China Merchants Securities released a research report stating that, looking ahead to March, A-share indices are expected to have limited upside, with structural opportunities dominating the market. The upcoming Two Sessions meeting and the disclosure of the 15th Five-Year Plan in March will lead markets to trade around policy expectations and implementation directions. Geopolitics has become the most significant marginal variable affecting A-shares, with the U.S.-Iran situation likely to influence subsequent commodity trends and global macroeconomic logic. Additionally, communication between China and the U.S. represents another important event. Market styles are expected to become more balanced, with small and mid-cap stocks potentially continuing to outperform. The diffusion of cyclical price increases and AI hardware remains a core theme.
Key views from China Merchants Securities are as follows:
**Macro Outlook and Core Logic:** In March, major indices are likely to continue oscillating near previous highs. Following earlier regulatory signals to cool the market and significant outflows from ETFs, investors are no longer favoring large-cap stocks. Core indices are expected to trade sideways in the near term. On the policy front, the Two Sessions will convene in March to announce annual economic and fiscal targets. The outline of the 15th Five-Year Plan will also be disclosed. These events will reinforce expectations of stabilizing growth policies, with discrepancies mainly centered on the scale of government investment. The first year of the 15th Five-Year Plan is expected to see accelerated implementation of major projects. March is also a critical window for geopolitical developments, with the U.S. deploying its largest military presence in the Middle East since 2003, making the U.S.-Iran situation the most impactful event of the month. Furthermore, Sino-U.S. communications represent an additional unknown variable. In terms of liquidity, margin trading balances and quantitative private funds are expected to remain the main drivers, reinforcing the preference for small and mid-cap styles. Overall, index movements are likely to be constrained, with narrow fluctuations and structural opportunities prevailing. The diffusion of cyclical price increases and AI hardware remains the core theme. Policy catalysts in March should focus on traditional infrastructure and consumption support policies for the service sector.
**Style and Sector Allocation Strategy:** Considering factors such as Two Sessions-related trading, U.S.-Iran tensions, rising PPI, first-quarter fiscal expenditure supporting macro liquidity, and fund flows, growth and value styles are expected to become more balanced. Small and mid-cap stocks may continue to outperform, while gold's allocation value becomes more prominent. Recommended index combinations include the CSI 2000, STAR 50, CSI 300 Dividend, CSI 800 Materials, and gold. At the sector level, March represents a key window for Two Sessions policy expectations and the continued diffusion of price increases. Allocation strategies should center on Two Sessions outlook and price hike diffusion. Based on prior performance, valuation, trading activity,景气 changes, and policy catalysts, the firm recommends focusing on nonferrous metals (industrial metals, energy metals, minor metals), basic chemicals, machinery and equipment (automation equipment, construction machinery), power equipment (batteries, grid equipment, wind power equipment), electronics (semiconductors), and utilities (power).
**Liquidity and Capital Supply-Demand:** Incremental funds are expected to continue net inflows in March, with attention on the interplay between margin trading funds and ETF flows. On the macro liquidity front, given the clear supportive stance of central bank monetary policy and the upcoming Two Sessions, liquidity conditions are expected to remain ample. Externally, January CPI data has eased inflation concerns, boosting expectations for rate cuts within the year. Markets are pricing in a 45.9% probability of a 25-basis-point cut in June, with the U.S. dollar index likely to continue retreating after a recent pullback. In terms of equity market capital supply and demand, net outflows of trackable funds narrowed significantly in February, with newly issued funds becoming the main source of incremental capital. On the supply side, new equity fund issuance declined, ETF net redemptions narrowed, and margin trading risk appetite fell, turning into net outflows. On the demand side, net减持 by major shareholders decreased, IPO issuance scaled back, while refinancing activity picked up, keeping overall capital demand stable. Looking ahead to March, incremental funds are expected to continue net inflows, with focus on the dynamics between margin inflows and ETF redemptions.
**Mid-Cycle景气和 Sector Recommendations:** Earnings expectations have been revised upward, with improvements noted in resources, information technology, and midstream manufacturing. According to Wind consensus earnings forecasts, full-market A-share, financial, and non-financial 2025 profit growth estimates have seen slight upward revisions over the past five weeks. Full-market A and non-financial 2026 earnings growth estimates have also been modestly raised, while financial sector expectations remain largely unchanged. Sector-wise, agriculture, forestry, animal husbandry, and fishery have seen the most significant upward revisions over the past month. Additionally,煤炭, nonferrous metals, steel, social services, power equipment, electronics, and petroleum and petrochemicals have seen varying degrees of upward revisions for 2026 performance. Based on disclosed annual earnings previews and 2026 profit expectations, sectors like electronics, computers, power equipment, and defense are expected to maintain high景气. Meanwhile, consumer sectors such as social services, retail, and textiles may benefit from low bases and demand recovery, showing marginal景气 improvements. In February, high景气 areas were mainly concentrated in certain midstream manufacturing, consumer services, and information technology sectors. Within resources, oil prices rose while metal prices diverged; in midstream manufacturing, excavator sales improved and lithium raw material prices saw marginal increases; in consumer services, civil aviation aircraft utilization rates recovered year-on-year; in financials and real estate, residential property sales remained low, while utility sector gas prices declined. For March, allocation strategies should focus on Two Sessions policy expectations and price hike diffusion, with attention on sectors such as nonferrous metals, basic chemicals, machinery and equipment, power equipment, electronics, and utilities.
**Trend Investing and Industry Shifts:** A review and outlook on the U.S. software stock sell-off and industry transformations under AI restructuring. Since 2026, U.S. software stocks have experienced sharp sell-offs, with the IGV US ETF, representing U.S. software-related stocks, underperforming the broader market by over 35% since September 2025. As of February 2026, its forward P/E ratio has compressed from a peak of around 40x to 20.4x, with a historical 50% premium to the S&P 500 turning into a 5% discount. The sell-off was directly triggered by Anthropic's launch of the Claude CoworkAI plugin tool, reflecting a fundamental reassessment of the software industry's long-term growth logic, business models, and valuation frameworks. In the short term, the industry remains in a period of valuation adjustment. Long-term, AI is not simply replacing software but driving a transformation toward intelligent service platforms. The U.S. market faces structural differentiation, while China's SaaS industry, benefiting from digital transformation dividends and policy support, is expected to follow a distinct development path.
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