Daniel Zhang: The A-shares will still be in a bull market in 2026, with two key time points, and the structural differences will not be as significant as this year

On December 5th, Zhang Yu, Deputy Director of the Research Institute at Huachuang Securities and Chief Macro Analyst, shared her outlook on macroeconomic and asset allocation for 2026 with the theme "Where will the deposits go? Spring water flows to the 'midstream'."

Overall, she has a relatively positive expectation for the domestic macroeconomy and the A-share market. She also provided key timing insights for CPI and PPI, reminding that, considering seasonal factors, particular attention should be paid to January's CPI and the second quarter's PPI next year.

She also indicated that the midstream industry may have a stronger certainty in this round of prosperity, taking the lead.

Key Quotes:

1. "I believe 2026 is likely to be a key year for the awakening and construction of the allocation value of the Chinese stock market."

2. "There are two key time points in 2026. The first is in January when the expectation for CPI turning positive for the whole year will become clear, and the second is the consensus on PPI in the second quarter of next year."

3. "Within 3 to 6 months, look for secondary subjects among all major items, and the most certain and verifiable is midstream manufacturing. I believe the midstream may outperform in this round of prosperity, taking the lead."

4. "Due to 'muscle memory,' the upstream industry has recently shown some 'early running,' but I think the subsequent verification of the upstream may not be as good as that of the midstream, especially under this year's unique changes in China."

5. "Next year, two changes will occur: the logic of valuation will weaken, and structurally—the ChiNext will significantly outperform the CSI 300, which will also weaken in 2026."

6. "After a certain point in 2026, the stock market will pay more attention to safety margins and profit improvements, increasingly focusing on fundamentals."

7. "Whether the Chinese capital market can maintain a positive trend in 2026 is crucial to breaking stereotypes. Next year, external demand will provide support, and policies will have confidence."

8. "Many investors still hold the view that if there are no policies regarding housing prices, they are not optimistic about the economy; this logic is incorrect. The core logic of this round is that stabilizing the economy can stabilize housing prices."

9. "From 2021 to 2024, bonds have been favorable due to unit risk-return being better for bonds, but this year has reversed, and the cost-performance ratio of stocks has improved."

10. "Next year, there will not be a bull market in both stocks and bonds; it will only be a seesaw between stocks and bonds. Pay attention to stocks doing well while bonds are bearish."

Using the first person, some content has been abridged.

“Spring water flows to the midstream”

I believe that current analysis should consider both the "real" and "virtual" aspects.

In terms of the prosperity of the real economy, what is currently the clearest from a macro perspective, with the most complete arguments and the most rigorous logic, including complete leading indicators that can be tracked, observed, and verified, is in midstream manufacturing, hence "spring water flows to the midstream."

In the realm of the virtual economy, financial conditions, valuations, and styles are consistent with the team's characteristic research over the past year to two years, which is about "where the deposits go," that is, the distribution of deposits.

Therefore, the combination of the real and the virtual is ultimately today's view on investment. This is a distilled summary of two distinctive macro contradictions for 2026

2026 is the Key Year to Break Stereotypes

Qualitatively speaking, 2022 is the inaugural year of the "post-real estate" era, and 2025 is considered the year when the Sino-U.S. competition eases, the risk appetite of Chinese society recovers, and deposits actively relocate. I believe that 2026 is likely to be the key year for the awakening and construction of the value of allocation in the Chinese stock market.

Regarding past investments in China, both globally and domestically, there are stereotypes about China's capital market—"fast bulls" are common, while "slow bulls" are rare; speculation is frequent, but allocation is not.

It is believed that whether the Chinese capital market can maintain a positive trend in 2026 is crucial to breaking stereotypes. This depends on external demand for support and robust policy backing. I am confident about this, and I think it will break some stereotypes.

In the past, there has been an impression of short bull markets and long bear markets, or short bull markets with long corrections. A bull market lasting a year is common, but a continuous 2-3 years is very rare and would change some key impressions. I think the significance of 2026 lies here, and it is a key observation point.

