CITIC Securities: Expect the market in February to gradually emerge from the high volatility environment caused by large-scale capital inflows and outflows

China Securities Expected that in February, the market will gradually emerge from the high volatility environment caused by large-scale capital flows, and asset pricing will return to two main themes: domestic policy efforts, economic recovery, and overseas Federal Reserve rate cut expectations. In terms of asset allocation, it is still necessary to tilt towards risk assets, while equities with relatively lower volatility will be a better choice.

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Major Asset Classes | Returning to the Main Themes (February 2026)

We expect that in February, the market will gradually move out of the high volatility environment caused by large-scale capital flows, and asset pricing will return to two main themes: domestic policy efforts, economic recovery, and overseas Federal Reserve rate cut expectations. In terms of asset allocation, it is still necessary to tilt towards risk assets, while equities with relatively lower volatility will be a better choice.

▍Macro and Policy: Potential Risks and Drivers for the Economy.

The key theme for the macro environment in the first quarter of 2026 is policy efforts. The strength and pace of policies are similar to those in 2025. Under the dual effects of policy support and low base effects, the economy in the first quarter of 2026 is expected to shift from low to high volatility. The direction of policy efforts will be a major difference between 2026 and 2025. It is expected that the proportion of special bonds directly impacting the economic fundamentals will increase in 2026, which could boost infrastructure investment that experienced negative growth in the second half of 2025, leading to better performance in the first quarter of 2026. Additionally, China’s more diversified export structure and more competitive export products are expected to sustain high levels of exports. Similar to infrastructure, manufacturing investment will also see positive changes, while real estate and consumption will require more policy support.

▍Overseas: Rate Cuts Should Be Early, Not Late.

Referring to the historical process of US job openings leading to unemployment rate changes, we expect that the deterioration of the US labor market will not reverse quickly, indicating that the Federal Reserve still needs to cut rates early in the short term. However, the stickiness of inflation, especially in energy and core commodities, is becoming apparent, and the tension between US labor market pressures and inflation persistence complicates the Fed’s monetary policy decisions. The transition between the old and new Fed chairs has led to market expectations of rate cuts being pushed back, but delaying rate cuts will only increase the risk of stagflation in the US. From a fundamental economic perspective, early rate cuts are a more reasonable choice.

▍Major Asset Allocation Strategy Judgment.

Since the beginning of 2026, large capital flows have intensified volatility in risk assets, and February may be a key point for volatility convergence and asset pricing to return to the main themes. Commodity volatility is currently at a historical high, and bond expected returns are limited. Against the backdrop of policy efforts and economic recovery, equities still offer strong value. Before the Spring Festival, the stock market may experience seasonal decline in trading sentiment, but in the short term, net redemptions of broad-based ETFs may weaken market disturbances. In the medium term, increasing risk appetite and gradual fundamental recovery are expected to jointly support the stock market. It is recommended to focus on large-cap blue-chip sectors represented by non-bank financials that have been “mispriced.” Before the clear expectation of reserve requirement ratio cuts and rate cuts, the bond market is unlikely to break out of its oscillation pattern. As interest rates reach low levels, caution should be maintained on bonds before the Spring Festival. Regarding commodities, although non-ferrous metals and precious metals have long-term fundamentals improving and have recently experienced significant adjustments, it is not advisable to chase high prices excessively before commodity volatility converges.

▍Risk Factors:

Domestic policies for steady growth falling short of expectations; geopolitical conflicts exceeding expectations; Federal Reserve rate cuts smaller than expected; negative shocks from overseas risk events exceeding expectations.

(Source: People’s Financial News)