Summer Chill Reveals True Heroes: Xiangjiang Strategy 2026 Mid-Year Report (Haitong International Chief Economist Zhang Yidong, May 5, 2026)
Report Summary
Part 1: Global Liquidity Analysis - Fed Policy Wavers, Boiling Frog Scenario; Hong Kong's Loose Liquidity Faces Unlocking Disturbances - Divergence and contention over Federal Reserve policy have intensified. The short-term aggressive rate-cut faction lacks dominance, leading to increased market volatility during the summer. - The possibility of unexpected rate cuts in the second half of the year and the underlying rationale persist. Fundamentally, the Fed is still expected to cut rates 1-2 times in H2, with the actual extent dependent on oil prices and US policy decisions. From a political economy perspective, should the Fed's hawkish stance trigger significant summer volatility in US stocks amid mid-term election influences, a "preemptive rate cut" in Q3 2026 becomes more likely. - US Treasuries: The 10-year Treasury yield is expected to oscillate above 4.0% in Q2, potentially exceeding expectations to the upside, but a downward break below 4% remains probable in Q4. - USD: Short-term relative strength faces fluctuations against a medium-term weakening trend. The Dollar Index is forecast to maintain relative strength within a 98-102 range in Q2, primarily due to stronger US economic performance compared to Europe and Japan, and support from high Middle Eastern oil prices. A medium-term (6-12 months) USD weakening is highly likely, while the trend of RMB fluctuating with an appreciation bias remains intact. - Hong Kong Liquidity: Macro liquidity conditions remain mildly accommodative, but micro liquidity could face disturbances during the June-July peak period for HK stock lock-up expiries. The structure of micro liquidity continues to be dominated by southbound capital from the mainland, with net inflows exceeding HKD 270 billion in the first four months. Foreign capital回流 is gradually recovering, with cumulative net inflows into HK stocks reaching HKD 7.1 billion year-to-date. The HK IPO market maintains high activity, with strong participation from international capital.
Part 2: In-Depth US-China Economic Comparison - Surface Appearances and Core Realities under K-Shaped Economies - US Economy: Maintains a facade of prosperous data, with AI serving as a tangible pillar supporting a soft economic landing. In Q2, consumption and employment show signs of weakening. Inflation remains sticky in the short term due to aftereffects of Middle East conflicts and high oil price disruptions, potentially moderating downward in H2. Post-Q1 earnings reports led to widespread upward revisions for US stocks, but Q2 carries risks of downward revisions. A tail risk for the US economy lies in private credit risks. - Chinese Economy: Tepid macro data contrasts with vibrant new quality productive forces. China's Q1 GDP grew 5.0% year-on-year, with monetary policy shifting from broad monetary easing to enhanced credit support. New quality productive forces have become the core engine, with expected profit growth for tech firms significantly outpacing the market average.
Part 3: Investment Strategy and Allocation Recommendations - Seeking Winners in the Era of a Tech Bull Market Summer - Global Allocation Framework: Transitioning from "USD Asset Dominance" to "Diversified Allocation." Recommends balancing "Safety and Efficiency," adhering to a strategy of "Equal Emphasis on Defense and Offense." - Core Strategy for May-December 2026: Diversified allocation, selectively investing in global high-quality hard assets, accumulating Chinese assets on market dips, and actively taking long positions. Recommends gradually increasing overweight positions in A-shares and H-shares during market fluctuations, maintaining standard allocations to long-term US Treasuries, US stocks, and gold, while underweighting USD cash. - Summer Outlook for Chinese Stocks: An N-shaped trajectory with twists and turns, building momentum for a major autumn rally. Three key variables potentially causing an N-shaped pattern for Chinese stocks in summer 2026 include: The long-term norm of US-China relations characterized by "contestation without rupture," expecting continued periodic fluctuations post potential US leadership visits; Aftereffects of US-Iran conflicts and risks in emerging markets like Southeast Asia; Whether AI application deployments meet expectations. - Medium to Long-term Strategy for Chinese Stocks (A-shares + H-shares): Using the SMART framework to select era-defining winners. Differing from the 2016-2020 "core asset rally" focused on baijiu, property, and internet stocks, this cycle emphasizes new-era hard assets, focusing on hard strengths in security assets, manufacturing, and high-tech innovation. S·Security Assets (Energy/Resources/Gold, etc.) + MA·Manufacturing Abroad + RT·R&D Technology (Hard Tech/High-Tech). Backtesting results for the SMART portfolio are impressive since October 28, 2024: The Energy/Resource Security portfolio achieved a cumulative return of 46%, with 58% alpha; the Manufacturing Abroad portfolio returned 10% cumulatively, with 22% alpha; the High-Tech/Hard Tech portfolio returned 26% cumulatively, with 38% alpha. The composite portfolio outperformed the MSCI China Index by 39%. - Summer Investment Strategy for HK Stocks: Being a friend of time, employing a defense-to-offense approach. * Leveraging HK stocks' valuation discount, capital inflows, and earnings improvement, the strategy advises selecting era winners and focusing on three investment themes during the N-shaped market consolidation: New Tech Growth Stocks, High-Dividend Yield Assets, and Value-Growth Stocks. * The Hang Seng Index's forward P/E ratio is approximately 10x, significantly lower than the S&P 500's 21x and the CSI 300's 13x, with the discount at historically extreme levels. * HK IPOs are set to systematically increase the weighting of new-era emerging growth sectors like AI technology, semiconductors, and innovative drugs. On one hand, full-year 2026 HK IPO fundraising is expected to exceed HKD 300 billion, with pipeline projects concentrated in tech and healthcare. On the other hand, 2026 will see a historic peak in HK stock lock-up expiries, which often act as a trigger for shifts in capital style, transitioning the narrative from growth stories to earnings delivery.
Conclusion: Walking with the Times at History's Turning Point True character is revealed in turbulent times. History's turning points are often moments of intense wealth redistribution. Walking with the times and aligning with trends are essential for seizing opportunities amidst change. Paying homage to the renowned Hong Kong film "A Better Tomorrow," Chinese stock markets also deserve a better tomorrow, with a structural, enduring bull market yet to fully unfold. This is because the global economic and financial order is shifting from "unipolar" to "multipolar" – evidenced by cracks in USD credit credibility, the accelerated internationalization of the RMB, China's technological self-reliance, the passing of the policy and economic troughs for Chinese assets, and profits beginning to show a spark that could start a prairie fire. The price re-rating of Chinese assets is merely a matter of time. The period from May to September 2026 represents a critical window to accumulate Chinese assets during market fluctuations. Strategically, maintaining conviction in long positions on China's core assets is paramount; the greatest risk is not volatility, but missing the opportunity entirely.
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