuation swings, convertible volatility may not be weaker than that of underlying stocks. Given the median price remains above 130 yuan, safety margins are still insufficient. Thus, convertibles retain more trading than allocation attributes. Q2 should focus on防守反击. Structurally,建议 building a base with low-price, low-premium bonds, emphasizing large-cap dividend-paying stocks, while utilizing significant valuation fluctuations for波段 trading.
A-Shares: The quarter saw initial strength followed by weakness, demonstrating relative resilience compared to overseas markets. A-shares rose initially in Q1, continuing the spring rally momentum into January, transitioned to high-level volatility in February, and experienced a notable correction in March due to external geopolitical conflicts. Judging by the March adjustment幅度, the CSI 300 displayed greater resilience among global equity markets. Structurally, the core market themes shifted continuously during the quarter, with significant volatility in some hot themes and resource sectors. Defensive industries relatively outperformed by the quarter's end. By the end of Q1, the PE of the Wind All-A Index一度 approached the rolling 3-year average plus one standard deviation, and the PB also gradually neared a similar level.
Earnings: Q1 earnings are expected to recover steadily; subsequently, PPI recovery supports continued earnings improvement. Based on preliminary Q1 2026 reports, changes in profit expectations in March were significantly better than seasonal patterns, and overall performance in Jan-Feb was relatively stable. Our fitted All-A景气 index also indicates a recovery trend in Q1. Furthermore, industrial enterprise profits for Jan-Feb showed signs of recovery, suggesting Q1 A-share earnings may trend towards steady recovery. Looking ahead to Q2 2026 and the second half, a positive turn in PPI is expected to further guide the recovery of listed companies' net profit margins. However, note: 1) Against a backdrop of weak demand logic and marginally stable fiscal impulse in 2026, the recovery elasticity may still be constrained. 2) As PPI rises, profit differentiation among sectors may further intensify.
Interest Rates: Affected by geopolitical conflicts at the quarter-end, external tightening concerns intensified; a subsequent correction is possible. At the end of Q1, global inflation expectations and the monetary policy paths of major central banks were persistently disturbed by the situation. Markets repeatedly博弈 over the timing and extent of Fed rate cuts within the year, with frequent expectation adjustments causing heightened volatility in US Treasury yields and the USD index. Concurrently, monetary policy rhythms in major economies like Europe and Japan showed further divergence. By end-March, various assets breached key levels: the USD index surpassed 100, the JPY汇率 touched 160, the 2Y US Treasury yield broke above 3.75%, and the 10Y US Treasury yield exceeded 4.3%. Looking to Q2, based on current baseline conditions, the difficulty and threshold for the Fed to hike rates within the year are considerable. The current market tightening expectation exhibits惯性 from linear extrapolation and may oscillate repeatedly.
Risk Appetite: Monitor developments in overseas geopolitical conflicts, the April Politburo meeting, and the May US-China meeting. Reviewing Q1, March saw significant market adjustments due to external shocks, pulling A-share market sentiment down to low levels. Looking ahead to Q2, external turmoil contrasts with internal stability, suggesting a floor for risk appetite decline. 1) April is a critical period for geopolitical conflict developments. The situation is gradually shifting from "unilateral uncontrolled escalation" to "bounded博弈 and expectation management." However, significant differences in ceasefire demands and ongoing US troop movements mean the situation remains fluid, and short-term volatility may not decline rapidly. Also, closely watch the retreat in oil volatility and the VIX. 2) Internally, the May US-China summit proceeds steadily, domestic policy节奏 is stable, and macro data shows steady recovery, supporting a floor for A-share risk appetite.
Fund Flows: Q2 market micro-liquidity is expected to remain stable. Q1 fund flow structure showed marginal weakening by the quarter-end. 1) Foreign capital: EPFR data indicated active foreign inflows turned to net outflows by the quarter-end after consecutive net inflows. 2) Margin trading: Activity continued to decline, falling to mid-2025 levels. 3) Mutual funds: New issuance of equity-oriented funds remained relatively stable. For Q2, margin trading risks appear controllable, and foreign capital is expected to reconfigure A-shares post-disturbance, suggesting stable market micro-liquidity.
