【Shenwan Hongyuan Strategy | Weekly Review and Outlook】A-share market progresses along its own path

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1. Expectations of US-Iran conflict fluctuate, but A-shares remain relatively resilient. Recent policies aimed at stability have prevented over-rapid gains, and market expectations for mid-term trends are important foundations. Meanwhile, A-shares have significantly improved in pricing against geopolitical conflicts, effectively integrating short-, medium-, and long-term projections to reflect changes in relative national strengths and China’s ability to maneuver in complex overseas environments. A-shares are embracing a “competitive mindset,” adapting to an environment with frequent geopolitical conflicts.

US-Iran conflict suppresses global risk appetite, leading to widespread adjustments in equity markets, but A-shares show resilience. Changes in relative national strength subtly influence asset pricing (globally, pricing is generally insufficient, and A-shares’ resilience under US-Iran conflict may mark the starting point for pricing). China is no longer a passive recipient of imported inflation nor a bystander in geopolitical conflicts. China has the capacity to skillfully navigate geopolitical games and buffer the impact of sudden shocks. The pricing of A-shares based on medium- and long-term “competitive landscape” changes is underway. A-shares are adapting to a high-frequency geopolitical conflict environment, requiring proactive measures. This is a major optimization of A-shares’ market characteristics and a proof of the bull market’s fundamental stability.

2. A-shares are progressing along their own path, with the “two-stage bull market” unfolding. Overall, A-shares’ static valuation is at a historical high, increasing resistance to valuation expansion. Currently, the market is transitioning from a structural bull to a range-bound consolidation, which will serve as a foundation for a full-scale bull.

A-shares are moving along their own trajectory, transitioning from the “first upward phase” to a “consolidation range,” with US-Iran conflict mainly confirming this phase shift.

The classic bull market pattern involves first a structural bull, then a comprehensive bull, corresponding to two historically high valuation zones. The structural bull occurs when industry trends are still fermenting, with the market rushing ahead of optimistic outlooks, leading to valuation expansion. The comprehensive bull happens when nonlinear earnings growth materializes, and the market, under a bullish atmosphere, still assigns very high valuations. Usually, there is a consolidation phase between the two.

Currently, valuations in sectors like communications, electronics, electrical equipment, defense and military, computers, and basic chemicals are at historic highs, and the overall valuation of all A-shares is also elevated. Under these conditions, discovering new structural opportunities becomes more difficult, and the market generally leans toward transitioning into range-bound consolidation. This phase may last 1-2 quarters. If industry trends remain neutral, 2026 could be the start of Bull 2.0; if there are quarterly industry disruptions, Bull 2.0 might be delayed until Q4 2026.

3. During the market’s accumulation phase, the structural features are: not a high-to-low switch, nor a style rotation, but rather a dissipation of main themes. Leading sectors and core stocks enter high-level consolidation. The space for new opportunities diminishes, and overall size shrinks. However, resilient investment opportunities mainly come from extending main assets and expanding macro narratives. Before the first-quarter earnings reports, focus on “practicality” by recommending structural opportunities. Pay attention to chemical sectors that may see price increases in March-April, as well as the upcoming Nvidia GTC conference, which presents a window for exploring new inflationary links in the computing chain, and CPO investment opportunities.

Historically, the styles of structural and full-market bulls are interconnected. The accumulation period in between is not about switching styles or high-to-low cuts but more about the dissipation of main themes.

Reviewing experiences from 2014 and 2018-19, we see that the early stage of accumulation features strong styles that adjust and stabilize before the start of Bull 2.0. The industry gains and declines during this phase are weakly positively correlated with the stages of structural and full-market bulls (no clear switching). Therefore, the accumulation phase is not about high-to-low style shifts but about the dissipation of main themes. Leading sectors and core stocks enter high-level consolidation. The opportunity for new structural growth diminishes, and the overall size shrinks, which is characteristic of the accumulation phase. Nonetheless, high-resilience investment opportunities mainly stem from extending core assets and expanding macro narratives.

Mapping this to the current situation, focus on: extending core assets—continue exploring AI industry chains and new cyclical alpha segments. Follow the core industry clues from Bull 1.0 (AI hardware) to Bull 2.0 (AI applications). The “practicality” feature will likely persist through Q1, emphasizing hardware: optical components, PCBs, and other inflation-sensitive links, as well as the global penetration of gas turbines. Later, shift toward applications—cloud computing, edge devices, robotics—focusing on domestic AI chains that are emerging rapidly. We still see AI transforming traditional industries as a future investment opportunity (opposite of HALO trades). Cyclical opportunities include basic chemicals with early price increases, mainly in March-April. Expand macro narratives by paying attention to the potential revaluation of manufacturing driven by shifts in relative national strength, which could present a medium-term opportunity.

Risk warning: Overseas economic recession exceeds expectations; domestic economic recovery underperforms.