In the previous Chief Perspective, we analyzed market divergence and consensus based on first principles, arriving at a fundamental allocation conclusion: war acts as an exogenous disturbance but does not alter the main cyclical trend or the momentum of technological expansion. The oil price shock accelerates technological differentiation and improves corporate profits. The trend of revaluing Chinese assets is clear—anchor the cycle and profitability, and focus on deploying in core directions.
As US-Iran talks enter a substantive phase, the conflict has moved into a new stage. We believe negotiations will not be concluded overnight, and back-and-forth will be the norm. However, these disturbances should no longer be the primary factors for asset allocation. Investors need to refocus their attention on fundamentals.
**I. Market Review: The Logic of Cycle Evolution Continues to Hold** Last week, the performance of major asset classes was primarily driven by the one-off clearing of geopolitical shocks and the continuation of cyclical logic. Growth equities led the gains, with the ChiNext Index and the Nasdaq 100 posting the highest weekly increases. Oil prices saw a significant correction, and US Treasury yields declined. Essentially, following the de-escalation of geopolitical risks due to US-Iran talks, the market priced in a "one-off oil shock landing and a moderation in global inflationary pressures," without changing the core trajectory of the cycle evolution. Within the A-share sector, TMT and high-end manufacturing advanced across the board, with communications and electronics leading the gains. Cyclical and consumer sectors showed divergence, while defensive sectors like banking closed lower, highlighting the dominance of the growth rebound, aligning with the structural theme of "ample liquidity + recovering risk appetite."
US-Iran talks were a key catalyst for the rebound: The cooling of geopolitical conflicts completed the one-off clearing of the oil shock, easing global inflation expectations, creating room for the Federal Reserve to cut interest rates, pushing US Treasury yields lower and the US dollar weaker, thereby providing valuation support for global growth equities. In the domestic market, the logic of cycle evolution remains unchanged, supported by ample liquidity and ongoing domestic industrial policy support. Capital is concentratedly flowing into high-growth sectors, with TMT and high-end manufacturing becoming the core vehicles for the rebound. Going forward, we will continue to monitor the progress of the talks, the pace of Fed rate cuts, remain vigilant against potential geopolitical fluctuations, and steadfastly focus on the structural opportunities within the growth theme.
**II. Assessment of Economic Fundamentals: From Stagnation to Gathering Momentum** The stage of the economic cycle constitutes the economic fundamentals. In our Chief Perspective reports from late 2025 and early 2026, we conducted a detailed analysis of the real investment cycle and the financial cycle. The basic conclusions are as follows:
* **Real Economy:** The Kondratiev cycle is in transition from the fifth wave (driven by information technology) to the sixth wave, with AI as the core super-wave. The Juglar cycle has entered a new phase, characterized by the resonance of equipment updates and the AI long wave. The Kitchin cycle is shifting from the late stage of inventory drawdown to the early stage of inventory replenishment, with a clear recovery expected in the second half of the year. * **Financial Sector:** The real estate cycle remains in a phase of deep adjustment. The debt cycle is characterized by slow deleveraging and a paradigm shift driven by sovereign debt resolution.
Cycle differentiation is clear: The oil crisis accelerates this divergence, with the triple shocks of liquidity, technology, and institutions becoming more pronounced, intensifying the K-shaped divergence between the old and new paradigms.
The above analytical conclusions remain unchanged. These cycle assessments are more focused on the industrial side, differing from the traditional analysis of aggregate economic cycles that investors are accustomed to. In this Chief Perspective, we will discuss the fundamentals of the economic cycle from an aggregate perspective.
**1. Logic for Classifying Economic Cycles** Based on a macro strategy framework that has withstood market tests over many years, we have moved beyond the limitations of traditional linear four-stage models. Anchored in the non-linear evolution characteristics of structural transformation periods, we have constructed a four-dimensional core factor model encompassing "growth, inflation, liquidity, and external shocks." This model divides the economic cycle into five major stages: stagnation, downturn, momentum accumulation, prosperity, and overheating, to better suit cycle analysis needs in an open environment.
