The most crucial issue after A-share declines: some stocks may never recover.

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Full Summary

Core conclusion: The current A-share market is facing two major underlying logic changes that cannot be ignored: 1. Structural imbalance of internal positions; 2. Huge changes in the macro environment. The former refers to that by Q4 last year, the broad tech institutional positions had exceeded 50%, plus overseas sectors reaching over 70%, and resources nearly 90%. The high allocation to tech + overseas + resources makes the positions extremely sensitive to negative news, while sensitivity to positive news declines. The latter is that high oil prices are turning the dollar from weak to strong, and the inevitable rise in the oil price center leads to a contraction in liquidity. With both significant changes present, we believe the current position structure cannot be maintained as before, and a major round of “rebalancing allocation” (or cutting high and raising low) is unavoidable, meaning some sectors will never return, and also signifies the need to be prepared to part with many stocks that have benefited from past logic and soared in the last three years, both mentally and psychologically.

Comparing past phases in the A-share market where internal position structure imbalance and major global macro changes coexisted, the key question is whether this round of decline is analogous to early 2021 or early 2022. 2021 implies that large-cap indices could still hit new highs in the second half of the year; after declines in the "Mao index" and "Ning combination", the Mao index becomes an “never returning” type under position imbalance + macro change, while the Ning combination (“stronger prosperity”) becomes the main line. Essentially, it’s structural adjustment, with ensuing moderate inflation + strong dollar as well as economic resilience globally. 2022 means the highs were set in Q1, and besides coal, most sectors fell sharply, essentially moving to reduce positions. This matches stagflation or even recession priced in afterwards. Currently, we tend to believe it's a 2021 "structural adjustment" mode, needing to note the transition from "Mao index" to "Ning combination" after universal early-year declines in 2021. An extreme case would be a rebalancing between tech/overseas/resources (90% positions) and domestic demand/real estate (10% positions), triggered by inflation leading to stagflation and recession, prompting more domestic policy support, especially given the vulnerability of Southeast Asian export/overseas entities facing an energy crisis. Another more practical scenario is rebalancing within tech + overseas + resources, which we repeatedly emphasize as “four rebalancings.” This matches a moderate inflation outlook; the new/old rebalance has been validated, the drop in resource financial attributes and rise in commodity attributes have been validated, and the tech + overseas rebalance is ongoing.

First, the institutional position structure in A-shares is imbalanced, the main contradiction now is PPI stabilizing and rising, causing tech excess to swing back to cyclicals. As of Q4 2025, domestic institutional tech holdings have broken 50%, plus offshore sector total holdings are near 70%, and resources are almost 90%. Tech + overseas + resources are now the absolute main base for domestic institutions. Also, we observe that by Q4 2025, A-share tech and cyclical styles have diverged to a high level, while PPI stabilization will further restrict this divergence. Structural rebalancing is now an inevitable trend. This means that towards 2026, “rebalancing” is a must, and continuing 2025’s “one-sided tilt to tech” is inappropriate—“new and old dancing together” will be key to structural allocation.

1. One scenario is rebalancing between tech/overseas/resources (90% positions) and domestic demand/real estate (10%), triggered by inflation causing stagflation and recession, thus driving stronger domestic policy, especially considering the fragility of Southeast Asia export/overseas entities facing the energy crisis.

2. Another scenario is moderate inflation under high oil price, strong dollar, and global economic resilience. We repeatedly emphasize the key is [four rebalancings], which means rebalancing or cutting high and raising low within tech, overseas, and resources.

Specifically: 1) New/old rebalance (tech positions down, cyclicals up, validated); 2) Resource internal rebalance (validated): Financial attributes fall (precious metals), commodity attributes rise (oil-chemicals); 3) Tech internal rebalance: Moving to the fourth stage of supply-demand gaps (storage, power, energy storage, copper, etc.); 4) Overseas internal rebalance: Extending from downstream consumption sectors to mid-/upstream manufacturing (engineering machinery, new energy [wind power, power equipment], chemicals, building materials, industrial metals), focusing on energy security, industrial security, and global south industrialization.

Second, though the market is still shrouded in global stagflation and recession uncertainty, the rise in oil price centers and strengthening dollar are certainties, and major changes to the macro environment are undeniable. From the perspective of major asset classes, the dollar turning from weak to strong reverses the liquidity logic and causes “cut high raise low” in asset allocation globally; from the internal resource perspective, pricing impact of rising oil center is a drop in financial attributes of resource products, rise in commodity attributes, and falling gold/oil ratio as the core tool, confirming our resource rebalance judgment from the annual strategy meeting.

