CITIC SEC: In the process of market cooling, the allocation should gradually narrow down and continue to focus on China's advantage in manufacturing.

CITIC SEC released a research report stating that the possibility of TACO still exists, but the patience of the market funds has been exhausted. It is expected that the war will be coming to an end this month, but the possibility of the "weaponization" of the Hormuz Strait and intermittent disruptions in the supply chain are increasing. Currently, out of the five fundamental clues (dividends, going overseas, AI, PPI, and domestic consumption), only PPI, domestic AI, and consumption are not fully priced. The transmission of oil->PPI-> corporate profits after the war subsides is the most important fundamental factor. Domestic AI is a relatively independent industry change, and consumption is likely to lag behind PPI transactions. Of course, the trading of "PPI-> corporate profits" will only start after the war subsides oil prices peak. In the process of market cooling, the allocation should gradually focus on Chinese advantage manufacturing. The main viewpoints of CITIC SEC are as follows: The possibility of TACO still exists, but the patience of the market funds is gradually being depleted Based on last year's experience in dealing with "counter-tariffs", the current market is extremely sensitive to TACO information. However, the frequent fluctuations in geopolitical situations and diplomatic postures have made the market tired of responding, severely depleting the patience of transactional investors, and continuously suppressing the risk appetite of trend-based funds. Trump's speech on April 2 once again turned into a classic trade of "buying expectations and selling reality". After this event, the market began to gradually numb to marginal changes, and the global recession narrative began to dominate. On recent trading days with amplified market volatility, the size of the margin settlement has increased several times, usually due to investors reducing their positions. The ratio of market margin to market capitalization has also reached a high level recently, which to some extent reflects investors' low positions and wait-and-see attitude. Of course, from another perspective, these funds have not exited and are potential buying orders. According to the research channels of CITIC SEC, as of March 27, 2026, the active position of the sample private equity had decreased from 82.9% at the end of February (the week of February 27) to the current 78.4%, although it is still slightly higher than the historical median of 76.2%, but significantly lower than the high point of 84.3% in January. The index futures have continued to be in a deep discount range. As of April 3, the annualized discount rates (MA5) of IM and IC stock index futures were 6.7% and 9.9% respectively, staying in the deep discount zone, and not showing a significant convergence on days when the index rebounded. This indicates that institutional funds still maintain certain positions while having a strong demand for hedging stock spot positions. It still believes that the possibility of TACO exists and is not low, but for a market dominated by trend allocation funds and transaction funds, once the market becomes fatigued due to repeated games, the re-convergence and recovery of market confidence usually requires several months. It is expected that the war will come to an end this month, but the risk of the "weaponization" of the Hormuz Strait and intermittent disruptions in the supply chain are increasing The transmission of this geopolitical conflict to the fundamentals has significant lag: first, the attacks on refining and public utility facilities do not bring about a single price pulse, but rather form a "long tail cost" of post-war repair in terms of production recovery, maintenance windows, spare parts supply, and safety redundancy investment, affecting the delivery and cash flow of finished oil, aviation coal, chemical industry, and continuous manufacturing in the more distant future; Secondly, the extreme pressure on energy facilities has placed some hard constraints on the expansion plans of technology and high-end manufacturing capacities; Thirdly, the damage to upstream basic raw materials (such as aluminum, chemicals) and logistics disruptions, even if the war quickly cools down, the supply-demand matching may not fully recover within the quarter. In the long run, the "weaponization" of the Hormuz Strait will become increasingly apparent. The fragility of the supply chain exposed in this round of shocks will drive the transition of the supply chain from "most efficient" to "most resilient". The deep-rooted damage to the supply chain will continue to reward companies with pricing power, logistics, and inventory resilience at the portfolio level, while those thin-profit segments that are forced to bear uncertainty but unable to pass on costs will accelerate the supply-side clearance, and leading companies will gain higher shares. In addition, safety redundancy itself will create demand (countries and enterprises will establish strategic reserves for a wider range of products), and the simple assumption that "high oil prices equal industrial recession" carries risks. After the war subsides, the transmission of oil->PPI-> corporate profits is the most important fundamental clue There are five main fundamental clues in the A-share market currently (dividends, going overseas, AI, PPI, and domestic consumption), but only PPI, domestic AI, and consumption are not fully priced. The current dominant narrative in the short-term market is pessimism towards demand, leading to market adjustments that are somewhat inevitable. When the narrative of demand recession dominates the market, the adjustments of different varieties are just a matter of sooner or later. However, after the war subsides, what can rekindle consensus and attract funds will certainly be varieties that combine expectations, high certainty, and space. Dividends were the mainstream narrative from 2022 to 2024, transitioning from being looked down upon to becoming the mainstream market style, having already been priced