Traditional cycle models are often based on closed-economy assumptions and rely solely on the three factors of growth, inflation, and liquidity, making them prone to failure under major transformations due to external shocks. Our system upgrades external shocks—such as Federal Reserve policy, geopolitical conflicts, and supply chain disruptions—to core variables. It employs multi-dimensional cross-verification instead of single-dimension judgments to accurately capture the dominant influence of the external environment on the rhythm of the cycle.
The economic essence of each stage is clear: 1) **Stagnation Period:** Characterized by balance sheet recession and deflationary trap, with low growth and inflation, highlighting liquidity traps, requiring strong policy stimulus to repair expectations. 2) **Downturn Period:** Dominated by supply shocks or external hard landings, involving passive deceleration under high inflation pressure or geopolitical crises, with prominent stagflation risks. 3) **Momentum Accumulation Period:** The core innovation of the model, corresponding to the structural reshaping during the transition between old and new drivers. Aggregate growth is weak, but inflation is moderate and risks are controllable. It is a strategic stalemate phase of "apparent weakness but actual strength," where old drivers are cleared, and new drivers accumulate, storing energy for high-quality expansion. 4) **Prosperity Period:** A golden resonance of rising quantity and price, featuring strong growth, moderate inflation, ample liquidity, and a stable external environment, leading to dual improvements in corporate profits and valuations. 5) **Overheating Period:** Involves high inflation due to supply-demand imbalances, growth exceeding capacity bottlenecks, passive tightening of liquidity, and risks of transitioning into stagflation.
This system uses growth to determine direction, inflation to set constraints, liquidity to define rhythm, and external shocks to identify inflection points. During the transition between old and new paradigms, it identifies the cycle stage by analyzing the misalignment between aggregate and structural factors, providing underlying logic support for asset allocation.
**2. Review of China's Economic Cycle Over the Past Decade: From Aggregate Expansion to Structural Upgrading** Over the past decade, the core trajectory of China's economic cycle has been a deep transformation from high-speed growth to high-quality development. The duration of cycle stages has significantly diverged, reflecting the non-linear evolution under the shift from old to new paradigms. Specifically:
* **Stagnation periods** cumulatively lasted about 18 months, concentrated in the early stage of supply-side reforms in 2015-2016 and the post-pandemic scar repair period in 2023-2024. The core features were weak demand and prominent downward price pressures, corresponding to the painful period of balance sheet repair and the clearance of old capacity. * **Momentum accumulation periods** cumulatively lasted about 36 months, spanning the second half of 2016, 2019, the second half of 2020, and 2025-2026. This is the常态 stage of the transition period, where aggregate performance is weak but structural strength accumulates, facilitating the shift between old and new drivers and the accumulation of new quality productive forces, reflecting economic resilience and the strategic patience of "trading time for space." * **Prosperity periods** cumulatively lasted about 12 months, appearing as short pulses around the end of 2016 and early 2020, driven by strong policy stimulus. These were phased rebounds from short-term demand release, lacking sustainability. * **Overheating periods** cumulatively lasted about 14 months, concentrated during the 2017-2018 destocking cycle and early 2021, driven by global inflation, supply chain bottlenecks, and domestic capacity mismatches, forcing policy tightening due to inflationary pressures. * **Downturn periods** cumulatively lasted about 16 months, occurring during the 2018 trade war and from the second half of 2021 to 2022, resulting from the resonance of external shocks and internal tightening, highlighting the relative vulnerability of cycles in an open environment.
Overall, the lengthening of the momentum accumulation period and the shortening of the prosperity period clearly confirm the fundamental shift of the transitioning economy from "aggregate expansion" to "structural upgrading." Cycle evolution no longer follows traditional linear patterns, with the K-shaped divergence between old and new drivers becoming the core theme.
