The most critical issue after the A-shares decline: some stocks can never go back to their previous highs.

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Source: Lin Rongxiong Strategy Lounge

Guotou Lin Rongxiong states that A-shares are facing a dual fundamental logical shift: institutional pan-technology positions exceeding 50%, combined with over 90% of outbound resources, creating an extreme imbalance. Coupled with high oil prices driving the dollar to strengthen and liquidity tightening, “rebalancing allocation” is inevitable. Historically, current conditions are closer to the 2021 “structural adjustment” rather than the 2022 “decrease in positions,” but caution is needed: future main themes are weakly correlated with the heavily weighted stocks that led gains over the past three years. Saying goodbye to old logic requires full psychological preparation.

Summary of the full text

Core conclusion: The A-share market is currently experiencing two major underlying logical changes: 1. Internal position imbalance; 2. Significant macro environment shifts. The former refers to the fact that by Q4 last year, pan-technology institutional holdings exceeded 50%, outbound resources over 70%, and resource commodities nearly 90%. The high positions in tech, outbound, and resources make the market highly sensitive to negative news but less responsive to positive signals. The latter involves the dollar strengthening from a weak state due to high oil prices, with the oil price center inevitably rising, leading to liquidity contraction. With these two major changes occurring simultaneously, we believe the position structure cannot remain the same. A vigorous “rebalancing” (or shifting from high to low) is unavoidable, and some stocks may never return to previous highs. This also means being prepared to part ways with many stocks that benefited from the old logic and surged significantly over the past three years—mental readiness is essential.

By comparing historical phases of internal imbalance plus major macro changes, a key question is whether the current decline resembles early 2021 or early 2022. 2021 implied the possibility of the index reaching new highs in the second half, with the Maotai index and Ning portfolio falling early in the year, after which the Maotai index, due to imbalance and macro shifts, “could not return,” while the Ning portfolio’s “stronger prosperity” became the main theme—essentially a structural adjustment, corresponding to mild inflation, a strong dollar, and resilient global economy. 2022, however, saw the index at high levels in Q1, with most sectors declining sharply, indicating a reduction in positions—implying a stagflation or recession expectation. Currently, we lean toward believing it’s a 2021 “structural adjustment” scenario, noting the transition from the “Maotai index” to the “Ning portfolio” after the initial broad decline. An extreme case would be a rebalancing between tech outbound resources (90% positions) and domestic demand real estate (10%), triggered by inflation-induced stagflation and recession, prompting domestic policy tightening, especially considering Southeast Asia’s vulnerability to energy crises. A more pragmatic scenario involves internal rebalancing among tech, outbound, and resources—what we repeatedly call the “Four Rebalancings”—leading to mild inflation. The new and old rebalancing patterns have been validated: the decline in financial attributes of resource commodities and the resurgence of their commodity nature, with tech and outbound rebalancing still ongoing.

First, the imbalance in institutional positions in A-shares is evident. The main contradiction now is that PPI stabilization and rebound are causing tech to over-rotate toward cyclical stocks. By Q4 2025, domestic institutions’ pan-tech holdings will surpass 50%, outbound sectors nearly 70%, and resource commodities close to 90%. Tech, outbound, and resources have become the core allocation base. We observe that by Q4 2025, the differentiation between tech and cyclical styles in A-shares is high, but as PPI stabilizes, this divergence will be further constrained, making “rebalancing” an inevitable trend. This means that by 2026, a “rebalancing” must continue. Continuing the 2025 “one-sided tilt toward tech” is inappropriate; a “new-old dance” will define the structural allocation.

1. One scenario is rebalancing between tech outbound resources (90%) and domestic demand real estate (10%). The trigger is inflation leading to stagflation and recession, prompting policy tightening, especially considering Southeast Asia’s energy vulnerability.

2. Another scenario involves mild inflation, a strong dollar, and resilient global economy under high oil prices. We emphasize the “Four Rebalancings,” which involve internal rebalancing among tech, outbound, and resources, or a high-to-low shift.

Specifically: 1) The new-old rebalancing (tech positions down, cyclical up)—validated; 2) Internal resource rebalancing (financial attributes decline—precious metals, commodity attributes rise—oil-chemical); 3) Tech internal rebalancing: moving toward the supply-demand gap in storage, power, energy storage, copper, etc.; 4) Outbound internal rebalancing: shifting from downstream consumer sectors to mid-upper 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, although the market currently faces doubts about global stagflation and recession, the rising oil price center and dollar strength are certain. The macro environment has changed dramatically. From a macro asset perspective, the dollar’s strengthening reverses liquidity logic, causing a “high-to-low” shift in global asset allocation. Internally, rising oil prices mainly reduce the financial attributes of resources, with commodity attributes rising—gold-oil ratio falling is a key indicator, confirming our early-year resource rebalancing view.