Among the "Three Engines," Exports Are the Most Anticipated

First, let's summarize the overall economic outlook, including economic growth, policies, and prices.

From the economic outlook perspective for 2026, I would like to introduce a relatively simple method. After all, not everyone is engaged in macroeconomics.

The most important point is to first distinguish what provides the power for price increases and what provides the pressure for contraction. This is very important. Among the three engines, which one has higher certainty and growth rate?

First, under the assumption of certain subsidies, the growth rate of retail sales may be around 4%. If there is additional support for service consumption subsidies, it may reach about 4.5%. In other words, the final result for retail sales should be able to achieve a range of 4.5 to 4.9, which would be very good.

Second, exports are currently considered the only area to look forward to. It is a variable that can have a growth rate higher than the range of 4.5 to 4.9. It is expected to maintain resilience, similar to this year, with a growth rate of about 5%, possibly slightly higher.

Third, fixed asset investment. After all, it is the starting year of the five-year plan. Under the central government's leading investment in 2026, it is expected to rise from this year's -3.1 to next year's range of 0 to 1%, or around 1.1%. Among these, manufacturing is estimated to be around 2, while real estate remains negative at -10 to -13%, and infrastructure growth may be in the range of 5 to 6%, so fixed investment is clearly below the range of 4.5 to 4.9%.

Therefore, exports provide the power for price increases, while within fixed investment, although the growth rate of manufacturing is declining, the medium-term balance of manufacturing itself is good. Infrastructure and real estate will definitely provide pressure, while retail sales act as a stabilizer.

Fiscal Support for Growth "Expansion"

As an exogenous variable, what direction will fiscal policy provide support?

It will definitely provide support in the direction of price increases. With proactive fiscal measures, the budget index growth rate for the two accounts in 2026 is expected to be around 5%, with new government debt in the range of 1 to 1.5 trillion, each item slightly more than this year, indicating overall expansion However, do not expect a particularly large "big move" from any specific number; I believe that this is no longer the policy expectation we should have at present. We are now very focused on counter-cyclical measures and cross-cyclical policies, and we are still very prudent.

If the capital market performs well, like this year, if the capital market expands, it can provide a bull market tax effect, which could amount to several hundred billion.

The above is an outlook on the economy and policies. However, it is important to note in the policies how much of the special bonds are used for debt reduction and how much is used for actual physical workload?

Uncertain.

The specific structure of the ultra-long-term special treasury bonds is also uncertain. The consumption subsidies within the "two new" category, particularly the trade-in aspect, how to allocate between goods trade-in and services is uncertain. It is very likely that the trade-in for goods will remain flat, with possibly not much incremental growth, or only a little. The service sector may serve as a new increment. It is also difficult to specify the internal categories of goods; theoretically, durable goods categories should be expanded.

However, there may be a gradual decline in areas currently related to anti-involution, such as new energy vehicles, because after all, anti-involution and subsidies coexist, and some corrections may be made.

The overall large data list currently estimates the data to revolve around this range. Economic growth at constant prices is between 4.8 and 5.0, nominal growth is between 4.4 and 4.6, overall public investment looks at 5.7, profits look at industrial enterprise profits at 2%, fixed asset investment at 1.1, manufacturing at 2%, infrastructure growth rate is about 5 to 6, real estate at -13, then retail sales around 4%, and resident consumption at 4.6, with export growth rate around 5%.

Consensus on CPI in January, Consensus on PPI in the Second Quarter

There are three judgments regarding prices. The trend of CPI is a fluctuating upward trend, which will eventually turn positive. The trend and positive turn of CPI in 2026 are certain. The trend of PPI is certain, but its positive turn is less certain. The trend and positive turn of housing prices are still uncertain; these are the three major judgments on prices in 2026: CPI, PPI, and housing prices.

