Zhang Xia from China Merchants Securities: The most important focus for asset allocation should be "price increase," and 2026 will be a year of cyclical prosperity

Zhang Xia, Chief Strategy Analyst at China Merchants Securities, shared his outlook on investment opportunities and asset allocation for 2026 at an event hosted by China Merchants Bank. Key points: A very important change in 2026 is that the positive feedback mechanism of incremental funds (or liquidity-driven) may slow down in stages. 2026 is the first year of the 14th Five-Year Plan, and major projects will accelerate implementation. Therefore, we judge that commodity demand will marginally improve, which will help boost inflation, a relatively obvious change. The market in 2026 may shift from being "liquidity-driven" to "fundamentals-driven"; sectors related to policy support, price increases, or local high-growth will perform better. Looking ahead to 2026, there are three core main lines. The first is the least expected by everyone, infrastructure investment and real estate. The second main line is the marginal improvement on the consumption side. The third main line is structural opportunities in the technology sector. One of the most effective ways to reduce risk is to choose the main line of the era—the direction with the fastest penetration rate and the best growth potential. This direction may seem expensive in terms of valuation, but as long as it is an upward direction with continuous capital inflow, it becomes a tool to reduce volatility. In 2026, the most noteworthy term in the process of asset allocation is "price increase." The core change is that once the expectation of price increases is formed, price increases may really happen. This is the most important change in the asset thinking for 2026. In years ending in "6" and "1," cyclical stocks usually perform better. Here, cyclical stocks refer to those related to investment and with price increase attributes, such as oil and petrochemicals, non-ferrous metals, chemicals, building materials, and even some food and beverage products also possess this attribute. The first-person perspective is adopted, and some content has been omitted. Entering the "Third Phase of the Bull Market" in 2026 I will first throw out a brick to attract jade, sharing my overall view on 2026. We proposed a theory as early as 2024: A-shares have an implicit 5-year cycle. A-shares often see the bottom of the index in years ending in "9" and "4," such as 1999, 2004, 2009, 2014, 2019, and 2024; then, in the following time, A-shares will generally enter an upward cycle of about two and a half years, reaching the top in years ending in "1" and "7," such as 2001, 2007, 2011, 2017, and 2021. Based on this pattern, we believe that A-shares have already entered an upward cycle since 2024, with the index continuously reaching new highs amid fluctuations. The performance in 2025 also aligns with our judgment. Although the index stumbled, it started to rally in June and achieved considerable gains by the end of the year. The characteristic of 2025 is "incremental fund-driven." Especially since June 2025, when the SSE Index stood above 3450 and the All A Index above 5400, the index entered what we call the second phase of the "third stage of the bull market," shifting from "risk appetite-driven" in September 2024 to "liquidity-driven" in 2025 By the beginning of 2026, the index experienced a noticeable upward trend again. We observed that incremental funds such as margin financing continued to flow in at an accelerated pace, and the index reached new highs. However, starting from January 2026, the index began to show different changes: there was a significant outflow of ETF investors, and the regulatory authorities released some "cooling" signals, causing the slope of the index's upward trend to start to flatten, and the pace of incremental funds also began to slow down. Therefore, we judge that a very important change in 2026 is that the positive feedback mechanism of incremental funds (or liquidity-driven) may phase out. 2026 is a "6 and 1" year. In other words, 2026 is the first year of China's 14th Five-Year Plan and also the year before the central meeting. Several major projects will accelerate their implementation this year, leading to noticeable changes in the investment side compared to 2025. Generally speaking, the implementation of major projects will improve the demand for bulk commodities and other industrial products, which will help push the PPI upward. From historical statistics, "6 and 1" years are often years of accelerated recovery in new construction starts, which is also the year when major projects of the five-year plan are concentrated. Historical data from these years show that the PPI tends to accelerate upward. From a domestic perspective, 2026 is the first year of the 14th Five-Year Plan, with major projects accelerating their implementation. Therefore, we judge that commodity demand will marginally improve, thereby boosting inflation, which is a noticeable change. Thus, the most significant change affecting the stock market in 2026 may be that the negative growth of PPI lasting for three years will come to an end, and the PPI will accelerate upward. At the same time, the current geopolitical changes and the weakening of the U.S. dollar credit system leading to the depreciation of the dollar may cause price increases to exceed market expectations. Ultimately, we judge that the PPI will accelerate upward in 2026, and inflation will rise rapidly. In this context, liquidity may marginally converge and will no longer be as abundant as before. Therefore, we refer to the market in 2026 as the "third phase of the bull market," transitioning from the previous positive feedback mechanism of incremental funds to the PPI rebound driven by price increases, which in turn promotes the improvement of corporate profit growth, known as "fundamental-driven." The biggest change in 2026 is likely not to be dominated by "grand narratives" or technological trends, but rather those sectors that can truly benefit from the implementation of major projects in the first year of the 14th Five-Year Plan or those relatively advantageous areas after policy intensification (such as real estate, consumption, etc.). The upward trend of PPI will also further enhance price increase expectations, making price-related varieties (cyclical) significantly stronger. In summary, the market in 2026 may shift from "liquidity-driven" to "fundamental-driven"; sectors related to policy support, price increases, or areas with locally high growth rates will perform better. Three Core Main Lines Looking ahead to 2026, we believe there are three core main lines. The