in, and from 2025 onwards, it is all about absolute returns with no excess returns. Going overseas was a process from 2023 to 2025, facing the anticipated impact of equal tariffs, to relying on relative performance advantage for accelerated revaluation last year, and pricing has become more sufficient, but this year it faces uncertainty in overseas demand. Among AI varieties, North American chains are the strongest fundamentally, with the most stable holdings and clustering, high certainty but lacking expectations gap; on the other hand, domestic hardware chains have significantly lagged, with an expectations gap and space, but lacking performance verification. The narrative of PPI rebound driving corporate profit recovery has been reflected in expectations and stock prices since August of last year until February of this year, but due to a lack of strong fundamental verification and the outbreak of the Middle East conflict, it has experienced a sharp correction since March. Domestic consumption recovers briefly only when market liquidity and sentiment are extremely positive, playing a peripheral role. Looking ahead, the clues that are not fully priced and may be triggered after the war subsides are only PPI, consumption, and domestic AI, with the clue of PPI rebound being more suitable for absolute return funds that have reduced positions; domestic AI relies on industry verification, the expectation of explosive growth in Token demand has already been priced in, but there is still an expectations gap and space in the hardware chain, which may attract some technology-oriented switching funds. The transaction probability of consumption recovery is ranked after the pricing of PPI rebound, and is not a key sector for the second quarter. Only when the Middle East war subsides, the trade of "PPI-> corporate profits" can begin It is crucial for the formation of the trade of "PPI-> corporate profits" to dispel expectations of demand recession due to high oil prices. This will still depend on the cessation of the Middle East conflict, and investors need to maintain great patience for this. Considering Trump's planned visit to China in May, and his increasingly frequent remarks on negotiations and the end of the war, it may already be in the final stage of maximum pressure. Both investor sentiment and turnover rates in the Shanghai and Shenzhen markets have returned to the lows since last December, and market turnover has also entered the range of reasonable turnover rates as previously calculated for the calm period within the 1.9 trillion yuan range. Considering the substantial disruption of global financial conditions (especially expectations of monetary easing) caused by the Middle East conflict, and that this disruption will not simply end with the cessation of the war, but may continue due to supply chain interruptions and price transmission from upstream to midstream and downstream, even if the war ends, it is not overly optimistic about the rebound of overvalued varieties driven by liquidity and narrative. Instead, the focus should be on varieties with actual profit support or significant profit margin restoration space. In terms of style, it involves placing more emphasis on the factors of quality and valuation. The trade of "PPI-> corporate profits" faces significant challenges in the short term under the narrative of global recession, and due to the existence of expectation gaps, such varieties are usually held more by absolute return funds and less by relative return funds. In periods of market sentiment downturn, these varieties are most likely to encounter headwinds. Only after enduring this stage can there be an opportunity to gain excess profitability through expectation gaps and earnings elasticity. Investors need to patiently wait for the Middle East situation to become clearer before actively increasing their positions. Narrow down the allocation and stick to Chinese advantage manufacturing From the perspective of ETFs, the ETFs that are still above the 30-week line include communications, chemicals, non-ferrous metals, oil and gas, semiconductor materials, and equipment, which are basically focused on North American AI, energy and chemicals, and upstream resources. Innovative drugs have returned to above the 30-week line after this rebound, showing relatively independent industry logic and some signs of liquidity desensitization. Dividend varieties (such as coal, green electricity) have always been above the trend line. In fact, even if the US-Iran conflict ends, the focus should only be placed on the price transmission of the chemical chain, resource pricing, and AI hardware demand, as the market funds have already made their choices. In terms of allocation, it is recommended to firmly build a layout around the pricing power of Chinese advantage manufacturing. The current recommendation for the bottom position is still the industry that has an advantage in market share, faces high difficulty in resetting overseas capacity costs, and has supply flexibility easily affected by policies, such as new energy, chemicals, electric power equipment, and non-ferrous metals. The recent liquidity shock has returned the valuations of many varieties to cheap areas, somewhat similar to the overseas varieties after April 7 last year, bringing in expectations gaps and undervaluation. On top of the aforementioned layout, it is recommended to continue to increase exposure to undervalued factors, with a focus on insurance, securities brokerage, and electricity. In addition, attention should be paid to the innovative pharmaceutical sector, as its stock price is relatively weakly related to liquidity shocks and the industry logic is still advancing. Risk Factors Intensification of friction in the fields of technology, trade, and finance between China and the United States; Insufficient effectiveness of domestic policies, implementation, or economic recovery; More stringent than expected macro liquidity at home and abroad; Further escalation of conflicts in areas such as Russia, Ukraine and the Middle East; Unexpectedly slow digestion of real estate inventories in China; Operating risks in overseas markets.