Looking back at 2025, the A-share market rebounded from its April low to reach a decade-high, driven primarily by shifting narratives that attracted incremental capital inflows. Valuation expansion emerged as the dominant force: improved domestic fundamentals and a low-interest-rate "asset shortage" prompted insurers to increase equity allocations; global AI development synergies drew fund inflows into AI computing and new energy sectors, while retail investors followed suit; geopolitical tensions, particularly great-power competition, spurred state capital interventions to stabilize markets and boosted sentiment toward resource commodities and import substitution plays.
For 2026, valuation factors may continue providing positive momentum, though with diminishing intensity. Global monetary easing policies will persist, but the timing of overseas rate cuts and domestic liquidity expansion remains uncertain. While insurance capital inflows into equities appear relatively stable, retail participation trends and macroeconomic visibility face challenges amid US-China tensions, policy shifts, and AI-related uncertainties. Key narratives sustaining valuation drivers include AI technology, supply chain security, industrial globalization, and dividend investing—themes demonstrating clear rotational patterns since September 2024 with enduring structural appeal.
Earnings contribution to returns could see modest improvement. The macroeconomic environment likely remains lackluster, with exports being the sole demand-side bright spot benefiting from the global manufacturing upcycle, which may gradually lift PPI—though oversupply conditions will cap recovery potential. Policy effectiveness warrants monitoring, as 2026's fiscal stimulus might not expand significantly, while consumption incentives and property sector support show limited impact. Supply-side reforms face industry-specific constraints in capacity rationalization.
Despite macroeconomic headwinds, base effects could drive further A-share earnings recovery, with 2026 non-financial profit growth projected at 7-9%, contingent on optimistic assumptions including reduced real estate losses and manufacturing write-downs from 2024. Structurally, four cyclical upturns merit attention: global technology, global inventory, global consumption, and domestic inventory cycles.
Portfolio strategy for 2026 recommends 80% neutral positioning, emphasizing AI and supply chain security as core holdings, supplemented by industrial globalization and dividend plays. Cyclical sectors showing upward technical trends or limited macroeconomic sensitivity warrant overweight allocations. Tactical positions should target thematic opportunities like cyclical supply rationalization and industrial AI applications, with commercial aerospace currently highlighted as a key focus area.
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