First, regarding CPI, CPI is very interesting; January 2026 is a key point. The most important feature of inflation in 2026 is actually the misalignment of the Spring Festival. Even when predicting according to a downward trend, it can be seen that January will have the lowest monthly reading of the year, meaning that January 2026 is the last hurdle. As long as the CPI reading for January 2026 is positive compared to the same month last year, it can be considered the lowest point, and then it is expected that CPI will be positive month-on-month for the entire year of 2026.

For CPI, there is a unified consensus in the capital market at a specific time point in January. In January, once the high-frequency CPI data is released, major buyers and sellers will calculate and generate data models, and the basic error will not be particularly large. Everyone will know that the entire CPI for 2026 will be positive, and every subsequent month will also be positive; this is basically a very important point Therefore, the reading in January 2026 will be very important, as it will be the point where the entire market reaches a consensus on CPI for next year. Even if you don't understand macroeconomics, you will know by January that next year's CPI will be positive month by month, which will be the last pressure point.

Specifically, next year's CPI may have upward risks. If there are indeed policy subsidies for the service industry next year, or some auxiliary expansions to boost domestic demand from goods to services, if the policy strength is significant, the service industry may lead to unexpectedly high price increases.

The second point is to look at PPI. The trend of PPI will be very clear throughout the first half of next year until July and August. Since leading indicators can only be observed 9 to 12 months ahead, we can only see that PPI will likely be most accurate until around July and August. Leading indicators can only determine the upward trend for the first half of next year, which is clear. However, for the second half of the year, the readings in August, September, and the following months will ultimately depend on how the leading indicators for the first half of next year perform. The direction for the second half still needs to be observed, and whether it can turn positive remains challenging and carries considerable uncertainty.

Regarding housing prices, I would like to share some research findings. In the past, when supply did not meet demand, a very interesting viewpoint often discussed was that only by stabilizing housing prices can the economy be stabilized. However, I want to say that this round is different. Because many investors still hold this idea, thinking that if there are no policies regarding housing prices, the outlook for the economy is not optimistic, which is a flawed logic. The core logic this time is that stabilizing the economy can stabilize housing prices. Against this backdrop, research was conducted to find the preconditions for housing prices to stop falling, specifically looking at mortgage rates and rental yield from a cash flow perspective.

From international experience, if mortgage rates can be lower than rental yields, it indicates that the cash flow from housing is positive. Between renting and buying, buying is appropriate, at least after purchasing, renting it out results in positive cash flow. Thirdly, there is a certain correlation between the extent of the price decline and the duration of the leading indicators. If the decline is severe, even if cash flow conditions are met, it will still take a longer time to reach the point where housing prices stop falling. The greater the scar effect, even if cash flow turns positive, residents may take a longer time to change their behavior and re-accept real estate.

Therefore, based on the above experiences, it is believed that China still needs further fulfillment of cash flow conditions. Currently, the rental yield in 100 cities is around 2.2, while mortgage rates are around 3.0, indicating a negative spread of about 80 basis points. This means that the overall cash flow conditions and prerequisites have not yet been met.

In other words, it is believed that lowering mortgage rates in China remains a high-priority option, as its necessity, rationality, and alignment with international experience are matched, and implementation is relatively straightforward. Such a policy may be one of the top options.

It is still believed that there is a significant observability for a substantial reduction in mortgage rates by the end of the year and the beginning of next year.

To summarize, in the context of economic prosperity, exports are a source of strength. In terms of prices, the year-on-year CPI is the entire deflation index, and nominal GDP has bottomed out, which is certain (to some extent). The direction and trend of CPI are determined; the trend of PPI is determined, but turning positive is uncertain. Housing prices are uncertain.**

There are two key time points in 2026. The first is in January, when expectations for CPI to be positive for the entire year will become clear, and the capital market will quickly reach a consensus by the end of the year and early January. By the second quarter of next year, around April and May, we should be able to determine whether PPI can turn positive by the end of 2026, so the consensus on PPI will crystallize in the second quarter of next year. CPI consensus crystallizes in January, PPI consensus crystallizes in the second quarter, these are some important time points for investors.

