Shenwan Hongyuan Group Co., Ltd. has released a research report indicating that the latter half of 2026 represents a pivotal transition phase for markets. In the short term, vigilance is required against volatility stemming from geopolitical tensions and U.S. dollar liquidity disturbances. For the medium term, the focus should be on the diffusion of AI industry benefits and the improving value proposition of Chinese assets in global portfolios. A strategy combining tactical agility with strategic conviction is essential to navigate cycles and position for the future.
On tactical asset allocation, considering risks from oil prices and dollar liquidity, the analysis suggests: in the short term (1-3 months), increase cash holdings, maintain hedges with commodity and energy positions, continue underweighting U.S. Treasuries, and reduce equity exposure in markets like South Korea (which have seen significant prior gains) and Southeast Asia (where fundamentals face pressure from high oil prices). For the medium term (3-6 months), opportunistically increase allocations to high-quality equity assets in U.S. and Chinese tech stocks as dollar liquidity conditions evolve. Strategically, the firm continues to favor commodities, high-quality Chinese assets, and the AI industry trend.
The latest iteration of the quantitative asset allocation "Five-Star Model" suggests an overweight position in commodities, Chinese equities, and cash for Q3 2026. It recommends a neutral stance on U.S. equities and Chinese bonds, and an underweight position in U.S. Treasuries and other emerging markets.
Key Observations on the First Half of 2026
The first half of 2026 saw global asset prices experience sharp volatility and divergence amid macro disturbances including geopolitical risks, rising inflation, and interest rate fluctuations. Global equity markets showed strength in AI hardware stocks and benefiting markets like South Korea, Japan, and U.S. tech, while other sectors and markets faced pressure. In global bond markets, interest rate trends diverged, with U.S. Treasury yields rising sharply while Chinese bond yields edged lower. Commodities saw crude oil strengthen significantly, industrial metals remain resilient, and precious metals adjust notably. In forex, the U.S. dollar was strong while the Renminbi appreciated steadily. Looking back at Q2 2026, the global quantitative "Five-Star Model" achieved excess returns by overweighting commodities and equities, with a cumulative return of 3.79% since March 2026.
Global Asset Divergence on the Left Side of the "J-Curve"
The global equity market rally in 2026 has become more extreme and fragmented, evident on several levels: 1) Market flows: Since April, funds have further flowed into the U.S. market and out of non-U.S. markets. 2) Style performance: The performance gap between tech and non-tech stocks in H1 2026 widened further compared to 2025. 3) Within tech: Performance between AI hardware-related companies and software stocks has diverged further. This market fragmentation is characteristic of the left side of the productivity "J-curve": in the early stages of new AI technology adoption, corporate capital expenditure leads, while productivity gains lag, concentrating market gains in direct tech hardware, resources, and capital goods sectors, leaving other sectors behind.
The market will transition from the left to the right side of the "J-curve" via one of two paths. The optimistic path (breadth recovery) involves AI productivity benefits successfully spilling over to a wider range of industries, driving demand improvement and inflation subsidence, leading to broad market gains. The pessimistic path (broad decline) occurs if capital costs (interest rates and risk premiums) rise sharply before productivity benefits materialize, potentially cutting off the AI investment cycle and leading to growth stagnation and a broad market sell-off.
Macro and U.S. Dollar Liquidity Outlook
In the short term (next 1-3 months), U.S. dollar liquidity disturbances persist, warranting attention to tactical volatility risks. Geopolitical uncertainty and oil price concerns may resurface; with strait transit disruptions and declining inventories, the oil price trend is biased upward. Secondly, the policy stance of the new Fed Chair, Warsh, is under observation. Finally, with the U.S. midterm elections approaching in Q4, policy uncertainty may rise. Focus on changes in the U.S. Treasury term structure and volatility; a "bear flattening" and rising volatility pose significant pressure on U.S. equities.
From a medium-term perspective (next 3-6 months), the Fed faces constraints on continued aggressive rate hikes, suggesting a lack of foundation for a trend of sustained dollar liquidity tightening. The U.S. economy shows a "weak consumption, strong investment" divergence, with AI-related equipment and intellectual property investment as the core driver, but household savings rates, consumer confidence, real wage growth are low, and labor market tightness is unlikely to persist. Furthermore, high U.S. fiscal pressure and a structurally strained reserve system will limit the Fed's room for significant rate hikes or trend "quantitative tightening." If the Fed places more weight on metrics like the trimmed-mean PCE, the bar for further hikes could be raised.