Overall Market Summary: The core concern priced into the market currently is the significantly elevated risk of global liquidity tightening extrapolated from an uncontrolled Iran situation. We believe, first, the external situation is gradually transitioning from "unilateral uncontrolled escalation" to "bounded博弈 and expectation management." Second, the difficulty and threshold for Fed rate hikes within the year appear high. As the situation clarifies further, A-shares should gradually revert to endogenous drivers, including supportive capital market policies, economic bottoming and recovery, and the unchanged tone of high-quality development, coupled with overall stable market micro-liquidity. Market performance remains promising after undergoing consolidation.
Structure: Entering Q2, earnings take precedence. With external disturbances persisting and the earnings season approaching, April's focus should be on earnings, emphasizing resources, technology, and advanced manufacturing. Regarding sector allocation, profit expectation changes across industries from Jan-Mar in Q1 indicate outperformance by resources, technology, and advanced manufacturing. Sectors like petrochemicals, non-ferrous metals, basic chemicals, power equipment, and electronics are core supports for upward A-share profit revisions, while consumption has seen significant downward revisions. Meanwhile, after March adjustments, the risk-reward profile for resource and tech stocks has improved somewhat.
Sector Comparison: Three main allocation themes. Focus on sectors with strong earnings momentum during the reporting season + grasp the energy security theme amid geopolitical conflicts +适度 increase allocation to dividends for defense before external uncertainties resolve. Thematic investment directions include energy security, computing-power coordination, humanoid robots, AI applications, and commercial spaceflight.
Asset Allocation 1. Standard Allocation to Bonds, Standard Allocation to Equities Macro environment: Uncertainty regarding the conflict remains high at the quarter's start, but related trends may become clearer over the quarter. Overseas liquidity and inflation environments are unfavorable. Export demand is robust, and domestic demand momentum is acceptable. Preliminary assessment suggests the conflict's impact on growth is controllable. The trend of corporate profit improvement is relatively certain, inflation is further exiting excessively low levels, and domestic liquidity expectations should be stable. The industry level is expected to offer many highlights, particularly concentrated in AI and semiconductor-related industries. Anti-involution efforts also favor improved profit expectations. For Q2 2026 asset allocation, consider a standard allocation to bonds and a standard allocation to equities. The US-Iran conflict situation, changes in the AI industry regarding computing power and applications, and progress in domestic anti-involution efforts are key观察点.
2. Bond Allocation Recommendations Rate Strategy: Recommend standard allocation. The impact of the US-Iran conflict on China's economy is relatively controllable, so accommodative monetary policy is unlikely to be withdrawn imminently. Upside risks for China's short-to-medium term rates are limited, making these segments relatively certain. Long-term bonds are more susceptible to oil price and risk appetite volatility, possessing more trading than allocation value.
Credit Strategy: Recommend standard allocation. Focus on coupon value in short-to-medium term segments; await clearer signals for long-end segments. Universal credit bonds offer opportunities only in specific niches. For secondary perpetual/bank capital bonds, opportunistically participate in swing trading in long-end segments. For urban investment bonds, use short-to-medium term bonds as core coupon assets and continuously monitor debt resolution policies.
Convertible Bond Strategy: Recommend a slight overweight. Valuation pressures eased somewhat in March, although safety margins remain insufficient. Emphasize defense and counterattack, structurally建议 using low-price, low-premium bonds as a base, and utilizing valuation fluctuations for swing trading.