1. It’s still uncertain whether the global stagflation or recession probability is confirmed. According to global think tanks, Brent oil prices at $100–120 for over six months could trigger stagflation risk; above $125 for over eight weeks could mark a recession threshold. Previously, we believed that unless a rapid end to the third oil crisis or large-scale OPEC+ production increases occur, the oil price center will rise, implying persistent inflation into Q2. Currently, oil prices remain above $100; even optimistic estimates suggest a mid-$80s to $95 range, but geopolitical volatility means further increases are uncertain.

2. Major asset performance shows that a strong dollar is the key pricing factor. Currently, the combination of high oil prices, relatively high U.S. yields, falling gold, and a strong dollar suggests that if recession is priced in, the dollar would weaken; if stagflation is priced in, gold shouldn’t fall so fast. The current scenario of high oil prices, a strong dollar, and weak gold indicates we are not in a typical stagflation or recession environment. If oil prices stay high and the dollar suddenly weakens while gold rises, that would be problematic.

When facing these two issues—1) internal imbalance in A-shares; 2) major macro environment shifts—it suggests that continuing with many heavily weighted stocks from the past three years is inappropriate. It also indicates that future main themes are unlikely to be highly correlated with the stocks that led gains previously. Against this backdrop, considering the market’s decline from over 4,000 points to around 3,800, the key question is whether to compare it to early 2021 or early 2022.

1. If comparing to March 2021: The response to early-year decline is mainly structural adjustment rather than systemic collapse. Position imbalance, rate hike expectations, and the emergence of stronger prosperity themes led Ning portfolio to replace Maotai index later.

Our review shows that this decline was triggered by rising U.S. bond yields and deteriorating micro-structure after the Spring Festival, with core assets like Maotai experiencing broad corrections—Shanghai Composite fell up to 8.1%, ChiNext nearly 21.6%. But the market did not enter a full downturn; instead, it shifted its main focus—Ning portfolio replaced Maotai as the core, and cyclicals continued to strengthen amid economic recovery and industrial upgrades, showing clear “prosperity rotation” throughout the year. Institutional holdings also shifted from crowded blue-chip stocks to higher-prosperity, less crowded sectors like new energy and semiconductors.

2. If comparing to February 2022: The main response was defensive reduction, not just structural rebalancing. The macro environment then was: 1) Unexpected inflation; 2) Overseas rate hikes; 3) Domestic pandemic and declining property prices. This led to a phase of risk aversion, with declining risk appetite, diminishing new funds, and falling earnings expectations.

Our review shows that this decline was triggered by stagflation expectations from Russia-Ukraine conflict, with the full A-share index dropping 9.46% in January, broad indices falling sharply. Afterward, the market lacked sustained profitable themes aligned with industry trends, only sporadic policy-driven opportunities like stabilizing growth and digital economy. Overall, profit-taking, declining new capital, and reduced positions led to a shift from high-valuation growth stocks to low-valuation defensive sectors, evolving into a stock-rebalancing market.

Based on these historical comparisons, we consider two core scenarios for the current market:

1. If the macro environment shows mild inflation, a strong dollar, and resilient global economy, the market will resemble March 2021, with the Shanghai Composite possibly reaching new highs in the second half. Structurally, internal financial attributes of resources decline, commodity attributes rise—gold index underperforming compared to 2021. Whether AI and tech stocks follow the “Maotai index” or “Ning portfolio” depends on future prosperity levels. If mild inflation tightens liquidity but does not affect tech capital expenditure, AI tech will remain part of the “Ning portfolio”; otherwise, high positions could lead to passive declines.

Additionally, under energy and industrial security drives, upstream outbound stocks like wind power, engineering machinery, new energy, and power equipment will continue to enjoy high prosperity, becoming essential components of the “2026 Ning portfolio.”

2. If a clear global stagflation or delayed rate-cut cycle emerges, the market will resemble early 2022, requiring full position reduction and defensive shifts, with only select defensive stocks offering relative gains.

Currently, compared to the 2022 “decrease in positions” mode, we believe it’s more aligned with the 2021 “structural adjustment” pattern. The imbalance in A-shares and major macro shifts coexist, and the transition from the “Maotai index” to the “Ning portfolio” after broad declines is more credible. The “2026 Ning portfolio” is likely to have low correlation with the most heavily weighted stocks that surged in the past three years. Be psychologically prepared for this.

Risk warning and disclaimer

Markets are risky; investments should be cautious. This article does not constitute personal investment advice and does not consider individual user’s specific investment goals, financial situation, or needs. Users should evaluate whether any opinions, views, or conclusions herein are suitable for their circumstances. Invest at your own risk.