CITIC Securities: How should the industry be allocated in Q2 2026?

Source: CICC (China International Capital Corporation) Securities Research

By: Zhang Yulong Wang Dalin

Geopolitical events such as the U.S.-Iran conflict that broke out in March, as key external variables, have significantly changed the pricing logic of capital markets—from focusing on internal earnings repair to trading global inflation and seeking safety

Against this backdrop, industry business conditions are highly differentiated: upstream resource commodities, as well as sectors related to energy security and national defense security, benefit from inflation and heightened tensions; the technology manufacturing space continues the trend of industrial upgrading, but external supply-chain risks need to be watched; within discretionary and non-durable consumer spending, performance varies due to different demand elasticities across sub-sectors. Over the full year, the development of the economy and markets will be dynamically balanced across a dual-track framework of internal “stabilizing growth and adjusting the structure” and external “preventing risks and combating inflation”

In the first 3 months of 2026, China’s economy started with an initial pattern of strong supply, rapid growth in external demand, and a moderate recovery in domestic demand. The effect of policy front-loading to cushion the downside has become evident. Meanwhile, affected by geopolitical conflicts, the capital market logic has shifted from earnings repair to inflation-based pricing + structural repricing, and industry business conditions have become notably differentiated

I. Macroeconomy: Inflation-based pricing + Structural repricing

Economic data in January and February delivered an “excellent start,” with industrial value added up 6.3% year over year and the services sector production index up 5.2%. Fixed-asset investment turned from negative to positive at 1.8%, with infrastructure investment surging 11.4% and manufacturing investment up 3.1%, effectively offsetting the drag from real estate investment at -11.1%. Retail sales of consumer goods (social retail) rose 2.8% year over year, indicating a mild rebound in domestic demand. Exports led with high growth of 21.8%, highlighting resilience in external demand. Prices improved actively: in February, CPI returned to the “1 era” with a year-on-year reading of 1.3%, while the decline in PPI narrowed to -0.9%, with pressure from imported inflation rising. Financial activity showed stronger government leverage, strong corporate credit, and households continuing to shrink their balance sheets; social financing stock increased 8.2%, M2 growth was 9.0% and M1 rebounded to 5.9%**, indicating improved corporate capital activity. Public finance featured “stable revenues and faster spending,” with increased investment in people’s livelihood areas. Corporate production recovered, but profit repair remained constrained by demand

In February, the manufacturing PMI fell to 49.0%. In the short term, seasonal slowdown is expected, but high-tech manufacturing remains within an expansion range and market confidence is steady. The two sessions set the full-year GDP target of 4.5%-5%. With fiscal policy leading the way, tools such as ultra-long-term special treasury bonds and local government special bonds work in tandem. A shift toward green and low-carbon has moved toward a dual-control approach for carbon emissions, aligning efforts with the carbon peak target and advancing industrial transformation People’s Daily

At the beginning of the year, market logic completed a triple shift: from January to February, policy shifted from counter-cyclical adjustment to deeper pursuit of effectiveness, the market moved from valuation repair to earnings repair, and capital shifted from risk-averse watch-and-wait to long-term money entering the market. In March, the U.S.-Iran conflict triggered concerns about global stagflation, prompting a policy shift to a dual main line of stabilizing growth + preventing risks. The market focused on inflation-based pricing and structural repricing, while capital turned to risk-averse and defensive allocations. Upstream energy, resources, gold, defense and military industries, among others, were repriced upward, and volatility increased in growth sectors

II. Industry performance: Upstream strengthens, tech stays active, consumption diverges

In January and February of 2026, the total profits of industrial enterprises above a designated size nationwide reached CNY 10,245.6 billion, up 15.2% year over year, with a sharp rebound in growth rate of 14.6 percentage points versus the full year of the prior year. This strong start was driven jointly by manufacturing recovery, new quality productive forces leading the way, and improved cost controls, presenting the characteristics of “overall volume rebound and structural optimization.” Even though the start was strong, external geopolitical risks and continued losses in some domestic industries (such as automobiles and steel) still warrant attention. Going forward, as stabilizing-growth policies continue to gain traction and the cultivation of new quality productive forces deepens, industrial profits are expected to maintain a modest repair trend. However, uncertainty in external demand must be kept in mind

By industry, computer communications and electronics, non-ferrous metals, and electrical machinery led the gains; coal and oil and natural gas improved

