We judge that the concentrated wave of ETF redemptions has essentially concluded, with heavyweight stocks entering a recovery window; a style shift on a major cyclical dimension is underway, transitioning from small-cap to large-cap, and from thematic stocks to quality stocks; the nomination of Warsh as Federal Reserve Chair represents a policy intention of an "American version of shifting from virtual to real economy." Regardless of whether this philosophy can be successfully implemented, it will have a significant impact on the style of global risk assets. From the perspective of A-shares, the full unfolding of price increase clues, from a resource boom to a cyclical boom, may persist throughout the first quarter. The fundamental commonality of cyclical sectors is their substantial room for profit margin recovery, underpinned by China's policy shift from scale expansion towards quality and efficiency improvement. The underlying logic for allocation should still revolve around the revaluation of global pricing power for industries where China possesses competitive advantages. The foundational allocation rationale for chemicals, non-ferrous metals, power equipment, and new energy remains valid; however, caution is warranted regarding the increasingly speculative precious metals sector. Restless recovery in the consumer and property chains should logically occur in spring, which is not contradictory to manufacturing and technology sectors.
The concentrated wave of ETF redemptions has essentially ended. Heavyweight stocks are entering a recovery window. This week, CSI 300 ETFs saw cumulative net redemptions of 244.3 billion yuan, comparable to the previous week's total net redemptions of 237.4 billion yuan. However, net redemptions on Friday were only 7.3 billion yuan, marking the first time since January 15th that daily net redemptions fell below 30 billion yuan. As of January 29th, the total net redemption scale of broad-based ETFs across the market reached 993.9 billion yuan, already exceeding the total net subscriptions for broad-based ETFs in 2024-2025 (677.8 billion yuan). It is important to note that even after this round of reduction, Central Huijin still holds a significant amount of ETFs, but a portion of these holdings may be long-term and not used as counter-cyclical adjustment tools. Considering the significant decrease in broad-based ETF redemptions on Friday, we estimate that Central Huijin may have already reduced most of its trading-oriented holdings during this counter-cyclical adjustment process. From a perspective of market reflexivity, index heavyweight stocks bear greater pressure during the "index suppression" process via broad-based ETF reductions, while the consensus for recovery is stronger once the reduction phase ends.
A style shift on a major cyclical dimension is underway. Transitioning from small-cap to large-cap, from thematic to quality. Historical experience shows that the cyclical rotation between large-cap and small-cap, and between quality and thematic styles, spans approximately 10 years, with 5-year periods of relative outperformance and underperformance. For instance, small-caps relatively outperformed from 2012 to 2016, large-caps from 2017 to 2021, and the cycle rotated back to small-caps from 2022 until now. The rotation rhythm between quality and thematic styles is similar to that of large and small caps. At the peak of the "China Nifty 50" rally in early 2021, the PE-TTM ratio of the CSI 1000 relative to the CSI 300 fell to around 2.5, below the 20th percentile level of the past five years, subsequently triggering a style shift where small-caps took over from large-caps and thematic stocks took over from quality stocks. The loss-making stock index outperformed the high-performing stock index for five consecutive years, a trend that has persisted until now. Currently, the excess returns of small-cap and thematic styles have again reached extreme levels. As of January 30th, the PE-TTM ratio of the CSI 1000 relative to the CSI 300 is 3.55, at the 98.1st percentile level of the past five years; the pace of the thematic stock rally is also approaching levels seen during the 2015 bubble market. These are unsustainable phenomena. Over the past decade, the first five years saw the quality style pushed to its extreme, followed by five years of rampant thematic speculation, with "mediocre economy" becoming a catch-all logic arguing for the persistence of small caps and thematic plays. As market discussions on inflation recovery and corporate profit recovery increase, a major cyclical style shift is highly likely next. Globally, the wind is also subtly changing. The recent nomination of Warsh by Trump as the next Federal Reserve Chair; his policy leanings are difficult to simply categorize as hawkish or dovish. Historical remarks suggest elements of an "American version of shifting from virtual to real economy." Regardless of his ability to successfully implement this philosophy, it will significantly impact the style of global risk assets.
From resource boom to cyclical boom. The unfolding of price increase clues may persist throughout Q1. We have compiled statistics on major sectors recently experiencing price increases, the landmark events triggering these increases, and the primary driving factors behind them. It can be observed that price increases are evident not only in upstream resources (industrial metals, precious metals, etc.) but also in midstream manufacturing (chemicals, photovoltaics, lithium batteries, etc.) and technology (memory, analog chips, etc.), extending to downstream property chains (waterproofing, fiberglass, etc.). From a temporal perspective, price increases in the second half of 2025 were still mainly concentrated in new energy sectors driven by "anti-involution" and some upstream chemical products and non-ferrous metals driven by supply-demand dynamics. However, since the beginning of 2026, cost-pass-through price increases have begun to appear in mid- and downstream manufacturing fields. Furthermore, "inflation" across the industrial chain, driven by AI, is also spreading. Starting from memory, price increases of varying degrees have now appeared in packaging and testing, CPUs, AI cloud services, analog chips, and other areas. Recently, even the wholesale prices of baijiu in the domestic demand consumer sector have begun to rebound. Once price increases become a common phenomenon, they may be regarded as a core rotation clue, especially in the current context where this trend has not fully materialized; we should pay full attention to it.