first is the one with the lowest expectations, infrastructure investment and real estate. Currently, the market has very low expectations for infrastructure investment and real estate policies. However, 2026 is very special, being the first year of the 14th Five-Year Plan, and several major projects will accelerate their implementation With the convening of the Two Sessions and the release of the 14th Five-Year Plan outline, the significant projects of local governments will lead to a marginal improvement in infrastructure investment. After experiencing a four-year downturn, the real estate sector is seeing continuous policy support, with a possibility of stabilization in 2026. The marginal improvement on the investment side is currently in a low expectation environment, but from the perspective of historical patterns and political cycles, it is the area most likely to see marginal changes. Therefore, domestic investment-related bulk commodities (including some overseas-priced bulk commodities) may perform well. Historical statistics also indicate that in years ending with "6" or "1," cyclical sectors tend to outperform, such as oil and petrochemicals, steel, chemicals, non-ferrous metals, and building materials, which benefit from investment and price increases. The second main line is the marginal improvement on the consumption side. With relatively low consumption growth in 2025, driving a rebound in consumption growth in 2026 should be a policy goal, especially since the 14th Five-Year Plan mentions the need to significantly boost the household consumption rate. This time is different from the past: in the last two years, the focus was mainly on subsidies for replacing old products, promoting durable consumer goods like home appliances, automobiles, and mobile phones; whereas in 2026, a key policy direction is to increase support for the service industry, encouraging residents to travel and consume services. Consumption in the service sector deserves special attention. The third main line is the structural opportunities in the technology sector. In 2025, technology stocks will show significant valuation expansion—if the space is large enough and the story is compelling enough, valuation expansion can be achieved. However, in 2026, against the backdrop of marginal liquidity convergence and potential interest rate hikes, there may be a "valuation kill," and only those with high performance growth can perform better. High growth in the technology sector may be concentrated in areas such as semiconductors and new energy. Overall, cyclical (investment and price increases), service sector consumption, and technology with high growth potential that may benefit from price increases or demand improvements (such as semiconductors and new energy) may perform better. The most effective way to reduce risk is to choose the main line of the era In my personal understanding, the core of (reducing volatility) is three points. The first is the selection of targets; the second is the investment portfolio and risk control; the third is discipline at the trading level. These three aspects can help effectively reduce volatility. First, choosing the right direction and track is the top priority. One of the most effective ways to reduce risk is to choose the main line of the era—the direction with the fastest penetration rate and the best growth potential. This direction may seem expensive in terms of valuation, but as long as it is an upward direction with continuous capital inflow, it becomes a tool for reducing volatility. For example, the consumption upgrade and new energy from 2016 to 2021; standing at the stage of this round starting in 2024, the core main lines include semiconductor localization, AI, and great power resource competition. After selecting the right main line, the second key is to choose high-quality targets that truly align with industrial trends within that main line. A long-standing characteristic of the A-share market is that it tends to look for thematic concepts that "sound plausible" in a certain direction, but do not genuinely benefit from industrial trends. For instance, in AI and semiconductors, it is essential to identify targets that are not just about storytelling, but can genuinely enjoy industrial dividends through technological progress, industrial development, and corporate operations, achieving accelerated penetration and generating real profits For general investors, they may sense the overall direction, but determining "which company can emerge" relies more on the research and studies of professional institutional investors. Therefore, ordinary investors trusting professional institutions with strong research capabilities is a shortcut. To summarize the first point: choose the right track and industry trends, while selecting leading companies or high-quality targets that truly benefit from industry trends or have the fastest technological advancements. Second, building a portfolio. To reduce volatility and drawdown, one can create a portfolio across different types of tracks. For example, over the past year, we often mentioned the "eight major tracks": AI, humanoid robots, solid-state batteries, commercial aerospace, controllable nuclear fusion, military trade, semiconductors, innovative drugs, and core consumption. Different tracks have different correlations; some have high correlations (such as commercial aerospace and nuclear fusion), while others have low correlations (such as innovative drugs and new consumption). If you find it difficult to accurately judge what to speculate on at a certain stage, you can combine these new industry trend tracks, achieving a central upward movement through mutual growth, thereby effectively reducing portfolio volatility. In terms of methods, you can create your own combinations using different track ETFs; you can also trust investment managers or fund managers who are skilled in industry trends or growth stocks to create an industry portfolio for you. This is the second effective way to reduce volatility. Third, discipline at the trading level to control drawdowns. Even in a long-term upward industry trend, there will be multiple significant drawdowns during the process. To reduce volatility, it is necessary to set an acceptable drawdown and execute disciplined stop-losses. Even if you are optimistic about a track, you cannot confirm whether it is overvalued on a certain day or whether it has entered a prolonged correction. Trading discipline is crucial in reducing volatility. Professional institutions often find it easier to execute discipline, sometimes even with systematic assistance. Overall, to reduce drawdowns/reduce volatility, three main things should