CITIC Securities: Domestic Stability with External Concerns! Structural Opportunities Remain Core! Seize Two Major Themes of Policy Catalysts and Earnings Certainty!

This Week’s Market Summary:

This week, the market experienced a noticeable correction, with the index’s center of gravity continuing to decline. The short-term trend was relatively weak, with the Shanghai Composite Index falling below 4,000 points during the week. Risk aversion sentiment continued to rise, capital risk appetite decreased, and high-flying thematic stocks collectively retreated. Sector differentiation was quite evident, as funds shifted out of high-growth and cyclical sectors at high levels and moved toward defensive sectors. Industry sectors experienced increased volatility, making operations more challenging. Overall, the ongoing adjustment of A-shares this week was not caused by a single factor but resulted from combined internal and external pressures and synchronized market sentiment. Future investment opportunities will focus on structural themes. Investors need not be overly pessimistic; it is advisable to control overall positions, avoid blindly bottom-fishing and chasing highs, and patiently wait for the risk release to conclude before deploying. Below is a brief review of this week’s market movements:

On Monday, the market bottomed out and rebounded, with the Shenzhen Component Index closing in the green, and the ChiNext Index rising over 1%. Storage chips led the gains throughout the day. DeepSea Technology was boosted by positive news and performed strongly in the early session. However, short-term risk appetite was low, limiting the number of stocks hitting daily limits, and due to the lack of strong thematic drivers, short-term investors faced high operational difficulty amid rapid sector rotation. On Tuesday, the market experienced volatility and correction, with the Shenzhen Index down over 1% and the ChiNext Index down over 2%, accompanied by shrinking trading volume. Chemical stocks continued to fluctuate amid divergence, while power stocks rebounded after two days of correction. Newly listed stocks performed well, with sectors like CPO and PCB experiencing sharp declines.

On Wednesday, the market bottomed and rebounded, with all three major indices closing higher. The computing power industry chain exploded across the board, with hardware weights surging collectively. The concept of computing power leasing strengthened in the afternoon, while energy and chemical stocks weakened. Thursday saw a volatile correction, with all three major indices falling over 1%. The Shanghai Composite briefly broke below 4,000 points during the session. Most stocks declined, with nearly 5,000 stocks in the red, led by declines in the non-ferrous metals sector, while energy, new energy, and computing power leasing sectors remained active against the trend. On Friday, the market surged then retreated, with the Shanghai Index oscillating and losing the half-year moving average, breaking below the 4,000-point mark. The ChiNext Index hit a new high for the year during the session but quickly fell back. The divergence between the blue-chip and small-cap stocks was obvious, with small and mid-cap stocks generally declining. Power sector stocks repeatedly showed activity, energy storage concepts rapidly strengthened, and hardware related to computing power rose during the session. Meanwhile, chemical stocks declined, and the computing power leasing sector weakened collectively.

Below are key recent financial news impacting the market:

On March 16, Premier Li Qiang chaired the 11th Executive Meeting of the State Council. He emphasized deepening the construction of a unified national market, actively planning to expand and improve the service industry, accelerating the development of new-generation intelligent manufacturing, and systematically advancing major infrastructure network construction.

From March 15 to 16, China and the U.S. held economic and trade consultations in Paris, France. China’s Ministry of Commerce International Trade Negotiator and Vice Minister Li Chenggang stated that over the past day and a half, both sides conducted frank, in-depth, and constructive discussions, reaching preliminary consensus on some issues. The next step is to maintain the consultation process. Topics discussed included bilateral tariffs under new circumstances, arrangements for tariffs and non-tariff measures, and possible further extensions.

On March 17, Foreign Ministry spokesperson Lin Jian hosted a routine press conference. When asked about high-level exchanges between China and the U.S., Lin Jian said that both sides are maintaining communication regarding President Trump’s visit to China.

On March 17, the Chinese Academy of Sciences’ Molecular and Cellular Science Center announced that its research team, led by Cheng Xin, in cooperation with Professor Yin Hao’s team at Shanghai Changzheng Hospital, recently achieved the world’s first minimally invasive transplantation of autologous and allogeneic stem cell-derived regenerative islets (E-islet), realizing pancreatic islet function reconstruction and autonomous blood glucose regulation in type 1 diabetes patients.

On March 18, the CSRC held a comprehensive strict governance and disciplinary inspection work conference for 2026. The meeting emphasized further deepening special governance of corruption in key areas, focusing on key personnel and issues, increasing case investigations, especially cracking down on acts that disrupt capital market order and harm small and medium investors, and resolutely removing “obstacles” and “stumbling blocks” hindering capital market reform and development.