Midstream Prosperity is Superior

The second part is the analysis of the virtual and the real.

First, prosperity. The core point in prosperity is that within 3 to 6 months, if we look for the most certain and verifiable secondary subjects among all major macro items, it is midstream manufacturing. It is believed that midstream may be ahead in this round of prosperity.

First, its clarity is the highest. Midstream has already seen some new changes; for the first time in over a decade, we are seeing that the overseas gross profit margin of midstream listed companies is higher than that of domestic gross profit margins. This is actually very precious. Before 2020 and 2021, China's overseas gross profit margins had been lower than domestic gross profit margins for many years. In other words, doing business domestically was more profitable; exports were not as profitable, domestic was more profitable.

This is why, although exports have been a very important external judgment condition for the prosperity of the Chinese economy, ultimately the profit cycle of midstream listed companies is still closely related to the domestic economy. Now it is different; with overseas gross profit margins rising, this logic has changed, allowing profits to achieve independent prosperity due to overseas factors, which is different from before. This is the first point.

Second, having a high gross profit margin alone is not enough. The overseas gross profit now accounts for about 25-30% of the gross profit of midstream manufacturing listed companies, so both the weight and the gross profit margin are high, creating conditions for the birth of independent prosperity.

This indicates a very important judgment: the first time overseas gross profit margins have surpassed economic structure and profit contributions, there has been a tremendous change in midstream.

The second point is the reversal of involution. The reversal of involution mainly affects the midstream. The growth rate of demand and investment in the midstream has improved for a year, with demand growth outpacing supply growth. However, in the upstream, although it is also recovering, the recovery slope is not as steep as that of the midstream, and the absolute value has not turned positive yet. This round is very different.

So I want to point out that before 2018 and 2019, every round of economic recovery in China first reacted by focusing on the upstream and bulk commodities, partly because the profitability of listed companies was determined by the domestic economy, and partly because the supply-demand conditions in the upstream had always been better than in the midstream. Therefore, from 2012 to 2019, we could see that although there were also overcapacity issues in the upstream, the overall demand was better than the investment growth rate, leading to fluctuations that could bring about price changes, but overall supply-demand conditions were actually better than in the midstream, so new opportunities could always emerge But now it's different. It is indeed the midstream that has been affected, including the slowdown in manufacturing growth this year. Upon closer inspection, the midstream has dropped the most, and the investment growth in the midstream has also decreased the most, so the midstream has improved relatively better.

Therefore, since 2019, the entire export volatility has pulled up the midstream, making it more volatile because it is related to exports, which is worth noting.

The third point is that the midstream is also the first to benefit from the current technological revolution, whether it is the increase in overseas AI capital expenditure or the domestic technological self-reliance. Investments are happening both inside and outside.

In fact, the so-called enterprise equipment purchases in the midstream, including research and development expenditures, servers, and a whole bunch of other things, are all in the midstream and are the first to benefit from it. There is indeed a significant technology sector, a reversal of internal competition, and the overall strengthening of China's overseas competitiveness, which ultimately results in the observation that the midstream's ROE has begun to recover first and has already started to rise. This is the first change.

The second change certainly has a backing. I believe this backing truly exists. It can be seen that there is currently a significant differentiation among the upstream, midstream, and downstream. During the National Day holiday, the People's Daily published multiple articles on how to scientifically and dialectically view the Chinese economy, and one important aspect is understanding that there is a large differentiation in China now.

Looking at different industries in the upstream, midstream, and downstream, three indicators have been constructed. The retail sales, fixed asset investment, and exports have been broken down into corresponding demands for the upstream, midstream, and downstream, viewed as operational indicators. Corporate expenditure, government expenditure, and direct and indirect financing of the real economy have been disaggregated into support for the upstream, midstream, and downstream, viewed as potential indicators.