Looking ahead to H2 2026, the 10-year U.S. Treasury yield is expected to oscillate at elevated levels, with a core range of 4.2% to 4.7%, potentially higher earlier and lower later. In a downside scenario (geopolitical easing, weaker labor market), it could fall to 3.7%; in an upside scenario (continued conflict, AI investment and fiscal deficit synergy), it could break above 4.7%. Trend-based U.S. dollar index strength typically occurs during Fed hiking cycles or deep U.S. recessions; its core range for H2 2026 is forecast at 97-103.
Global Equity Markets: The "J-Curve" Transition
From a fundamental perspective, the AI tech industry trend and penetration rate still have significant room for growth; the fundamental AI trend has not been systematically disproven. AI penetration is spreading from the tech sector to areas like finance and professional services, with cloud business revenue and profits growing in tandem, validating the industry trend. However, as capital expenditure rises, U.S. AI cloud providers' reliance on debt financing is increasing, warranting attention to operational pressures and capital expenditure expectation volatility for some companies.
From a valuation and risk perspective, valuations are not yet in bubble territory, but tactical volatility risks warrant caution in Q3: current P/E valuations for the S&P 500 and Nasdaq are not at extreme bubble levels, but P/B percentiles are high. Short-term risks to monitor include: surging U.S. Treasury volatility (MOVE index) pressuring equities (especially tech), inherent high policy uncertainty in a midterm election year, and historically poor market performance following large IPOs. Spillover effects from liquidity volatility risks in markets like South Korea also deserve attention.
Structurally, after near-to-medium-term macro liquidity disturbance risks subside, the AI semiconductor rally still has room to spread to other tech subsectors and other styles. Currently, semiconductor outperformance relative to other industries is near 2000 highs, but overall tech industry outperformance remains below 2000 peaks, and the outperformance of U.S. large-cap growth stocks over small-cap value stocks is far below levels seen during the dot-com bubble.
Chinese Equities and Bonds: Strategic Opportunities
Strategically, the firm remains positive on Renminbi asset allocation opportunities amid currency internationalization. Unlike overseas markets facing broad interest rate upward pressure and high volatility, Chinese asset liquidity has continued to improve marginally in 2026, with the resilience of Chinese assets becoming more prominent amid global volatility.
In the bond market, Renminbi appreciation, through the trade surplus, leads to foreign exchange settlement inflows, akin to a "passive RRR cut," providing some support. The 10-year Chinese government bond yield is expected to oscillate around 1.60%-1.80% in H2 2026, supported by factors including currency appreciation expectations, relatively controllable imported inflation pressure, accommodative monetary policy, and strong institutional demand.
In the equity market, the overall A-share uptrend since 2025 has primarily been driven by incremental domestic capital, with less direct short-term impact from foreign allocation and dollar liquidity. As domestic AI computing power and high-end manufacturing sentiment recovers, internal structural opportunities still have room to expand. Hong Kong stocks' sensitivity to U.S. Treasury rates has increased this year, and overseas liquidity risks continue to pressure them in the short term. However, profit expectation adjustments have been relatively thorough, with negative factors somewhat digested. Currently, global capital has not fully priced the value of Chinese manufacturing and China's own AI industry trend. Global fund allocation to Chinese equities remains at historically low percentiles; from a global PB-ROE perspective, A-shares and H-shares are positioned attractively. Medium-term, as expectations for underlying Renminbi assets improve, global capital allocation to Renminbi assets still has significant room for growth.
Commodities: Strategic Favor and Agricultural Catch-Up
The firm remains strategically positive on commodities, citing global fiscal deficits, a manufacturing cycle recovery, geopolitics and resource control, and demand synergy from AI capital expenditure. For crude oil, tight supply-demand balance makes the price trend biased upward, offering hedging value against geopolitical risk. For industrial metals (copper, aluminum), supply is constrained by mine accidents and rising costs, while demand is driven by AI computing infrastructure and energy transition; the uptrend is not over. Gold faces increased short-term volatility: in 2026, gold prices have been dominated by changing rate cut expectations triggered by U.S.-Iran tensions. Gold ETF holdings (e.g., SPDR) have seen significant outflows following the rise in real U.S. rates. The long-term thesis remains solid, supported by high U.S. fiscal deficits and central bank gold buying amid global "de-dollarization." With implied volatility low, patiently await allocation opportunities after a shift in dollar liquidity expectations. For agricultural products, a configuration window has emerged. Global grain inventories are low, and high energy prices are pushing up planting costs and biofuel demand. Historically, in commodity cycles driven by supply shocks, agricultural products often represent the "last leg" of the rally. Additionally, a potential El Niño event in 2026-2027 could further increase upward pressure on agricultural prices.
Risks to Monitor
Key risks include escalating geopolitical conflicts, non-linear weakening of the global economy, and a sharp decline in U.S. AI tech stocks.