CMB Securities Zhang Xia: The main focus of asset allocation should be "price increases," and 2026 will be a big year for the pro-cyclical cycle

China Merchants Securities Chief Strategy Analyst Zhang Xia shared his outlook on investment opportunities and asset allocation for 2026 at an event hosted by China Merchants Bank.

Key insights:

1. A significant change in 2026 is that the positive feedback mechanism of incremental funds (or liquidity-driven growth) may slow down temporarily.

2. 2026 marks the first year of the 14th Five-Year Plan, with major projects accelerating implementation. We expect marginal improvements in commodity demand, which will help boost inflation—a noticeable shift.

3. The market in 2026 may shift from “liquidity-driven” to “fundamentals-driven” growth; sectors related to policy support, price increases, or high-growth segments locally will perform better.

4. Looking ahead to 2026, three core themes emerge. The first, the least expected, is infrastructure investment and real estate. The second is marginal improvement in consumption. The third is structural opportunities in the tech sector.

5. One of the most effective ways to reduce risk is to choose the main themes of the era—those with the fastest penetration rates and strongest growth potential. Although valuations may seem high, as long as the trend is upward and capital continues to flow in, this can actually serve as a tool to reduce volatility.

6. In 2026, a key term to watch in asset allocation is “price increases.” The core change is that once inflation expectations form, actual price rises become possible. This is the most important shift in our view of major asset classes for 2026.

7. In “6 and 1” years, cyclical stocks tend to perform better. These include commodities related to investment and price increases, such as oil and petrochemicals, non-ferrous metals, chemicals, building materials, and even some food and beverage stocks.

Adopting a first-person perspective, with some content omitted.

Entering the “Third Stage” of a Bull Market in 2026

Let me start by sharing my overall view of 2026.

As early as 2024, we proposed a theory: A-shares have an implicit 5-year cycle. The index tends to bottom out in “9 and 4” years—such as 1999, 2004, 2009, 2014, 2019, 2024—and then enter roughly a two-and-a-half-year upward cycle, peaking in “1 and 7” years like 2001, 2007, 2011, 2017, 2021. Based on this pattern, we believe that since 2024, A-shares have entered a new upward cycle, with the index continuously reaching new highs amid volatility.

The trend in 2025 aligned with our expectations. Although the market fluctuated, it started to rally in June and achieved significant gains by year-end.

In 2025, the market was driven by “incremental funds.” Especially after June 2025, when the Shanghai Composite broke above 3,450 and the All A-Index surpassed 5,400, the market entered what we call the “second stage” of the “three-stage bull market,” shifting from “risk appetite-driven” in September 2024 to “liquidity-driven” in 2025.

At the start of 2026, the market experienced another clear upward move. We observed continuous inflows of incremental funds via margin trading and other channels, pushing indices to new highs. However, from January 2026 onward, a different pattern emerged: ETF investors started to withdraw large amounts, and regulatory signals indicating cooling measures appeared. The upward slope of the index slowed, and the pace of incremental capital inflows decelerated.

Therefore, we believe that a very important change in 2026 is that the positive feedback mechanism of incremental funds (or liquidity-driven growth) may phase out temporarily.

2026 is a “6 and 1” year. That is, it’s the first year of China’s 14th Five-Year Plan and a year before the central government’s key meetings. Major projects will accelerate their implementation, leading to noticeable changes in investment. Typically, the completion of major projects boosts demand for bulk commodities and industrial products, helping push PPI upward.

Historically, “6 and 1” years tend to be years of accelerated new project starts, especially for significant projects in the five-year plan. Data from past cycles show PPI tends to accelerate in these years.

From a domestic perspective, 2026 being the first year of the 14th Five-Year Plan with major projects accelerating suggests that commodity demand will marginally improve, helping to boost inflation—a clear and significant change.

Thus, the most impactful change for the stock market in 2026 could be the end of a three-year period of PPI negative growth, with PPI accelerating upward.

Meanwhile, geopolitical shifts and the weakening of the US dollar credit system could lead to dollar depreciation beyond market expectations. We believe that in 2026, PPI will accelerate, and inflation will pick up speed. Under these conditions, liquidity may marginally tighten and become less abundant than before.

Therefore, we term the 2026 market as the “third stage” of the bull market, shifting from the previous positive feedback of incremental funds to a scenario where rising prices lead to PPI recovery, which in turn improves corporate profit growth—what we call “fundamentals-driven” growth.