3. A-Share Allocation Direction Range consolidation, focusing on earnings. Regarding the overall A-share market, the core concern priced in is the elevated risk of global liquidity tightening extrapolated from an uncontrolled Iran situation. We believe the situation is transitioning towards managed博弈, and Fed hikes face high barriers. As clarity emerges, A-shares should revert to endogenous drivers like supportive policies, economic recovery, and quality development, alongside stable micro-liquidity, making performance promising post-consolidation.
Style Judgment: Return to fundamentals, emphasize large-cap growth style. First, refocus on earnings; historically, the correlation between stock prices and earnings rises from March, potentially peaking in late April. Second, regarding size style, considering calendar effects, current sentiment shifts, and fund behavior, large caps appear relatively favorable. During the earnings season, focus on sectors with strong earnings momentum + grasp the energy security theme amid conflicts +适度 increase allocation to dividends for defense before external uncertainties resolve. First, prioritize earnings during the reporting season,关注 AI产业链 and cyclical sectors. Second, with the energy price center rising,关注 new energy/NEV产业链等 medium-term景气 directions. Third, before external uncertainties resolve,适度 increase allocation to dividends for defense,关注 utilities, banks, etc.
4. Hong Kong Stocks: Defend against overseas risk disturbances short-term; growth style could be supported if USD liquidity eases and domestic fundamentals stabilize. China's growth stabilization and rising inflation center in 2026 favor H-share profit improvement. Valuations remain disturbed by overseas risks short-term, with dividend styles likely dominating temporarily. If the phase of急剧 USD liquidity tightening passes, a relatively easier liquidity environment could support H-share growth styles.
5. Crude Oil: Geopolitical shocks combined with heightened energy security concerns among nations suggest oil prices will maintain a high center and high volatility short-term. Beware of demand destruction if the conflict prolongs. Post US-Iran conflict, with the Strait of Hormuz blocked, Gulf oil output has fallen by ~10 mb/d (~11% of global output). Uncertainty regarding the US-Iran outlook remains a core support for high oil price centers and volatility. Additionally, energy security concerns driving inventory builds will also bolster the oil price center. On an annual basis, if the US-Iran conflict persists without缓和, beware of原油 demand destruction. Oil prices could shift from pricing "risk premiums" to pricing "actual supply-demand."
6. Gold: Short-term still pressured by liquidity tightening, but largely priced in; medium-term benefits from potential conflict de-escalation and renewed safety narrative. USD liquidity tightening induced by the US-Iran war will continue disturbing gold short-term. Currently, both the US Treasury market and gold itself have largely priced in a prolonged conflict. If conflict intensity does not exceed expectations further, a turn towards easier USD liquidity coupled with the resurgence of a medium-to-long term safety narrative could benefit gold. (Risk提示: Recent gold volatility is high. Investing in gold funds requires full awareness of risks and prudent decisions based on individual risk tolerance. Continuously monitor global macro trends, central bank gold purchases, and relevant policies.)
Disclaimer: Information herein is from public sources. We make no guarantees regarding its accuracy or completeness. This report does not constitute actual investment results or investment advice. Copyright resides with Bosera Asset Management Co., Ltd. Investment involves risk; choose cautiously. Risk提示: Funds differ from bank deposits and fixed-income instruments. Different fund types carry varying risk-return profiles. Investors may gain or lose. Fund managers manage assets diligently but cannot guarantee profits or returns; fund NAVs fluctuate. Past performance of other funds managed does not guarantee future performance of this fund. Read the Fund Contract, Prospectus, and Product Summary carefully. Pay attention to suitability assessments. Suitability opinions from sales channels may differ; our suitability opinion does not indicate substantive judgment or guarantee of risk/return. Risk characteristics and ratings in fund contracts may differ due to different factors. Understand fund risks/returns, make decisions cautiously based on investment objectives, horizon, experience, and risk tolerance, and assume risks independently. Do not rely on non-compliant sales practices or promotional materials. Fund details and purchase channels are available on the manager's website. Bosera Fund's relevant business qualifications are described at: http://www.bosera.com/column/index.do?classid=00020002000200010007.
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