The recent Central Economic Work Conference reaffirmed that expanding the domestic cycle remains a key focus, consistent with last year's positioning. However, for the stock market, expectations and valuations for domestic and overseas demand sectors have diverged significantly from 2024.
Last year, investors were cautious about overseas demand but optimistic about domestic demand—yet overseas demand ultimately outperformed expectations. This year, markets have heavily positioned in overseas-exposed sectors with relatively full pricing, while confidence in domestic demand remains weak. Looking ahead, overseas demand may face greater challenges to exceed expectations in 2026, whereas domestic demand could see more positive catalysts.
From an investment perspective, overseas-exposed companies demonstrate strong earnings delivery but limited valuation upside. Domestic demand sectors, though currently subdued in performance, could offer substantial valuation elasticity if recovery exceeds expectations. The optimal strategy lies in identifying overlapping opportunities—companies with solid overseas exposure as a foundation but also potential catalysts from domestic demand improvements.
Key takeaways from the Central Economic Work Conference include: 1. Addressing the "strong supply, weak demand" imbalance by prioritizing domestic demand expansion and mitigating key sector risks. 2. Explicitly listing "reasonable price recovery" as a monetary policy goal alongside economic growth—a first in policy statements. 3. Introducing an "urban-rural income growth plan," signaling more proactive redistribution policies. 4. Continued emphasis on anti-internal competition ("anti-involution"), with 2026 likely focusing on corporate margin recovery rather than pure volume growth.
Market Implications: 1. **2024 Expectations vs. Reality**: While markets were bearish on overseas demand last year, export growth surprised at 6%, with sectors like communications, gaming, machinery, and commodities outperforming as global suppliers. 2. **2025 Positioning**: Investors now hold consensus optimism toward overseas demand, with active funds increasing exposure to high-foreign-revenue firms (63.6% of holdings in Q3 2025). Meanwhile, domestic demand sectors (real estate + consumption) have shrunk to just 8.9% of A-share market cap. 3. **2026 Outlook**: Overseas demand faces headwinds from potential trade conflicts (e.g., new tariffs by Mexico/Japan) and RMB appreciation pressures. Domestically, anticipated monetary easing and income-boosting policies could revive demand, historically coinciding with external pressures.
Allocation Strategy: - **Overseas Anchors**: Focus on globally competitive leaders in resources and traditional manufacturing (e.g., metals, chemicals, renewables) benefiting from overseas pricing power. - **Domestic Catalysts**: Service consumption sectors (aviation, duty-free, F&B, luxury) offer low positioning and high elasticity to potential demand recovery. - **Hybrid Plays**: Companies with overseas revenue bases but domestic sensitivity (e.g., industrials, pharma, gaming) remain key for balanced portfolios amid rising volatility.
Risk Factors: Escalating Sino-U.S. tensions; weaker-than-expected policy effectiveness or economic recovery; abrupt global liquidity tightening; geopolitical conflicts; prolonged property market stagnation.
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