be done: Stand on the correct track and choose companies with real technology and fundamentals; Create track combinations and diversify different attribute tracks; Maintain trading discipline and control drawdowns. Focus on Price Increases At the beginning of the year, we analyzed 2026 and believed that one of the most noteworthy terms in the process of major asset allocation is "price increase." From 2022 to 2024, and even into 2025, the continuous decline in interest rates and the deflationary environment have a greater impact on asset allocation. In this environment, fixed-income products, gold, and other assets are more advantageous; gold reflects the depreciation effect brought about by global monetary policy easing. In a low-interest-rate environment, major asset allocation tends to favor bonds, gold, and so on. However, 2026 may be a watershed year as it is the "year of China-U.S. resonance." On the Chinese side, it is the first year of the "14th Five-Year Plan," a complete year before the central meeting, with major projects landing and reform policies accelerating, which may bring marginal improvements in industrial product demand; on the U.S. side, it is a midterm election year, with fiscal and monetary policies leaning towards easing to deliver better results and strive for electoral victory. At the same time, doubts about the sovereign credit of the U.S. dollar lead to a depreciation of its intrinsic value, pushing commodity prices higher; coupled with new geopolitical changes, countries are "turning to their neighbors," initiating mineral reserves and protecting supply chains, forming what is called "mineral nationalism": reducing exports, cutting production, and driving up prices. In this context, the environment in 2026 may undergo significant changes compared to previous years, and deflation may truly end, with price increases or inflation potentially trending upward Many people will say that there is oversupply and insufficient demand, so why are prices still rising? Price increases have a kind of "self-fulfilling expectation." If everyone thinks that prices will rise, holders will be reluctant to sell, and buyers will worry about rising prices and stock up more, thus the expectation of price increases will change the supply-demand relationship and become an important factor in changing supply and demand. Why is there now an expectation of rising prices? Earlier, large-scale monetary easing and global interest rate cuts had already accumulated pressure for currency depreciation. Previously, due to insufficient physical demand, funds prioritized buying bonds and gold; when policy changes lead to increased physical demand, you will naturally consider that the currency (USD or other currencies) in hand is depreciating, so why not stock up before demand improves? A representative example is that the United States has stockpiled nearly 500,000 tons of copper over the past six months; it doesn't need that much, but it believes that currency is worthless, and copper won't spoil, so it can be used when needed, hence the large stockpiling of physical goods. In this situation, many commodities will experience price increases due to similar actions, with prices rising one after another. For major asset classes, the mindset needs to shift from "deflationary thinking" to "inflationary thinking." It is no longer just about worrying about price drops, waiting for a pullback to buy, or leaning towards fixed income, but rather focusing on those high-quality products that are truly needed, products that will require large amounts during the construction process, or varieties that may rise due to anti-involution and supply constraints. The core change is that once the expectation of rising prices is formed, price increases may indeed occur. This is what we believe is the most important change in major asset thinking for 2026. Performance of Cyclical Stocks in 2026 May Be Better To understand cyclical stock investment, one must grasp a basic principle of A-share investment: the most important factor is politics, followed by policy. China has an important policy cycle, which is the 5-year economic plan. A new 5-year plan is released every five years, during which several major projects accelerate implementation. Investment in major infrastructure projects is not uniform; it often concentrates in the first two years of the 5-year plan—specifically in the years ending in "6" and "1." In 2026 (the first year of the 14th Five-Year Plan) and 2027, project launches will be concentrated. In these two years, new infrastructure starts usually see higher growth rates, and major projects are implemented, making them often years of rising PPI, commonly referred to as "years of price increases." Our statistics show that in the years ending in "6" and "1," cyclical stocks usually perform better. Here, cyclical stocks refer to varieties related to investment that have price increase attributes, such as oil and petrochemicals, non-ferrous metals, chemicals, building materials, and even some food and beverage products also possess this attribute. Historically, in the years ending in "6" and "1," cyclical stocks have shown significant excess returns. For example, after the beginning of 2021, some sector stocks clearly retreated, followed by the rise of cyclical stocks; after adjustments at the beginning of 2016, various price-increasing stocks began to rise from February; after the beginning of 2011, cyclical stocks led the rise until April; 2006 was also a big year for cyclical stocks. Historical patterns show that in the first year of the 5-year plan, the acceleration of major projects leads to improved demand for cyclical varieties, making price increases a trend, and cyclical stocks perform better Specifically for 2026, will this pattern still hold? According to our various sources, it will be the same in 2026. A five-year plan outline may be released in March, and many major projects will accelerate implementation, likely reaching a peak in construction around the Two Sessions. Recently, some investors have already jumped the gun based on this factor. Non-ferrous metals have seen more early investments, benefiting from changes in the global geopolitical environment; in the past week or two, sectors such as oil and petrochemicals, building materials, real estate, and food and beverages have also performed well. Therefore, the view that "2026 is a cyclical year with 6 and 1" may be validated and reappeared this year. Risk Warning and Disclaimer The market has risks, and investments should be made cautiously. 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 align with their specific circumstances. Investing based on this is at one's own risk