CICC 2026 Second Half Outlook: Actively Adjusting Allocations, Focus on Three Main Themes.

China International Capital Corporation released a research report stating that looking towards the second half of the year, the overall view of the A-share market remains consistent with the annual outlook. The core DRIVE propelling the current market rally and reevaluation of Chinese assets is the resonance between the reconstruction of the international order and the trend of industrial innovation in China. These two conditions have not been shaken, and the market currently possesses more long-term and stable conditions than before. In the current environment where investor risk appetite is rising and expectations for the future are generally positive, it is important to pay attention to the external environment and global economic trends, especially the AI trend in the second half of the year, and to monitor the impact of liquidity in the market. In terms of allocation, focus on performance criteria. The opportunities in the A-share market at the macroeconomic level are still abundant, and it is recommended to focus on three main themes: 1) The AI industry chain requires careful selection: After achieving important breakthroughs in commercialization, the space for the AI industry chain has expanded along with the improvement in fundamentals. By considering valuation and supply-demand relationships, it is recommended to prioritize overseas supply chain infrastructure sectors such as optical communications and electronic components. Some areas, such as the acceleration of valuations in computing power, require more attention to match performance expectations. 2) Energy bottlenecks and transformations: AI infrastructure and the re-industrialization of some major countries will reinforce the global trend of power shortages, while high oil prices are catalyzing energy transitions. The main beneficiaries in the field of new energy are energy storage batteries, electricity grid equipment, as well as upstream energy metals and battery materials. In traditional energy-related areas, focus on coal chemical industry and electrolytic aluminum. 3) Cyclical reversals: Consideration of the position in the production cycle and rising demand, it is advisable to focus on sectors where supply-demand problems are approaching improvement turning points, such as engineering machinery, specialized chemical products, optical electronics, and some innovative drugs. Additionally, the broad consumer sector may be nearing a bottom, awaiting signals of improvement in domestic demand; high dividends may still be a temporary feature of the sector. Key views of China International Capital Corporation include: 1) First half of 2026: Act in accordance with the trend. The bank believes that the market is likely to continue the trend of volatile upward movement seen since September 2024, with a rhythm of "rising first and then stabilizing," and precautions against fluctuations. The structure of the market is led by technology industries, particularly the AI sector. Structural factors include the leading growth style represented by AI and strong performance in some cyclical industries. The overall performance and style of the A-share market in the first half of the year broadly align with the previous outlook. 2) Macro environment remains uncertain, global AI boom continues to expand. Externally, while market attention to the Iran situation has decreased, the central oil prices may systemically remain at relatively high levels in the second half of the year, affecting global demand and major countries' monetary policies. China's economy has stronger external demand than domestic demand, and emerging industries are stronger than traditional sectors. While first-tier city housing prices show signs of stabilization, improvements on a national scale are still needed. Part of the year-on-year positive change in China's PPI comes from the impact of imported inflation, and the sustainability of mild price improvements remains to be observed. The global AI revolution is currently in a stage of further proliferation rather than full-scale bubble formation, with AI applications still in the early stages of development. 3) Overall improvement in A-share earnings, structural differentiation, focus on buoyant industries and areas with good supply and demand dynamics. This year, more industries in China are experiencing improvements in supply-demand dynamics, combined with the high prosperity of AI and new energy, A-share corporate earnings are expected to continue to improve in 2026. Local pressures include high oil prices driving year-on-year positive changes in PPI, leading to cost increases and demand damage in some areas; RMB appreciation impacts profit and loss for outbound sectors, but to a limited extent. The bank expects that overall A-share/non-financial profit growth in 2026 may be around 6%/10%, with growth rates in the first half expected to be higher than in the second half. 4) A-share overall valuation is reasonable, some sectors with high valuations need to guard against their vulnerability to market fluctuations and increased volatility risks. The equity risk premium for the CSI 300 is 5.1%, slightly lower than the historical average, showing that dividend yields in the stock market are still advantageous compared to the bond market in the current "asset drought" environment. However, after a rise over the past two years, valuations at the sector level are relatively high, with around 20% of companies trading at a P/E ratio below 30, which is at a relatively low level in the past 10 years. At the fund level, Chinese residents' demand for asset allocation is being driven by the wealth effect. The bank's calculations show that investors at different terms are still strong in the wealth effect but one should pay attention to market turnover rate frequently exceeding the warning threshold for overheating, which can serve as a reference indicator for timing in the second half of the year. Risk warning: Geopolitical risks, fundamental improvements, and underperformance of industry trends, and high valuations in some sectors.