The fundamental commonality of cyclical sectors is substantial room for profit margin recovery. Underpinned by the policy shift from scale expansion to quality and efficiency. Price increases are merely the outcome; we need to recognize the underlying policy logic beyond industrial trends behind the cyclical sector recovery. China's past fiscal revenue growth was largely based on land sales and production expansion, with land sales and value-added tax being the two most important sources of fiscal revenue. However, the future potential of both paths is very limited. The market consensus is that the government's reliance on land finance is declining, and future dependence on capacity expansion to drive investment will also decrease. In 2025, the completed amount of national fixed asset investment was 48.52 trillion yuan, a year-on-year decrease of 3.8%, marking the first negative growth in the past 20 years. Future fiscal balance will rely more on direct taxes, meaning the government's fundamental objective will gradually shift from "increasing revenue" to "thickening profits" and increasing household income. As mentioned in our "A-Share Strategy Focus 20260104—Review and Outlook for the New Year": "Under the major waves of 'anti-involution,' corporate globalization, and global operations, China's room for pursuing VAT growth is increasingly limited. However, the room for growth in income tax, based on profits realized in the global market, is enormous. Fiscal interests are historically converging with shareholder interests." Anti-involution and the national unified market are merely pathways and methods to achieve the goal; the ultimate objective remains quality and efficiency improvement on the corporate side. Controlling supply, increasing profits, and stabilizing supply chains are the long-term directions. The current mainstream market expectations still linger on concerns about macro aggregate demand and博弈ing on the scale of policy stimulus, still underestimating the upward shift in the profitability center driven by the reshaping of supply-side logic, which is also an important source of future excess returns. Of course, this also definitively ends the historical process of internal involution and outward export of cheap resources and industrial products during China's rapid industrial expansion. The sustained outward export of "inflation" is an inevitable trend.
The underlying logic for allocation should still revolve around the revaluation of global pricing power for industries where China possesses competitive advantages. 1) The foundational allocation rationale for chemicals, non-ferrous metals, and new energy remains valid, but caution is advised regarding precious metals. Currently, chemicals, non-ferrous metals, and new energy remain three representative sectors where China holds a share advantage, overseas capacity reset costs are high, and supply elasticity is suppressed by policies. The transformation of share advantage into pricing power and the continuous recovery of profit margins are still in early stages. Long-term, ROE still has significant room for recovery, and potential profit elasticity remains underestimated. These sectors still form the foundation for building an anxiety-resistant, low-drawdown portfolio. However, the recent significant amplification in commodity volatility warrants vigilance against abnormal fluctuations in certain varieties, especially precious metals. If the market is merely reacting to heightened concerns about long-term US dollar credit, the allocation value of the renminbi at current levels clearly surpasses that of non-cash-flow-generating precious metals, as renminbi assets are fundamentally supported by the world's finest manufacturing capacity. At this juncture, rather than chasing precious metals further, it is better to buy renminbi-denominated interest-bearing assets. The renminbi is the ultimate safe asset, while gold might merely be a transitional asset during periods of uncertainty. Considering the general weakness of cryptocurrencies amid the recent "weak dollar" trend, it is reasonable to believe that a significant influx of speculative capital into precious metals originates from former cryptocurrency participants. Under such circumstances, commodity volatility is inevitable.
2) Restless recovery in the consumer and property chains should logically occur in spring, which is not contradictory to manufacturing and technology. As mentioned in our "A-Share Strategy Focus 20260125—Finding 'Strong Undertaking'", during the ongoing process of sustained market confidence recovery, "the desire for rising prices is the overarching environment." Any industry at a relatively low level with a plausible narrative is expected to undergo a round of expectation trading and recovery. The optimal timing for the recovery of the consumer and property chains is from now until around the National "Two Sessions," rather than waiting for actualization. Currently, the total market capitalization of A-share real estate companies accounts for only 1.0% of the total A-share market capitalization (as of end-January 2026, same below). The combined market capitalization of the property chain (real estate, construction, building materials, construction machinery II) and the pure consumer chain (food & beverage, consumer services, retail) accounts for 3.9% and 4.7% of the total A-share market capitalization, respectively. Their combined total is only 8.6%, which is evidently structurally inconsistent with the targets outlined in the proposals for the 15th Five-Year Plan. From the perspective of expectation trading leading the way, these sectors fit the characteristics of being "at a relatively low level with a plausible narrative." Integrating recommendations from CITIC Securities Research Department industry analysts, at the current juncture: For the consumer chain, we suggest focusing on duty-free, aviation, hotels, scenic spots, freshly-made tea beverages, etc.; for the property chain, we suggest focusing on high-quality property developers, building materials, REITs, etc.
Risk factors. Intensified friction between China and the US in technology, trade, and finance; domestic policy intensity, implementation effectiveness, or economic recovery falling short of expectations; unexpected tightening of macro liquidity domestically and overseas; further escalation of conflicts in Russia-Ukraine and the Middle East; slower-than-expected digestion of China's real estate inventory.