CITIC SEC: Under the expectation of increasing market sentiment, the A-share market may experience an upward trend after the start of the year.

CITIC SEC released a research report stating that the biggest expected difference in 2026 comes from the balance between external and internal demand. It is the general trend to impose "taxes" on external demand and subsidize internal demand, and this year is an important starting point for it. At the beginning of the year, considering that the funds were not particularly active at the end of last year, there is a higher probability of market volatility towards the upside in the new year, especially in a situation where investor sentiment is rising. In the medium term, it is recommended to adopt a mindset of "earning money from performance rather than relying on valuation money" for investment layout. There is a preference for sectors with lower heat and concentration of positions, but which are beginning to attract attention, with increasing catalysis and long-term potential for ROE improvement, such as the chemical industry, engineering machinery, power equipment, and new energy sectors. Sectors with high prosperity and heat but stagnant stock prices are approached with caution. At the same time, some new industry themes (such as commercial aerospace) may continue to evolve, and it is worth keeping a continuous watch on them. In terms of institutional earnings effects, the active managed public funds tracked by CITIC SEC had a median annual return of 28.2% in 2025. In the past 10 years (since 2016), it ranked third, only behind the 51.9% in 2020 and 37.7% in 2019, and ranked sixth over the past 20 years. Looking at the differentiation in returns, the top 10% percentile return was 60.8% in 2025, while the bottom 10% percentile return was 5.4%, with a difference of 55.4 percentage points, ranking second over the past 10 years, following the 71.9 percentage points in 2020. Balanced products performed relatively weakly in structural bull markets. CITIC SEC analyzed the performance of 30 representative balanced stock picking fund managers in 2025, with an average annual return of 28.0%, which was basically in line with the rise in the Shanghai Stock Exchange Composite Index (+27.6%). The market has enjoyed both the "valuation money" brought by expected differences and the "performance money" earned. 1) The A-share and Hong Kong stock markets in 2025 can be divided into five stages. The Shanghai Stock Exchange Composite Index rose by 27.7% throughout the year, and the Hang Seng Tech Index rose by 23.4%. There was a significant difference between A-shares and Hong Kong stocks in the superior interval. The first stage was from New Year's Day to before Chinese New Year. After the adjustment at the beginning of the year, the market experienced a brief frenzy, but the main theme continued to be consensus sectors at the end of 2024 (autonomous controllable technology, edge AI, Siasun Robot & Automation, etc.), with active funds participating. In the second stage, after Chinese New Year until the end of March, DeepSeek completely changed the market's narrative on Chinese autonomous technology and also brought imagination to AI applications. During this stage, Hong Kong stocks witnessed the largest primary wave rise of the year, and from after the Spring Festival to April 7, the Hang Seng Tech Index rose by 12%, significantly outperforming A-shares (Shanghai Stock Exchange Composite Index rose by 4%). This relative strength continued until the end of May. The third stage was from April 7 to the end of June, during which the market experienced unexpected tariff shocks and rapid recovery. Sectors less affected by tariffs (innovative pharmaceuticals, gaming) and new consumer sectors with internal demand narratives and structural prosperity performed well. The fourth stage was from late June to September. After successful Sino-US negotiations in Geneva and London, the Sino-US economic and trade negotiation framework gradually took shape, and uncertainties significantly decreased. The explosion of AI reasoning demand led to a primary surge in the North American computing power chain and the valuation expansion of autonomous technology. Leverage funds dominated the increase in liquidity during this period in A-shares, with an increase of nearly 700 billion yuan in margin balance, while the performance of Hong Kong stocks led by external demand openness was significantly weaker than that of A-shares. The fifth stage was the high-level volatility since October, with some funds shifting from pursuing returns to cashing out. 2) The "big money" of structural bull markets comes from significant expected differences and performance growth. The "big money" in 2025 mainly came from the valuation increase brought by correcting expected differences, while also realizing substantial performance growth. The first is the expected difference between internal and external demand structures. From the beginning of the year until the start of the tariff war, the market's expectations for external demand, overseas supply chains, and outward-bound trade were constantly shifting towards pessimism. The geopolitics between China and the US and external demand continuously exceeded expectations throughout the year, with a narrative changing to a potential G2 scenario by October, becoming a market consensus by the year-end. The second is the expected difference in the evolution of the AI industry. The surge in reasoning demand largely compensated for the slowdown in the pre-training Scaling Law and the industrial vacuum period during the transition from Hopper to Blackwell architecture. At the beginning of the year, DeepSeek once created a narrative of excess computing power in the market, but after the imposition of tariffs, overseas AI supply chain companies continued to be under pressure. According to the consensus net profit forecast for 2025, the valuations of Foxconn Industrial Internet, Eoptolink Technology Inc., and Victory Giant Technology were only 10 times, 12 times, and 20 times the lowest estimates for the year, respectively, but by the end of 2025, they had recovered to 40 times, 106 times, and 142 times, respectively. It can be seen that the parts of the industry trends that truly make money are during significant expected differences and prejudice corrections, rather than after the formation of consensus (the communication ETF rose by 84% in the third quarter, but only by 15% in the fourth quarter). Earning money through industry trends also requires great persistence and insight. Other structural opportunities from last year also followed this characteristic, such as the significant rise in new consumption occurred before the widespread dissemination of the concept of "new consumption," and the increase in innovative pharmaceuticals occurred before intense market discussions about the BD process. The only sector that saw a continuous bull market without major corrections last year was the resource sector. Although the expected differences were not as obvious, the market still exhibited biases towards traditional manufacturing industries during most of the time. 3) Incremental liquidity