It can be seen that whether from a static demand observation or a static potential observation, the midstream is significantly in a leading position. The downstream is stable and serves as the center. The upstream is actually the worst, as there have not yet been clear signs of optimization and improvement in the upstream.

Therefore, discussing the midstream reveals this differentiation, while in the upstream, whether regarding real estate or infrastructure, more detailed evidence is needed for observation. If the static view is purely based on belief, it lacks evidence; you can take a gamble, but that is certainly not something that can be clearly verified. I believe the midstream is the most certain.

Finally, from the perspective of leading indicators, it also possesses such conditions. The global industrial production index is highly correlated with the cumulative changes in interest rate cuts of major global economies. Therefore, the global monetary cycle has reached this position, and the industrial production cycle is on the rise.

Currently, it is believed that the global industrial production index should continue to rise in 2026, as the world is still in a new round of interest rate cuts, including the U.S. reintroducing dual easing, etc. From this perspective, if the global industrial production index can rise, it basically means that the global high-tech electromechanical and other electromechanical products can maintain more than double the elasticity of global industrial production. Therefore, if the global industrial production can achieve a growth rate of four to five points in 2026, other global electromechanical products are estimated to have a growth rate of about ten points.

All of China's high-tech electromechanical products can be divided into two parts: one part is the "Four Great Kings," and the other part is other electromechanical products, with the latter accounting for 50%. The elasticity is expected to be ten points. The "Four Great Kings," such as ICT, semiconductors, shipbuilding, and automobiles, all show good prosperity, with shipbuilding orders also being strong, and the Philadelphia Semiconductor Index is on the rise. China's automotive IC competitiveness is also solid, so basically, the "Four Great Kings" and the remaining other half of the electromechanical products are There are not too many problems on both sides, as the entire high-tech electromechanical sector accounts for "half of the sky" of China's exports, so the overall resilience of 5% in exports has basically received a preliminary guarantee. The electromechanical exports in the midstream sector are the most certain and the best.

The final conclusion is that we can see that the midstream ROE has a slight lead over the midstream PPI. So it has been confirmed that the recovery trend of midstream ROE is sustainable and has real evidence, which may allow us to see the midstream PPI stabilize year-on-year in the first half of next year, and even in the second half of next year, the midstream PPI may lead to a stabilization and price increase on a month-on-month basis.

It is known that whether the overall macro PPI can increase or stop falling next year, and the year-on-year growth rate of PPI in the second half of next year is still unclear. If everything goes smoothly in midstream manufacturing in the second half of next year, it may start to increase on a month-on-month basis, which is the fastest, so the prosperity is slightly better. In terms of the order of price increases, it is also expected to take the lead. Therefore, it is believed that midstream must be taken seriously. The entire capital expenditure in the midstream has already begun to enter a new upward cycle, having passed zero, which may indicate the beginning of a new round of prosperity.

So, the above is the judgment on the midstream. I want to emphasize one point: because the gross profit margin accounts for a significant proportion, and the main role of anti-involution is reflected in the midstream and the demand for exports, it mainly changes under the midstream. Additionally, the domestic real estate situation remains unclear, and it is still unknown when the major projects and pulse points in the leading provinces will appear next year. Therefore, there is a "muscle memory" where once the economy recovers, people tend to first focus on upstream and bulk commodities.

Due to "muscle memory," the market has already shown some early moves in the upstream, and I believe that the subsequent verification in the upstream is likely to be less favorable than in the midstream. This is precisely because I know that the market likes to first go for the upstream and bulk commodities in every round under "muscle memory." I think this point, under the special changes in China this year, emphasizes the need to focus on the certainty of midstream prosperity.

According to the logic I just mentioned, from observing the synchronization to the disassembly behind it, and then to leading indicators, I have thought it through very clearly. Many upstream sectors cannot pass this threshold; following this logical sequence, the upstream will definitely not meet the standards and will certainly not be as good as the midstream. The midstream is the only one that can be logically deduced under the entire rigorous framework, with almost no significant shortcomings, and the data is very solid.