On March 18, the Federal Reserve announced that the target range for the federal funds rate would remain at 3.5% to 3.75%, marking the second consecutive pause, in line with market expectations. The Fed maintained its forecast of one rate cut in 2026 and 2027. Chairman Jerome Powell stated that inflation remains slightly high; rising energy prices will push up overall inflation. It is still too early to assess the full impact of the Middle East situation on the economy.

On March 19, the People’s Bank of China (PBOC) Party Committee held an expanded meeting. The meeting pointed out the need to continue implementing moderately loose monetary policy, firmly maintain the stability of financial markets such as stocks, bonds, and foreign exchange, and promote the legislation and revision of laws like the People’s Bank Law and Financial Stability Law.

On March 19, Minister of Industry and Information Technology Li Lucheng chaired the 14th SME Roundtable. He emphasized that entrepreneurs should focus on the main battlefield of manufacturing, accelerate the development of new materials industries, target urgently needed key materials and weak links in the industrial chain, take on responsibilities, and improve the自主保障水平 of key materials in重点领域.

On March 20, the Ministry of Industry and Information Technology, the National Development and Reform Commission, the State-owned Assets Supervision and Administration Commission, and the National Energy Administration jointly issued the “Implementation Plan for High-Quality Development of Energy-saving Equipment (2026–2028).” The plan focuses on energy-efficient motors, transformers, industrial heat pumps, industrial refrigeration (heating) equipment, water electrolysis hydrogen production equipment, and information communication devices, aiming to promote intelligent, green, and integrated development across six categories.

On March 20, according to the latest news from the National Healthcare Security Administration, the 3.0 version of the grouping scheme for disease-based payment is expected to be released in July this year and officially implemented in January 2027. Disease-based payment refers to grouping or scoring diagnoses for bundled payment by medical insurance.

(Source: Xinhua News Agency, four major newspapers, Cailian Press, Choice, Wind, etc.)

(1) Overall Market Performance

This week, large and small-cap indices generally declined. Among the main indices, only the ChiNext Index rose 1.26%, while others fell. The CSI 500, CSI 1000, and STAR 50 indices declined significantly, by -5.82%, -5.25%, and -4.03%, respectively. (See Chart 1)

Chart 1:

Source: CITIC Construction Investment Tongdaxin

(2) Sector Performance

From the perspective of industry sectors, only the banking sector closed higher this week; all others declined. Entertainment and consumer sectors performed relatively weakly. (See Chart 2)

Chart 2:

Source: Wind Information

From thematic concept sectors, banks, generic drugs, and memory sectors performed relatively well, while food processing, insurance, and education sectors underperformed. (See Chart 3)

Chart 3:

Source: Wind Information

(3) Market Capital Flows

In terms of financing balance, this week’s financing remained roughly flat. However, the internal structure shifted from high-risk assets to defensive and more certain assets, with leverage sentiment turning cautious. (See Chart 4)

Chart 4:

Source: Wind Information

3. Key Factors Affecting the Market Recently

We believe that recent market movements mainly depend on the following factors:

(1) Domestic Policy Signals

From domestic policies, this week’s policies continued to release positive signals to stabilize expectations, promote innovation, and protect the market, forming a dual-driven policy pattern of steady growth and sci-tech innovation. On March 16, the State Council Information Office held a press conference on the national economic operation, emphasizing adherence to the general tone of seeking progress while maintaining stability, implementing more proactive macro policies, developing new quality productivity according to local conditions, and focusing on stabilizing employment, enterprises, markets, and expectations to set the policy tone for the year.

Industrial policies have been intensively implemented to catalyze sector trends. The Ministry of Industry and Information Technology’s “Millisecond Computing” project was officially launched, promoting interconnection of computing power across 50 regions nationwide, and the first batch of off-site AI index funds was approved, bringing incremental capital to the hardware tech sector. Fiscal and monetary policies coordinated efforts, with a proposed 4% deficit ratio for 2026, issuance of 1.3 trillion yuan in ultra-long special bonds, and continued reverse repo operations by the central bank this week, providing liquidity support and effectively offsetting external shocks.

(2) Market Data Performance

This week, macroeconomic data was fully released, with key indicators showing clear improvement, providing solid fundamental support for the A-share market. On March 16, the National Bureau of Statistics released economic data for January-February 2026. Industrial added value above designated size increased by 6.3% year-on-year, accelerating by 1.1 percentage points from December last year. Notably, the added value of equipment manufacturing grew by 9.3%, and high-tech manufacturing by 13.1%, significantly outpacing overall industrial growth, highlighting the leading role of new quality productivity.