The biggest change in 2026 may not be driven by “grand narratives” or technological trends, but by sectors that truly benefit from the first year of the 14th Five-Year Plan’s major projects or policy support (such as real estate and consumption).

Rising PPI will also reinforce inflation expectations, leading to a significant strengthening of related sectors (pro-cyclical). Overall, we expect that 2026’s market may shift from “liquidity-driven” to “fundamentals-driven,” with sectors related to policy support, price increases, or high-growth segments performing better.

Three Core Themes

Looking ahead to 2026, we see three main themes.

First, the least expected but most fundamental: infrastructure investment and real estate. Currently, market expectations for infrastructure and real estate policies are low. But 2026 is special—it’s the first year of the 14th Five-Year Plan, with several major projects set to accelerate. As the Two Sessions are held and the plan’s outline is released, local governments will ramp up project implementation, leading to marginal improvements in infrastructure investment.

After a four-year downturn, real estate policies continue to support stabilization. In 2026, there’s potential for stabilization. The marginal improvement in investment is currently underestimated but aligns with historical patterns and political cycles. Therefore, domestic bulk commodities (including some overseas-priced commodities) may perform well.

Historical data also shows that “6 and 1” years are favorable for cyclicals, such as oil and petrochemicals, steel, chemicals, non-ferrous metals, and building materials—sectors benefiting from investment and rising prices.

Second, the marginal improvement in consumption. In 2025, consumption growth was relatively low. Promoting a rebound in consumption is a policy goal for 2026, especially as the “14th Five-Year Plan” emphasizes a significant recovery in residents’ consumption. Unlike previous years, which mainly relied on subsidies for appliances, cars, and smartphones, 2026’s policies will focus more on supporting the service sector—encouraging travel and service consumption. Service consumption warrants close attention.

Third, structural opportunities in the tech sector. In 2025, tech stocks saw valuation expansion—if the growth story is compelling enough, valuations can continue to expand. But in 2026, with liquidity marginally tightening and interest rates possibly rising, valuation expansion may slow or reverse, and only companies with high earnings growth will outperform. High-growth areas like semiconductors and new energy are likely to be key.

Overall, sectors benefiting from investment and price increases, service consumption, and high-growth tech segments (like semiconductors and new energy) may perform better.

The most effective way to reduce risk is to choose the main themes of the era

My personal understanding is that reducing volatility hinges on three points: first, selecting the right targets; second, portfolio construction and risk management; third, trading discipline. All three help effectively lower volatility.

First, choosing good sectors and companies is paramount. One of the most effective ways to reduce risk is to select the main themes of the era—those with the fastest penetration and strongest growth. Although valuations may seem high, as long as the trend is upward and capital keeps flowing in, this can actually serve as a volatility buffer. For example, from 2016 to 2021, consumption upgrades and new energy were core themes; currently, in 2024, key themes include semiconductor localization, AI, and major resource competition.

After selecting the main themes, the second key is to pick high-quality targets that truly benefit from industry trends. A common market tendency is to chase themes that sound promising but don’t actually benefit from industry growth. For example, with AI and semiconductors, it’s crucial to identify companies that benefit from technological progress and industry development—those that can enjoy real market share gains and profit growth, not just stories.

For individual investors, understanding the big picture is easier, but identifying the winners requires professional research. Relying on research-driven institutions is a shortcut.

Summary of point one: choose the right sectors and industry trends, and within them, select leading or fastest-growing companies that truly benefit.

Second, building a portfolio. To lower volatility and drawdowns, diversify across different sectors. For example, over the past year, we highlighted “eight major sectors”: AI, humanoid robots, solid-state batteries, commercial aerospace, controlled nuclear fusion, military trade, semiconductors, innovative medicine, and core consumption.

Different sectors have varying correlations—some highly correlated (like aerospace and nuclear fusion), others less so (like innovative medicine and new consumption). If you find it hard to predict which sector will outperform at any given time, creating a diversified portfolio across these themes can help stabilize the overall trend and reduce volatility.

You can do this via sector ETFs or trust experienced fund managers specializing in industry trends and growth stocks to build a diversified portfolio. This is an effective way to lower volatility.

Third, trading discipline. Even with a long-term positive trend, large drawdowns can occur. To reduce volatility, set acceptable loss thresholds and stick to disciplined stop-loss rules. Even if you believe in a sector, it’s hard to know when it’s overvalued or entering a prolonged correction. Discipline in trading is crucial. Professional institutions often execute this more effectively, sometimes with systematic tools.