Cyclical resources: Geopolitical conflicts push up oil prices, and petrochemical and coal prices rise. Building materials and steel benefit from marginal improvements in infrastructure-construction demand, while non-ferrous metals show “new strength replacing old weakness,” and new energy metals gradually recover

Technology manufacturing: AI, semiconductors, and high-end equipment have high levels of business activity. Large AI models and computing-power infrastructure are quickly deployed. Industrial robots and special-purpose equipment see high growth in output, auto exports are strong, and policy support is further increased for new energy and hydrogen energy

Real estate consumption: The property market is still in a bottoming-out and base-building phase, with weak recovery in core cities and pressure on lower-tier cities. Consumption shows structural differentiation: essentials food, communications equipment, and gold, silver, and jewelry perform better, while autos and furniture are relatively weak. Service consumption recovers, but overall repair strength remains limited

Pharmaceuticals and defense: M&A activity is active, and attention is drawn to obesity drug and immunology and immunotherapy tracks. The national defense budget grows 6.9%, and new-domain and new-quality combat forces are a focus for deployment and investment

Early 2026 brought a solid start as policies were front-loaded, but internal momentum (especially consumption and real estate) still needs to be consolidated. Geopolitical events such as the U.S.-Iran conflict that broke out in March, as key external variables, significantly changed capital market pricing logic—from focusing on internal earnings repair to trading global inflation and seeking safety. Against this backdrop, industry business conditions are highly differentiated: upstream resource commodities and sectors related to energy security and national defense security benefit from inflation and heightened tensions; the technology manufacturing space continues the trend of industrial upgrading, but external supply-chain risks need attention; within discretionary and non-durable consumer spending, performance varies due to differing demand elasticities across sub-sectors. The development of the economy and markets throughout the year will be dynamically balanced along the dual-track main lines of internal “stabilizing growth and adjusting the structure” and external “preventing risks and combating inflation”

Anti-“involution” policies and progress not meeting expectations

Capacity de-escalation policies not meeting expectations

Overall economic policy advancement not meeting expectations

Risks intensify uncertainty in global macroeconomic operations such as “reciprocal tariffs,” etc. Capital markets are closely tied to the macroeconomy. Taking China’s A-share market as an example, changes in U.S. policies, downturns in overseas economies, and other factors could affect the business and performance of listed companies’ overseas assets, which in turn would affect listed companies’ revenue and equipment upgrade timelines

Capital market liquidity risk. Capital market performance is highly related to market liquidity. If market liquidity experiences a large marginal change, the market pricing or trend performance of related listed companies may fall short of investors’ expectations

Geopolitical conflicts spreading

Zhang Yulong: Chief analyst of the new share strategy team. PhD in Finance from Guanghua School of Management, Peking University. In 2016, a core member who ranked 5th (group) in New Fortune’s securities strategy analysts. In 2017, he led the team to achieve 4th place in the Financial World industry allocation ranking. In 2018, he ranked 4th in Wind China’s Gold Analyst ranking. In 2019, he ranked 3rd as a rising analyst in Sina Finance’s Gold Qilin securities strategy, 5th in Financial World industry allocation. In 2020, he ranked 2nd in Wind China’s Gold Analyst ranking, and 5th in the per-share Gold Stock portfolio. Mr. Zhang Yulong worked at the Risk Management Department of the head office of Industrial and Commercial Bank of China from 2013 to 2015, responsible for global sovereign risk management and overseas position control, and represented Industrial and Commercial Bank of China to carry out work exchanges in the UK. In 2016, he joined CICC (China International Capital Corporation) Securities. With extensive experience in financial research, he is committed to innovation in theories and applications at the frontiers of economics and finance. He has published multiple papers in top academic journals such as “Financial Research,” “Management World,” and “Quarterly Journal of Economics,” and has deeply participated in design research for the STAR Market. He initiated the design work for the CSI Technology 50 strategy index and the Technology 50 ETF fund, and authored “Ten Lectures on Investment Strategy for the STAR Market”

Wang Dalin: Macro analyst at CICC (China International Capital Corporation) Securities, mainly covering sectors such as mid-level industry economics and regional fields, focused on research into economic structure. He builds industry research frameworks and tracks changes in manufacturing investment, manufacturing capacity, and inventory cycles over the long term

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Editor: Wang Ke