Demand-side recovery remains clear, with retail sales of consumer goods reaching 86.079 trillion yuan in January-February, up 2.8% year-on-year, accelerating by 1.9 percentage points from December. Service retail sales grew by 5.6%, maintaining steady and rapid growth. Fixed asset investment nationwide increased by 1.8%, turning from decline to growth, with infrastructure investment up 11.4% year-on-year, showing effective fiscal support. Price levels remained generally stable, with CPI up 0.8% YoY in January-February, and PPI declines narrowing, indicating no deflation risk and leaving room for monetary policy easing.

(3) Overseas Events

This week’s key overseas events centered on the Fed’s interest rate decision and escalating Middle East geopolitical conflicts, which are critical variables affecting A-shares risk appetite and foreign capital flows. On the early morning of March 19, Beijing time, the Fed announced its second rate decision for 2026, maintaining the federal funds rate target at 3.5%-3.75%, in line with market expectations, but with a notably hawkish tone exceeding expectations.

Additionally, the ongoing escalation of Middle East conflicts has disrupted shipping through the Strait of Hormuz, pushing Brent crude oil prices above $105 per barrel. The energy supply shock has intensified global inflation expectations, further constraining the Fed’s room to cut rates and providing structural catalysts for energy security and oil & gas industries in China.

4. Outlook and Investment Strategies for Next Week

We believe that the upcoming week’s market trend will mainly depend on the implementation of domestic macroeconomic data, the catalytic effect of industrial policies, and changes in global liquidity expectations driven by the Fed’s rate decision. Overall, the market will likely exhibit wide-range oscillations and structural differentiation.

Based on this week’s movements, our assessment is as follows: First, the fundamentals remain solid, with macroeconomic data in January-February showing a comprehensive recovery, and sectors related to new quality productivity maintaining high growth, providing a strong fundamental bottom for the market. Second, liquidity remains generally stable, with the PBOC maintaining reasonable liquidity, effectively offsetting external tightening risks. Third, market sentiment has become cautious, with increased overseas uncertainties and weekly declines boosting risk aversion, favoring high-dividend defensive assets and growth stocks with strong earnings visibility. Fourth, sector rotation will continue, with policies from the Two Sessions entering a period of intensive implementation, and sectors related to new quality productivity and energy security likely to remain core themes, supported by geopolitical tensions.

Overall, we expect the A-share market next week to fluctuate within a range, with indices likely oscillating around the 4,000-point level. External hawkish signals from the Fed and the tightening of global liquidity will be offset by domestic economic recovery and policy support, making a sustained trend unlikely. Structural opportunities will remain the focus, with key themes being policy-driven and earnings-driven.

For allocation, we recommend focusing on several main themes:

(1) High-dividend defensive theme: Prioritize undervalued, high-dividend, stable-performance leading stocks, especially in sectors like power, oil & gas, utilities, infrastructure, and banking. In a volatile and risk-averse environment, high-dividend assets tend to be more resilient, with long-term capital inflows from insurance and pension funds supporting their value. Focus on stocks with dividend yields above 4% and above-expected dividend plans.

(2) Core growth in new quality productivity: Focus on AI computing power and digital economy sectors, including infrastructure, intelligent data centers, liquid cooling tech, optical modules, and domestic semiconductors. The demand for AI remains strong, supported by policies, with high industry prosperity. Prioritize industry leaders with order support and technological barriers. Also, pay attention to commercial aerospace and high-end equipment sectors, as the government has listed aerospace as a new pillar industry, with industry orders and earnings at a turning point. Key areas include satellite manufacturing, rocket supporting industries, low-earth orbit constellations, and aerospace equipment.

(3) Energy security and cyclical recovery: First, oil & gas and energy industry chains, as Middle East conflicts push up oil prices and domestic energy security strategies advance, with upstream oil & gas, oilfield services, and coal sectors benefiting from dual catalysts. Second, green power and new power systems, including offshore wind, energy storage, nuclear power, and smart grids, supported by ongoing energy transition and infrastructure investment. Third, cyclical chemical sectors, gradually recovering from lows, with resource-based and technologically protected leading stocks likely to see valuation repairs.

(4) Consumption recovery theme: Focus on old-for-new consumption and service consumption. January-February data shows continued recovery, with policies supporting consumption. Key sectors include home appliances, consumer electronics, and categories benefiting from old-for-new policies, as well as tourism, catering, and healthcare services with rising prosperity. Look for leading stocks with strong brands and resilient earnings on dips.