Let's also discuss "HALO trading"

1. Also discussing “HALO Trading”: The market is beginning to focus on the evolution of various industries in the AI era. Industries that may be replaced by AI, industries where excess profits could be compressed due to weakened barriers in the AI era, and leading tech companies that might not continue to succeed are all undergoing reassessment. Long-term expectations are being re-anchored, and valuation centers face downward pressure. Overall, Chinese assets are less affected than U.S. stocks. China has fewer industries enjoying monopoly barriers and excess profits.

Currently, thinking about the AI ultimate outcome is difficult to cover all key factors. The market tends to project technological industry trends toward the final capability of AI but struggles to fully consider the inevitable gradual changes in other critical factors (including productivity, production relations, political systems) during AI’s progress. Therefore, potential shocks from market pricing in the AI ultimate outcome may be misjudged.

Strategic resources that are hard to replace are assets of the era: security and controllability of strategic resources, plus the ongoing “inflation” in the AI era.

Globally, it seems everyone is playing out “HALO Trading,” with markets focusing on potential changes in industry organization forms in the AI era. Long-term expectations for three types of industries are being re-anchored: 1. Industries potentially replaced by AI. In the short term, breakthroughs by AI model companies can cause significant stock price adjustments in related sectors. 2. Industries where barriers weaken and excess profits may shrink, as AI significantly reduces supply costs and lowers entry barriers. Even established leaders that survive in the AI era will need to leverage AI to offer better products amid falling prices and face fiercer competition. 3. For leading tech companies with AI deployments, the key question is whether they can continue to succeed in the AI era. Among these, the valuation centers of the second and third types of industry leaders are originally anchored in monopoly profits and platform value but may downgrade to companies that participate in market competition for reasonable profits. Long-term expectations are being re-anchored, leading to a downward shift in valuation centers.

The market’s projections of the AI ultimate outcome are complex and varied. We do not discuss the correctness of specific projections. But what we can project is that, at this stage, thinking about the AI ultimate outcome is difficult to encompass all critical factors. The market tends to project technological industry trends (AI’s final capabilities) to the endpoint, overlaying analyses with current economic, social, and industrial organizational forms. In reality, AI’s progress will be gradual, with incremental “partial disruptions” accumulating into “comprehensive disruptions.” During this process, productivity, production relations, political systems, industry organization, and social organization will all undergo transformation. When AI weakens human labor demand, it also means profound changes in individual capabilities and the boundaries of human society. As AI approaches its ultimate capabilities, the boundaries of human society will expand significantly. Analyzing the AI ultimate outcome solely within existing social organizational forms may be biased. On a micro level, impacted industries and companies will inevitably respond, adjust, and transform.

Concerns about 2028, even if based on principles (which we doubt), are not necessarily so urgent in timing and can be addressed through adjustments. Such worries may themselves be opportunities to eliminate certain risks.

Regarding strategic assets that are hard to replace, we believe the logic of era assets is reinforced: in the context of great power competition, independence and controllability of strategic resources remain core investment clues. The “inflation” logic of strategic resources and energy in the AI era may be further strengthened.

2. Short-term market characteristics: After the Spring Festival, A-shares show a weak response to long-term tech narratives but are very positive about the visible “new and old economy inflation.” This reflects the “HALO Trading” mapping in A-shares and is also related to the Fed’s easing expectations being disturbed, leading to a relatively full interpretation of the tech narrative rally.

Post-Festival, the short-term market features: A-shares are less responsive to long-term tech narratives but very optimistic about current “new and old economy inflation.” Value-oriented styles are generally favored globally. This is related to the “HALO Trading” mapping in A-shares. Additionally, rising inflation expectations and disturbances in the Fed’s easing outlook have limited the reflection of long-term optimism in tech. Meanwhile, the tech narrative in A-shares is playing out relatively fully; with economic activity and earnings still not fully realized, valuations have already reached historical highs, and the tech rally is now more “grounded in reality.” The pricing of China’s robotics manufacturing and motion control sectors has been established, and the ongoing progress in AI applications has also been reflected. After a spring rally, these sectors show weaker momentum. This market experiment indicates that the market needs to see “cross-stage development” in industries before a new upward cycle can begin, aligning with our mid-term “two-stage rally” projection.

Maintaining the mid-term “two-stage rally” projection: The spring 2026 rally is an extension of the 2025 structural rally, and we are still in the high zone of the first stage. Currently, the overall PE valuation of all A-shares remains at historically high levels, with internal needs for correction and consolidation. This correction phase mainly awaits further reinforcement of industry trends, validation of the economic turning points (performance digestion of valuations), easing of valuation-cost issues, and more sufficient conditions for residents’ asset allocation shift into equities.

There is also a “second stage” of rally in the mid-term: with cyclical improvement in fundamentals, the tech industry entering a new phase, better conditions for residents’ asset reallocation into equities, and resonance with rising China influence expectations. The window for the second stage of rally is likely around mid-2026. We reiterate that the two-stage rally involves sectors and styles that are consistent. In this era, “inflation assets” are technology and strategic resources.

3. Short-term high-visibility inflation directions: These are the main sources of favorable structural assets: short-term surge in cyclical commodities driven by limited supply (steel, coal), but demand verification in March-April raises doubts about sustained price increases. Cyclical allocation still recommends focusing on strategic assets inflation (non-ferrous metals, basic chemicals, oil, shipping). The mapping of new economic inflation to traditional sectors remains the strongest short-term direction, with investment opportunities in internal combustion engines, fiberglass, optical fibers, and storage.

Mid-term structural recommendations: Prosperous tech + cyclical alpha. Focus on: overseas computing power chains, AI applications (Hong Kong internet opportunities), semiconductors, robotics, commercial aerospace, energy storage. Cyclical alpha focus: non-ferrous metals and basic chemicals. The extension of mid-term cyclical alpha investments may include export/outbound chains. Additionally, we are optimistic about revaluation opportunities in non-bank financials.

Risk warning: Overseas economic recession exceeding expectations, and domestic economic recovery falling short of expectations.

Source: Shenwan Hongyuan Strategy

Risk warning and disclaimer:

Markets are risky; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, viewpoints, or conclusions herein are suitable for their particular circumstances. Investment is at their own risk.