is just a result of expected differences and performance realization, and investors have overestimated the impact of incremental funds on the market. Between June 20 and September 25 last year, margin balances increased by 623.5 billion yuan, and the Shanghai Stock Exchange Composite Index rose by 14.6%. However, the index's full-year increase was only 18.4%. Excluding the three months of sharp increase in margin financing, the index mostly fluctuated for the rest of the time. But this does not mean that there was no increase in incremental funding during other periods. For example, excluding the aforementioned time interval, ETF net inflows for the full year were 230.6 billion yuan (a net outflow of 102.4 billion yuan in the time interval), and the insurance industry had a total of 5.76 trillion yuan in new premiums, of which 1.73 trillion yuan could potentially enter the market if 30% is invested. The increase in fund flows and the rise in the index do not have a simple mapping relationship; liquidity is just a result of expected differences and performance realization rather than a fundamental reason for the market's rise. The market is not lacking funds; it lacks sufficient investable assets and creative space. The biggest expected difference in 2026 will come from the balance between external and internal demand, and imposing "taxes" on external demand while subsidizing internal demand is the general trend. In a background where the market is optimistically focused on external demand and cautiously considering internal demand, it is important to identify where the biggest expected difference in 2026 lies. Investor high expectations for the new year are largely based on an expectation game revolving around "Trump's visit to China unhindered Sino-US relations before the visit." However, in reality, China is facing a more complex trade environment this year than last year, no longer solely revolving around China-US relations. Starting January 1, Mexico officially imposed up to a 50% import tariff on 1463 items, including automobiles, steel, textiles, etc., from countries without free trade agreements, including China; the European Union's Carbon Border Adjustment Mechanism (CBAM) entered the "charging period," encompassing six categories of products, such as steel, cement, aluminum, fertilizers, electricity, and hydrogen; and Japan has also begun to cancel its 36-year-old policy of exempting small imports from consumption tax. Changes in China's export attitude are also noteworthy, with strict export controls on strategic resources and more stringent export scrutiny for industries with technological advantages such as lithium batteries. Changes in the export licensing system for products like electric passenger cars and steel indicate a shift from merely expanding outward to stabilizing supply chains, protecting profits, and managing risks, transitioning from subsidizing external trade to taxing it, making foreign trade a policy tool for serving domestic demand, industry upgrading, and economic security. Under the wave of "anti-internal buckling," enterprises going global, and globalized operations, China's pursuit of growth through value-added taxes is becoming increasingly limited, while income growth based on profits realized in the global market presents a significant opportunity for tax revenue growth. The alignment of fiscal interests with shareholder interests historically is crucial for future sustainable subsidies for internal demand. Imposing "taxes" on external demand and subsidizing internal demand to ultimately achieve a balance between external and internal demand is a major structural adjustment that has never been seen in history. It is challenging for the market to quickly and fully price this in the short term, making it a source of expected differences and potential performance growth. The funds were not particularly active at the end of last year, increasing the probability of upward market volatility at the beginning of the new year. 1) At the end of 2025, the market's overall "frenzy" was very restrained. Most of the funds that had previously realized profits are currently waiting for re-entry opportunities, indicating that without significant unforeseen risks, the market is unlikely to see a significant correction. Based on investor sentiment indicators, as of December 31, 2025, the daily frequency indicator MA10 had a reading of 57.5 (range 0-100), which was at a low percentile level of 24.3% since the 2024 stock market rally. As of December 26, 2025, the latest position of active private funds surveyed was 80.0%, which had been above 80% for five consecutive weeks, reflecting that funds that had realized profits were still not returning on a large scale. Hong Kong stocks are at a temporary emotional low, with the Hang Seng Tech Index stabilizing above the annual line. Additionally, the US stock market has been volatile since November 2025, and as a leading indicator of risk assets globally, the price of Bitcoin has been trading sideways between $87,000 and $89,000 for over a month, showing a trend of upward correction in the new year. 2) In an environment of "rising investor sentiment," in the short term, simply holding positions may be a reason for upward movement in the market. The prevalent strategy of "adjust and get back in" for consensus sectors is likely the main focus of institutional fund investments, such as non-ferrous metals, overseas computing power, autonomous controllable semiconductors, etc. However, some contra-consensus sectors are also being considered for incremental fund allocation, focusing on the potential for unexpected policy changes in the new year through small allocations to internal consumption sectors to capture the year's policy surprises, with a particular emphasis on tax-free services for travel and related industries like aviation, and high-quality real estate developers. Furthermore, Hong Kong technology is a relatively straightforward option for increasing exposure to internal demand. The only downside in the short term is that the allocation percentage of funds to Hong Kong stocks has not shown a systematic decline. 3) In the medium term, it is recommended to adopt a mindset of "earning money from performance rather than relying on valuation money" for investment layout. CITIC SEC favors sectors with lower heat and concentration of positions, but which are beginning to attract attention, with increasing catalysis and long-term potential for ROE improvement, such as the chemical industry, engineering machinery, power equipment, and new energy sectors. Sectors with high prosperity and heat, but with stagnant stock prices, are approached with caution. Keeping an eye on some new industry themes (such as commercial aerospace) is also advisable. Additionally, CITIC SEC continues to closely monitor and track the trend of RMB appreciation. Recently, the heat in sectors like papermaking and aviation has risen rapidly, but the focus in the future will be on the policy logic changes triggered by continuous appreciation, with brokerage and insurance sectors being viable options from this perspective for both offensive and defensive allocations.