1. We still cannot confirm a global stagflation or recession probability at the economic level. According to global think tank estimates, Brent oil at $100-$120 and lasting more than six months will trigger global stagflation risk; oil above $125 per barrel and lasting more than eight weeks marks the global recession threshold. As mentioned in previous weekly reports, unless war ends rapidly and oil-producing nations hugely increase production, like the third oil crisis, a rise in oil center is inevitable, which means inflation stickiness in Q2 is undeniable. Oil is still above $100, and even optimistic forecasts put later oil at $85–95, but the outlook will be highly affected by geopolitical swings; whether it continues higher and persists needs observation.

2. In major asset performance, strong dollar is the core pricing tool. Now presents “high oil prices + relatively high US Treasury yields + sharply falling gold + relatively strong dollar” combo; if it was recession pricing, dollar wouldn’t be strong; if stagflation, gold shouldn’t drop so fast. At least it shows current regime isn’t fully typical stagflation or recession pricing. So, persistent strong dollar and weak gold under high oil prices is not a bad thing; if suddenly the dollar weakens and gold surges under high oil, then there's trouble.

When these two issues exist: 1. A-share internal position structural imbalance; 2. Huge changes in global macro environment, then continuing to heavily hold previous high-flying stocks is inappropriate, and more importantly, future leading stocks will have little correlation with those of the past three years. With the market dropping from above 4,000 to 3,800 points this round, we believe the key question is: Is it analogous to early 2021 or early 2022?

1. If analogous to March 2021: The response to early-year declines was structural adjustment rather than systemic market downturn. Position imbalance + rate hike expectations + emergence of stronger prosperity main line led to Ning combination replacing Mao index subsequently.

Reviewing history, that round of decline was triggered by rapid rise in US Treasury yields after Chinese New Year and worsened micro trading structure; core assets of Mao index (stock clusters) saw undifferentiated correction, with maximum drop in Shanghai Composite of 8.1%, ChiNext down nearly 21.6%. But after the drop, the market didn’t enter a broad downturn—instead, a clear switch in main lines occurred: the Ning combination replaced Mao index at the trading core, and pro-cyclical sectors continued rising driven by economic recovery and industrial upgrading, with obvious "prosperity rotation" throughout the year. Institutional positions also shifted from crowded white-horse stocks to newer high-prosperity, lower crowding tracks of new energy and semiconductors, achieving rebalancing.

2. If analogous to February 2022: The response to early-year declines was defensive position reduction, not simple structural adjustment or rebalance. The 2022 macro environment featured: 1. Unexpected inflation; 2. Overseas rate hikes; 3. Domestic COVID, with real estate prices falling. Thus, risk appetite, incremental funding, and profit expectations weakened together and entered full-scale defensive phase.

Reviewing history, that round of decline was triggered directly by stagflation expectations from the Russia-Ukraine conflict; in January 2022, the Wind All-A index fell 9.46% in a month, and all mainstream broad indexes plunged. After the drop, the market lacked any persistent profit-making main line resonating with industry trends, only temporary policy-driven trades like steady growth and digital economy. Overall, institutional profit-making disappeared, incremental funds continued dwindling, positions were marginally reduced, and the market shifted passively from high-valuation growth to low-valuation defensive sectors, eventually becoming a stock game.

Based on the above historical scenario comparisons, we project two core scenarios for the current market:

1. If the macro environment later shows moderate inflation, strong dollar, and resilient global economy, then the current market more resembles March 2021, and Shanghai Composite may hit new highs in the second half. Structurally, within resources, financial attributes fall, commodity attributes rise—gold (the “2021 Mao index” representative) will underperform; the key support for whether AI tech is “2021 Mao index” or “2021 Ning combination” depends on its subsequent prosperity. If moderate inflation and tightening liquidity don’t impact AI tech’s capital expenditure, we still believe AI tech will be “2021 Ning combination”; otherwise, at current high positions it becomes passive.

At the same time, one clear point is: driven by energy and industrial security, upstream/midstream overseas sectors represented by wind power, engineering machinery, new energy, and power equipment will continue to receive high prosperity support—currently, they are indispensable components of the “2026 Ning combination.”

2. If a clear global stagflation appears, and global rate-cut cycles are postponed, then the market will resemble early 2022, requiring broad reduction of positions and a defensive turn, with only a few defensive stocks offering relative returns.

Currently, compared to 2022’s “reduce positions” mode, we believe it’s the 2021 “structural adjustment” mode; with the coexistence of A-share internal position structure imbalance and huge global macro changes, note especially the transition from “Mao index” to “Ning combination” after early 2021 declines. We believe this “2026 Ning combination” has low correlation with most high-flying, heavily held leaders of the past three years, and must prepare psychologically for this shift.

Source: Lin Rongxiong Strategy Salon

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