I believe that in 3 to 6 months, if you ask me to choose, the midstream manufacturing prosperity is better and takes the lead, which is the most certain. This is very important because it is different from the muscle memory of most investors. The previous muscle memory was due to low overseas gross profit margins, low overseas proportions, and domestic real estate providing elasticity. When the economy recovers, it is always real estate and infrastructure that lead. This time is different.

Valuation logic will weaken

The second point is about the virtual aspect, which is that the distribution of deposits determines everything.

From two perspectives, the first is the significance of the total amount of deposits for investment, which is the switching of valuation and style. The second is the significance of the deposit structure for the economy, which can determine your trading volume and set your prices The first total amount, the most important feature this year is M2. The year-on-year growth of M2 in 2025 rises from 7.3 in 2024 to 7.9, with a peak of 8.8 in August 2025. This year is a year of unilateral increase in M2, while 2026 will see a gradual decline in M2. This rise and fall is the most important judgment regarding M2 growth rate. In 2025, because it is a year of year-on-year recovery for M2, there is an 80% probability of valuation expansion; in years when M2 declines year-on-year, there is an 80% probability of stable or reduced valuations.

From the perspective of the win rate in 2026, because M2 will decline year-on-year in 2026, the underlying reason is essentially due to anti-involution. To some extent, anti-involution carries a bit of clearing effect; perhaps new investments will diminish, which brings a certain degree of caution. Therefore, with M2 declining year-on-year in 2026, the logic of valuation expansion from 2025 will definitely weaken next year, as this year’s contributions mainly come from valuation increases, so the logic of valuation expansion will weaken next year. This is the first point.

The second point from a style perspective shows an interesting indicator: the proportion of new resident deposits in the new M2 has a very good relative trend relationship with the CSI 300 and ChiNext. A significant judgment this year is that in 2025, the denominator of new M2 will increase because of the activation of resident deposits, which will ultimately lead to the ChiNext significantly outperforming the CSI 300, completely corresponding to this year’s valuation expansion conditions.

In 2026, the new year’s changes are as follows: first, M2 may remain flat, with year-on-year growth rate declining, and new M2 may just level off. Resident deposits will continue to be activated, but the pace may be slower than this year, possibly a very gradual decline rather than a steep drop like this year. Therefore, both the numerator and denominator will shrink, making the final ratio uncertain; it is very likely to be oscillating or slightly upward, so the CSI 300 and ChiNext indices may not be as extreme as this year and should converge, thus not being as strong as this year.

Next year, two changes will occur: the logic of valuation expansion will weaken, and the ChiNext's significant outperformance of the CSI 300 will also weaken. The weakening of these two aspects leads to a general judgment that after a certain point in time in 2026, the stock market will need to pay more attention to safety margins and profit improvements. There will definitely be a gradual increase in the emphasis on fundamentals, but it is currently difficult to accurately predict the specific starting points. Many time points have been given to provide a basis, such as the consensus on CPI in January, the consensus on PPI in the second quarter, and the consensus on the relationship with the U.S. visiting China in March and April. There may be some points, but it is currently difficult to predict; it can only be stated that next year, at this time, it will definitely be gradually considered from another perspective as time progresses.

The second point is the structure of deposits, which is more important in determining who gets the deposits. The importance of who gets the deposits lies in the distribution of money in different hands, which is the core issue; they are all deposits and all M2 In the hands of residents, it is called resident deposits. When residents do not spend money and save, it reflects the contraction of demand, which is not good.

As long as money comes out of residents' hands and goes to enterprises, when enterprises have money, enterprise deposits are M1, which can lead to innovation, investment, capital expenditures, inventory cycles, and PPI price increase cycles. If deposits move from residents to non-banking financial institutions, non-banking financial institutions represent idle funds, which relates to the trading volume and activity of the stock market, as well as the asset price cycle.