**3. Consensus on China's Economic Cycle for 2026** Reviewing the past is important, but investors are more concerned with future cycle trends, especially whether the recent Middle East crisis has altered this trajectory. Utilizing Wind consensus forecasts, we analyze the cyclical scenario for the four quarters of 2026. This analysis needs to consider both aggregate levels and their internal driving factors. For continuity in cycle depiction, our analysis starts from 2024.
**1) Changes in the Four Major Factors** The economic cycle in 2026 presents a "momentum accumulation" pattern, forming a significant contrast with the "stagnation"-dominated cycle of 2024-2025. The synergistic changes in the growth factor, inflation factor, liquidity factor, and external shocks are the core drivers.
* The **growth factor** remains stably high at a level of 28 across all quarters in 2026, significantly higher than the fluctuation range of 0-28 in 2024-2025, reflecting strengthened endogenous economic growth momentum, possibly stemming from the implementation of previous policies and the release of industrial upgrading effects. * The **inflation factor** gradually recovers from 0 in 2025 to 36, indicating a warming of demand and the repair of price transmission mechanisms, with moderate inflation supporting growth. * The **liquidity factor** maintains an ample level of 87, continuously providing financial support to the economy and avoiding drags on recovery from liquidity constraints. * Although the **external shock factor** rises to 58 in the third quarter of 2026, it does not show extreme deterioration compared to 40 in 2024, and the resilience of the growth and liquidity factors is sufficient to hedge against external uncertainties.
The positive synergy of the four factors—stable growth, moderate inflation recovery, ample liquidity, and controllable external shocks—collectively drives the cycle's transition from "stagnation" to "momentum accumulation," laying the foundation for subsequent economic expansion.
**2) Changes in Core Indicators** A more detailed analysis of the changes in key indicators within each major factor reveals:
* **Growth Factor:** The Manufacturing Purchasing Managers' Index (PMI) shows significant changes, mostly declining/stagnant in 2024, but continuously recovering to prosperous levels in 2025-2026, reflecting the economy's shift from weak recovery to improving景气. * **Inflation Factor:** The Producer Price Index (PPI) year-on-year fluctuated sharply, with significant downward pressure in 2024, gradually turning positive in 2025-2026, indicating a bottoming out and rebound in the industrial goods price cycle. * **Liquidity Factor:** The year-on-year change in M1 is most prominent, persistently low in 2024 but steadily recovering in 2025-2026, showing a continuously accommodative monetary and credit environment and a recovery in real economy financing demand. * **External Shock Factor:** The US 10-year Treasury yield is the most critical indicator, running high in 2024 but continuously declining in 2025-2026, reflecting the end of the Fed's rate-hiking cycle and marginal improvements in global liquidity.
Overall, from 2024 to 2026, the domestic economy is moving from weak recovery to improving景气, downward price pressures are easing, liquidity remains accommodative, and coupled with the shift in overseas liquidity, the four factors are resonating positively.
**III. Key Allocation Points from a Total Cycle Perspective** The allocation strategy from the aforementioned aggregate perspective centers on equities as the core offensive play, captures the commodity price cycle, and uses bonds for defensive positioning, adapting to the characteristics of the "momentum accumulation" stage and balancing recovery elasticity with uncertainty.
* For **equity assets:** Capitalize on the benefits of growth recovery and ample liquidity. Overweight pro-cyclical equities (e.g., cyclical, growth sectors), as they benefit from dual improvements in profits and valuations driven by the PMI recovery and M1 rebound. * For **commodities:** Position for opportunities in industrial goods brought by the PPI bottoming out and rebounding, while simultaneously hedging against potential pulse-like movements in safe-haven commodities like oil triggered by Middle East crises. * For **bond assets:** Maintain a cautious allocation strategy, using high-grade, short-duration government bonds as the defensive core, strictly controlling duration and credit risk to avoid impacts from fluctuations in long-term interest rates.
Comments