In summary, to reduce drawdowns and volatility, focus on three things:

1. Invest in the right sectors and companies with strong fundamentals and technology;

2. Build diversified sector portfolios to spread risk;

3. Maintain disciplined trading and risk controls.

Pay Attention to Price Increases

At the start of the year, we analyzed that “price increases” is the most important term to watch in asset allocation for 2026.

From 2022 to 2024, and even into 2025, declining interest rates and falling prices favored fixed income and gold assets. Gold reflects the global monetary easing and currency depreciation. In a low-interest-rate environment, bonds and gold dominate asset allocation.

But 2026 could be a turning point—it’s the “year of China-US resonance.” China’s first year of the 14th Five-Year Plan, with accelerated project implementation and reforms, may lead to marginal improvements in industrial demand. Meanwhile, the US mid-term elections tend to favor expansionary fiscal and monetary policies to secure electoral success.

Additionally, doubts about US sovereign credit could lead to dollar depreciation, pushing up commodity prices. Geopolitical shifts, such as “mineral nationalism”—reducing exports and production to protect domestic industries—may further drive prices higher. Under these circumstances, the environment in 2026 could see a real end to deflation, with inflation or price increases trending upward.

Many ask: if supply exceeds demand, why would prices rise? The answer is “self-fulfilling expectations.” If everyone expects prices to rise, holders will be reluctant to sell, and buyers will stockpile in anticipation, pushing prices up further and altering supply-demand dynamics.

Why are inflation expectations forming now? Large-scale monetary easing and global rate cuts have accumulated currency depreciation pressures. Previously, with weak physical demand, investors favored bonds and gold. But as policies shift to boost real demand, people naturally consider that their cash (USD or other currencies) is losing value, prompting them to stockpile physical assets before prices rise. For example, the US has accumulated nearly 500,000 tons of copper in recent months, not because it needs that much immediately, but because it believes paper money is devaluing and copper can be stored and used later.

In such scenarios, many commodities will experience price increases driven by these actions, with rising prices occurring in waves. For asset allocation, the mindset should shift from “deflationary thinking” to “inflationary thinking.” Instead of just fearing falling prices and waiting for a rebound, focus on high-quality products that are in demand for upcoming projects or are limited in supply and likely to rise. The key change is that once inflation expectations form, actual price increases can happen. This is the most important shift in our view of major asset classes for 2026.

2026 May Favor Cyclical Stocks

Understanding cyclical stocks requires grasping a fundamental principle of A-share investing: politics is the most important factor, followed by policies.

China has a key policy cycle: a 5-year economic plan. Every five years, a new plan is released, with several major projects accelerating. Infrastructure investments are uneven but tend to concentrate in the first two years of the cycle—“6 and 1” years. 2026 (the first year of the 14th Five-Year Plan) and 2027 will see project launches. These two years typically see high infrastructure start-up rates and project completions, often leading to rising PPI, or “inflation years.”

Our data shows that in “6 and 1” years, cyclicals tend to outperform. These include sectors related to investment and price increases, such as oil and petrochemicals, non-ferrous metals, chemicals, and building materials—sectors benefiting from infrastructure and rising prices.

Historically, “6 and 1” years have seen excess returns for cyclicals. For example, after the start of 2021, some sectors declined sharply, but cyclicals and pro-cyclical stocks then surged; in 2016, after a correction, price-increasing stocks rose from February; in 2011, cyclicals led until April; 2006 was also a cyclically strong year. The pattern indicates that major projects in the first year of a five-year plan tend to boost demand for cyclicals, leading to a wave of price increases and better performance.

Will this pattern hold in 2026? Based on multiple sources, yes. The 14th Five-Year Plan outline is expected to be released around March, with many projects accelerating before the Two Sessions. Past experience shows investors have already started positioning based on this expectation. Metals have led the way, benefiting from geopolitical shifts; recently, sectors like oil and petrochemicals, construction materials, real estate, and consumer staples have also shown strength.

Therefore, the view that “2026 is a ‘6 and 1’ cyclic year” may be validated and repeated this year.

Risk Warnings and Disclaimers

Market risks exist; investments should be cautious. This article does not constitute personal investment advice and does not consider individual user’s specific investment goals, financial situation, or needs. Users should evaluate whether the opinions, views, or conclusions herein are suitable for their circumstances. Investment carries risks; responsibility rests with the investor.