Therefore, it is a good thing as long as money comes out of residents' hands, but it depends on where it goes. If it goes to enterprises and non-banking financial institutions, it represents economic and financial resonance. If it only goes to non-banking financial institutions, it is just a circular flow. If it only goes to enterprises, the overall economy will improve; in fact, for enterprises to do well, there must be an improvement in the profit cycle, which will also positively impact the stock market, leading residents' allocations to gradually shift towards non-banking financial institutions.

This is a very interesting matter, as it can construct two interactive models.

The first is the transfer of deposits between resident deposits and enterprise deposits. Therefore, by analyzing the year-on-year growth rate of these two deposits, we can see an indicator that the team has been using for the past two years, which leads the entire Wind A-share market. The key point is that the economy has actually bottomed out; the leading indicator just mentioned, the PPI leading indicator, is important because it is currently stable. If in the second and third quarters of next year, due to the misalignment in January and February, the financial data before March cannot be observed, it will fluctuate wildly.

If, after experiencing significant volatility at the beginning of the year, the situation can stabilize and trend upwards, the decline in PPI by the end of the year may narrow towards 0. This judgment is very important; the reason why the second quarter of next year is a core point for PPI is that the leading indicators will only become clear in the second quarter. This is the first point, but it is certain that the economic cycle is improving.

However, one must note that because the total M2 is expected to decline in 2026, as long as the old-caliber M1 can remain stable year-on-year, it indicates that the economic cycle is still improving against the trend.

Therefore, the standards for the old-caliber M1 next year will be more lenient than this year. This year, due to the rise in M2, the old-caliber M1 was required to rebound, and it indeed rebounded. Next year, because M2 is expected to decline, as long as the old-caliber M1 can remain stable, it proves that your economy and leading indicators are not problematic; this point must be noted.

The second point is the transfer of deposits between residents and non-banking financial institutions. It can be seen that the source of funds behind non-banking deposits, if it comes from the real sector, indicates that the speed of residents' deposits moving this year is actually very strong, with 2025 showing a straight line upward. Therefore, it can be observed that the new additions to non-banking financial institutions and the trading volume of Wind equity have basically stepped up compared to the entire year of 2024 or even 2023.

Thus, it is believed that the transfer of deposits in A-shares represents the continued movement of Chinese residents' deposits towards non-banking institutions, which does not necessarily mean a direct entry into the stock market; moving into non-banking institutions is the first step. The movement of Chinese residents' deposits indicates that the entire economy is improving due to nominal GDP, and the risk appetite should still not have major issues, so the gradual transfer is still ongoing, but this speed is unlikely to be as extreme as this year. For the A-shares, if the trading volume can generally maintain around the central level of 2025, it can sustain a decent trading volume. However, the probability of stepping up further compared to 2024 and entering a bull market is low. This is consistent with the previously mentioned weakening valuation logic and turnover rate. It is unlikely to step up again; maintaining the trading volume flat or even slightly decreasing is reasonable.

This is the judgment for next year. Combining the above two points, we can basically grasp the entire reality and illusion. The real midstream manufacturing is the best. The illusion of valuation, the ChiNext significantly outperforming, and the trading volume significantly increasing will all weaken next year.

The Stock Market is Likely to Bull

First, regarding the relationship between stocks and bonds, I still maintain a very important view: There is no dual bull market for stocks and bonds, only a seesaw between stocks and bonds. There is no dual bull market for stocks and bonds, only looking at stocks as bonds, only a bull market for stocks and a bear market for bonds.

Looking at 2026, I still believe that for most of the time, the focus will remain on being bullish on the stock market, while bonds still need to adjust; this is the overall judgment.

From the perspective of the stock-bond Sharpe ratio, the unit risk-return of stocks is the Sharpe ratio of stocks minus the Sharpe ratio of bonds. From 2021 to 2025, there is a trend of unilateral decline, and in 2025, the trend will reverse.

