Market participants are increasingly focusing on potential changes in industrial organization during the AI era. Long-term expectations are being reassessed for three categories of industries: sectors likely to be replaced by AI; industries where competitive barriers may weaken and excess profits could shrink in the AI age; and technology leaders that might not maintain their advantage in the AI era. This reassessment is creating downward pressure on valuation benchmarks. Chinese assets are generally less affected than U.S. stocks, as China has fewer industrial segments enjoying monopoly advantages and supernormal profits compared to the United States.

Currently, it is difficult for any analysis of AI's end-state to account for all critical factors. Markets tend to extrapolate technology trends to their ultimate conclusion (AI's final capabilities) but often fail to fully consider the inevitable gradual evolution of other key elements—such as productivity, production relations, and political systems—during AI's advancement. Consequently, the market's concentrated pricing of AI's potential end-state impact may lead to mispricing and unwarranted sell-offs.

Strategic resources that are difficult to replace are inherently era-defining assets. These resources are characterized by security, controllability, and a tendency toward inflation even in the AI age.

Globally, markets appear to be engaging in what can be termed the "HALO trade," concentrating on how industrial structures might evolve with AI. Long-term expectations are being recalibrated for the three aforementioned industry types. In the short term, stock prices in sectors where AI model companies achieve functional breakthroughs can experience significant adjustments. For industries where AI may lower supply costs and reduce entry barriers, incumbent leaders—even if they survive the AI transition—will need to leverage AI to offer superior products amid falling prices and intensified competition. For leading tech companies with AI strategies, a key differentiator will be whether they can continue to outperform in the new era. For the second and third categories, companies whose valuations were previously anchored to monopoly profits and platform value may be downgraded to entities competing for reasonable profits in a competitive market, leading to a downward revision of their long-term valuation benchmarks.

While market narratives about AI's ultimate impact are diverse and complex, the key point is that current end-state analyses are inherently incomplete. Markets often project tech trends to their conclusion based on current economic, social, and industrial structures. In reality, AI progress will be incremental, with "partial disruptions" accumulating into a "comprehensive transformation." During this process, productivity, production relations, political systems, and industrial and social organizations will all evolve. As AI reduces reliance on human labor, individual capabilities and societal boundaries will be profoundly reshaped. Ultimately, as AI capabilities mature, the boundaries of human society could expand significantly. Analyzing AI's end-state within existing social frameworks may therefore be biased. At a micro level, affected industries and companies will inevitably adapt, adjust, and transform.

Concerns projected for 2028, even if theoretically valid, are not as imminent as feared, and adjustments are possible. The emergence of such concerns might itself present an opportunity to price out these risks.

Regarding irreplaceable strategic assets, the logic of era-defining assets is being reinforced. Against the backdrop of major power competition, secure and controllable strategic resources remain a core investment theme. The inflationary logic for strategic resources and energy is likely to strengthen further in the AI age.

**Short-Term Market Observations:** Post-Lunar New Year, A-shares have shown a weaker response to long-term technology narratives but a very positive reaction to visible "old and new economy inflation." This aligns with the local manifestation of the "HALO trade" in Chinese markets and is also influenced by fluctuations in Fed easing expectations, which have tempered the rally in A-share tech themes. Furthermore, A-share tech narratives have already been extensively priced in, with valuations reaching historically high levels before fundamentals and earnings have fully materialized, leading to a market phase that is more "reality-focused."

China's advantages in robotics manufacturing and motion control have already been priced, and the theme of advancing AI applications has also played out. These sectors have underperformed following the spring catalyst period. This market behavior suggests that investors need to see "cross-stage industrial development" to initiate a new upward cycle, consistent with our medium-term expectation of a "two-phase rally."

We maintain our medium-term "two-phase rally" outlook. The spring 2026 rally is expected to be an extension of the 2025 structural bull market, with the market currently in the high range of the first phase. Overall A-share P/E valuations are in a historically high range, suggesting an inherent need for consolidation. This phase is primarily about awaiting a reinforcement of industry trends, broader validation of fundamental inflection points, an improvement in valuation attractiveness, and more favorable conditions for household asset allocation shifts toward equities.

A "second-phase rally" is anticipated, driven by cyclical improvements in fundamentals, technology trends entering a new stage, more conducive conditions for household allocation to equities, and expectations of rising Chinese influence. The window for this second phase is more likely to open around mid-2026. The leading sectors and styles are expected to be consistent across both phases. The "inflation assets" of this era are technology and strategic resources.

**Short-Term High-Visibility Inflation Themes:** Cyclical commodities with supply constraints have rallied recently, but the sustainability of price increases is questionable during the March-April demand verification period. For cyclical allocation, the focus should remain on strategic asset inflation. The spillover effect of new economy inflation into traditional sectors remains the strongest short-term theme, with investment opportunities in internal combustion engines, fiberglass, optical fiber, and memory.

**Medium-Term Sector Recommendations Unchanged:** High-growth technology and cyclical Alpha. High-growth technology focuses on: overseas computing power chains, AI applications, semiconductors, robotics, commercial aerospace, and energy storage. Cyclical Alpha focuses on: non-ferrous metals and basic chemicals. The extension of cyclical Alpha investing may include export/overseas chains. Additionally, we are optimistic about the re-rating potential of non-bank financials.

Risk Warning: Overseas economic downturn exceeding expectations; domestic economic recovery falling short of expectations.