【Shenwan Hongyang Strategy】Inflation Exceeds Expectations, Pro-cyclical Market Trend Continues——2026 Spring Sector Comparative Investment Strategy

(Source: Shenwan Hongyuan Strategy)

Main Conclusions

1. Market Trading Characteristics: Inflation in Q1 2026 exceeded market expectations and also surpassed our November 2025 annual industry allocation report “Moderate Inflation Restart, Focus on Cyclicals.” The February PPI year-over-year improved from the previous low of -3.6% (July 2025) to -0.9%. Global Halo trading & escalating geopolitical conflicts support the cyclicality allocation logic, with industry styles rotating from tech growth to cyclicals. Since the second half of 2025, the cyclically driven price chain rally has spread from non-ferrous metals to chemicals, oil, coal, steel, and building materials.

Historically, during the PPI bottoming and recovery phase, cyclicality factors outperformed in both A-shares and Hong Kong stocks: this cycle’s excess returns from cyclicals are shorter than the historical average. Oil prices surged from around $60/barrel at the end of 2025 to over $100/barrel, but the current cyclicality rally has only gained about 20%, still in progress. The relative performance and downstream transmission of the price chain are still in the “first half.” Reviewing past oil price uptrends (2007-2008, 2009-2011, 2016-2018, 2020-2022), the industry rotation sequence was: rising inflation expectations favoring resource commodities (non-ferrous metals, coal, etc.); prolonged high oil prices could lead to stagflation, favoring defensive sectors. If oil price increases are mainly supply-driven, industry rotation may skip the warming-up phase, with resource sectors reacting more directly.

2. Fundamentals: Inflation will rise in 2026, with A-shares entering a replenishment phase. Revenue, net profit growth, and ROE are expected to improve. Q1 results are expected to show strong performance in cyclically rising industries, manufacturing continues bottoming out, consumer and real estate sectors remain in consolidation, and non-bank TMT maintains high growth.

Two consecutive years of expanding domestic demand (new and重重: promoting consumption + expanding investment) remain the primary economic task this year. The “14th Five-Year Plan” emphasizes total volume again, focusing on economic development: previous five-year plans (“12th,” “13th,” “14th”) centered on structural reforms, while the “11th Five-Year Plan” also prioritized economic development. Historically, the nominal GDP growth rate in the first year of each five-year plan has accelerated compared to the previous year.

A-shares’ inventory cycle is at a low point. In 2026, the oil price center is expected to rise, and PPI improvements will drive companies into replenishment cycles. Additionally, oil prices influence cyclicals through inventory value revaluation, cost transmission, and demand elasticity.

Recently, with rising commodity costs, the first quarter’s price chain expansion has begun: 1) Prices of shipping, cobalt, copper, aluminum, gold, silver, and chemicals have increased significantly YoY; the decline in black series cyclical commodities has narrowed; 2) Storage prices have risen YoY, with DRAM prices transmitting to NAND; 3) Lithium battery materials have doubled in price YoY, while PV prices are diverging; 4) Industries actively raising product prices include chemical raw materials, textile chemicals, agrochemicals, fiberglass, and metal products; 5) Double-digit sales growth in semiconductors, domestic excavators, passenger car exports, heavy trucks, forklifts; 6) Prices of consumer building materials, beef and mutton, dairy products have partially rebounded YoY.

Industries with good supply clearance currently include: building materials, chemicals, real estate, photovoltaics, batteries, wind power, aquaculture, and chemical pharmaceuticals.

3. Industry Policies and Trends: “Domestic Super-Scale Market” vs. “Global Halo Trading”

Two consecutive years emphasize building a strong domestic market: “Buy in China,” “Export from China,” “Invest in China.” Key points include: 1) Future energy is prioritized as the leading industry, with long-term investment opportunities in nuclear-related chains; 2) The concept of “intelligent entities” and “building a new form of smart economy” highlights China’s advantages in global supply chains for intelligent manufacturing; 3) Focus on new consumption, modern service industries, and high-quality innovative startups that can drive consumer goods valuation recovery. International experience shows consumption evolves from “survival” to “experience.” Currently, China’s service consumption share is low, with room for expansion.

The current “Halo” assets in A-shares (heavy assets with low淘汰 rate, with both financial scores above 45) are mainly in cyclic resource sectors like coal, non-ferrous metals, oil & petrochemicals, building materials, infrastructure sectors such as utilities and transportation, and brand-rich consumer goods like food and beverages.

4. Industry Liquidity: Long-term incremental funds are expected

1. RMB appreciation expectations and rising PPI will attract significant foreign investment inflows; 2) Over the next 3 and 5 years in 2026, deposits exceeding 40 trillion yuan will mature, and amid an “asset shortage,” dividend yields in A-shares and Hong Kong stocks remain relatively attractive; 3) In Q1 2026, stock ETFs saw outflows of over 800 billion yuan, and active public funds are currently underweight cyclicals and consumer sectors.

5. Industry Valuation: China’s “Halo” assets are still undervalued with global advantages

1. Valuations of financials, consumer sectors, and some cyclicals in A-shares remain below historical medians; 2) Comparing A-share and H-share valuations, A-shares in power equipment and biomedicine are cheaper based on PB; many cyclicals in Hong Kong are still below net asset value; 3) Globally, China’s manufacturing strength warrants valuation premiums for Halo trading. Leading companies in traditional sectors (resource upstream, chemicals, construction & engineering, machinery, shipping, ports, logistics, finance, real estate) are relatively undervalued in both Hong Kong and A-shares.

6. Q2 2026 Industry Allocation: Continued Cyclicality Driven by Inflation, Recommend Traditional Resources and Future Energy. The fundamental trend investment framework favors traditional cyclicals benefiting from rising inflation, including steel, coal, building materials, construction, chemicals, non-ferrous metals, agricultural products, and power equipment. Thematic focus on future energy and nuclear industry chains.

Risk Warnings: 1) Uncertain global trade and economic growth outlook; geopolitical risks and international cycles may disrupt industry fundamentals, especially for outbound companies; financial data has lag and does not predict future trends; 2) This analysis is based on the top ten holdings disclosed in fund quarterly reports, which may differ from total fund holdings; public funds represent only part of market capital, with limited representativeness, and quarterly data is delayed; 3) Market style shifts depend on macro PPI upward assumptions; if macro conditions change unexpectedly, market reactions may be nonlinear.