From 2021 to 2024, bonds were in a favorable position because the unit risk-return was always better for bonds, but this year it reversed, and the cost-effectiveness of stocks has improved. Therefore, from the perspective of the stock-bond Sharpe ratio difference (as of the report cutoff date on November 21), it is at the historical relative 72% percentile over the past ten years, which means the attractiveness of the stock market and the value of cost-effectiveness allocation are still at a high level.

If you look at the ten-year government bond yield minus the Wind All A-share dividend yield, the static return of these two assets is basically still at the 10% percentile of ten years. Historically, static returns will tend to converge towards allocation value, or even slightly exceed it, which is a sign of the end of each market cycle. Currently, there is still a significant gap.

Therefore, I believe that the overall allocation value of the stock market is still relatively superior to bonds, so the rebalancing of these two assets has not yet ended. Currently, bonds are still relatively expensive compared to stocks, and I remain optimistic about the allocation value of stocks.

Thus, in 2026, there will gradually be a shift towards focusing more on safety margins and profit improvements, with greater emphasis on fundamentals.

Secondly, trading volume is expected to remain active, but it is unlikely to continue to increase significantly. The speed of activating household deposits is unlikely to surpass this year. Because next year, if the focus is on profits, this year was about valuation; profit elasticity may not be as large as valuation elasticity. Therefore, while the direction of household deposits moving is fine, it is unlikely to be crazier than this year. These are the two basic judgments I want to convey.

In summary, first, if next year the fundamentals take over the volatility logic, where is the least resistance for allocating funds? It is in areas with relatively low valuation percentiles, high dividend yields, and low fund allocations. I believe it can also be judged that interest rates may rise further, which poses risks. Bonds are still in a phase of adjustment, while insurance, home appliances, liquor, city commercial banks, and joint-stock banks may all just meet the conditions I mentioned. **

The second point is that bond investment is very easy to observe in the yield range of 1.5% to 2.5%. If monetary policy is normal, before zero interest rates, if the stock dividend yield is 1.5% to 2.5%, the yield on ten-year government bonds is basically above 2%. In fact, the Chinese economy has not yet entered the process of zero interest rates or unconventional monetary policy. From international experience, a yield above 2% is considered a reasonable neutral pricing.

Why did interest rates drop so sharply last year? After September 26th last year, the sharp decline in interest rates at the end of the year was due to a special reason: the moderate easing at that time triggered the entire bond market and financial market's imagination of significant easing, and even the possibility of moving towards zero interest rates, which caused such a sharp decline in interest rates.

These are the three bearish reasons for bonds that I want to discuss. I still believe that bonds need to adjust to at least above 2%, above 2.1%. Therefore, I think that at least bonds will need to rise by 20 to 30 basis points next year before discussing the trend and outlook for bonds.

Interesting Overseas Experience

There is also an interesting experience overseas. Why do I say that 2026 may be an observation year for China's allocation value? Because from overseas experience, the average ten-year Sharpe ratio of stocks is positively correlated with the proportion of stock assets in the ten-year asset allocation. The higher the Sharpe ratio, the higher the proportion of stock allocation in residents' financial assets.

I believe there is still a lot of room for improvement in China because the overall Sharpe ratio in China is still relatively low. The ten-year Sharpe ratios of all countries in the world are generally around 0.2 to 0.3 or higher, while China's is only about 0.2. Therefore, I think 2025 may be the starting point for constructing the Sharpe ratio of Chinese stocks and enhancing the allocation value of Chinese stocks, which will gradually improve the allocation of Chinese residents. The allocation to real estate will definitely need to decrease, while other methods will gradually take over. Of course, this is a long-cycle logic. Therefore, I believe that if you can continue to maintain a high Sharpe ratio in 2026, it may indicate two consecutive years of a high Sharpe ratio, which would be a meaningful change. This is also why 2026 is referred to as the year of awakening for the allocation value of the Chinese stock market.

Risk Warning and Disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk