Rongtong Fund's Li Jin: The upward logic of the stock market remains intact; the three major driving variables are the key observations

【Editor’s Note】

2026 marks the beginning of the “14th Five-Year Plan” period, as China’s economy enters a new development stage.

Under the new circumstances, international capital and foreign investment banks are continuously optimistic about China. Goldman Sachs recommends increasing allocations to A-shares and Hong Kong stocks in 2026; JPMorgan Chase has upgraded the ratings of mainland China and Hong Kong markets to “Overweight”; UBS believes that policy support, improved corporate earnings, and capital inflows could drive up A-share valuations. These judgments reflect international investors’ recognition of China’s economic transformation and development prospects in 2026, and also suggest that, as winter turns to spring, global capital may flow eastward.

The “Chief Connection” market outlook for 2026, titled “Spring Water Flows East,” also conveys this sentiment. In this outlook, the “Chief Connection” studio will interview dozens of authoritative economists, fund managers, and analysts to discuss their views on China’s economy in the new year and analyze new investment opportunities.

“In 2026, I believe there is still some room for stock market growth, with the main driving factors continuing to be in place, and valuations of growth sectors currently not high,” said Li Jin, Deputy General Manager of the Equity Investment Department at Rongtong Fund and Fund Manager of Rongtong Industry Trends Select Fund, during a guest appearance on the “Spring Water Flows East—‘Chief Connection’ 2026 Market Outlook” special on February 18. He noted that the current market temperature is neutral to slightly hot, but overall still within rational bounds.

Li Jin pointed out that this upward trend is likely not over, driven mainly by policy guidance, liquidity environment, and industrial trends—key variables to watch in the future.

Regarding specific sectors, Li Jin remains focused on computing power, believing that some raw materials, chips, and storage sectors have significant potential for earnings surprises. Meanwhile, he sees the independent energy storage sector entering a rapid growth phase, with sustained growth momentum expected in the coming years.

As for consumer and innovative pharmaceutical sectors, Li Jin is not pessimistic. He believes that after previous adjustments, valuation pressures have been digested, and these sectors are gradually entering a suitable deployment zone.

In 2025, Li Jin managed four products, two of which doubled in net value within the year, with Rongtong Industry Trends winning the 2025 stock fund championship.

Below is an edited transcript of the interview with Li Jin by Pengpai News:

Pengpai News: Looking back at 2025, the A-share market saw significant gains. In your view, what is the core logic driving the market’s upward trend?

Li Jin: Data shows that in 2025, the rise of A-shares was jointly determined by valuation and earnings growth, each contributing about half.

Overall, the ChiNext Board, with a growth style focus, had greater valuation and earnings elasticity, achieving larger gains.

The two sectors with the biggest gains in 2025 were non-ferrous metals and communications. The main companies in these sectors experienced high earnings growth, supported by fundamentals, and their leading firms’ valuations were relatively low.

Therefore, the 2025 stock market rally was a healthy upward trend.

Pengpai News: In your recent quarterly report, you mentioned an observation: “Current investor pessimism about the real estate market and retail investors’ cautiousness about entering the stock market indirectly indicate that the market remains rational.” Does this mean, within your framework, that the market has not yet entered an overheated phase?

Li Jin: The most important indicator is the valuation level. Currently, A-shares are not highly valued.

In a major market rally, the key is to look at the technology growth sectors.

The representative index is the ChiNext Index, which is still slightly below its 15-year historical median, not overheated. Meanwhile, valuations of the CSI 300 and SSE Composite Index are relatively high historically, mainly because banking, non-ferrous metals, insurance, and dividend-paying sectors have seen continuous new highs.

Another indicator is retail investor enthusiasm. The irrational part mainly involves a sharp increase in trading volume and high activity in certain thematic sectors.

At the end of 2025, market turnover was not overly active. However, after the start of 2026, trading volume rapidly expanded from 2 trillion to 3 trillion yuan, with some early-stage industries surging significantly, signaling some irrational behaviors.

The market temperature is currently neutral to slightly hot, but overall still within rational bounds.

Pengpai News: You have publicly stated that “this upward trend is unlikely to have ended,” but also noted in your quarterly report that “based on past experience, future trends are more habitual than rational.” What is the core logic supporting your view that the trend will continue?

Li Jin: I believe it hasn’t ended because the three main drivers of this rally are still in place, and these are the key points for future observation: policy, liquidity, and industrial trends.

First, on the policy front, both domestic and overseas, the environment is very friendly to stocks. The stock market has become an important lever to boost consumption and confidence, aiming to stimulate spending and stabilize the economy. All these measures are positive for the real economy and the stock market.

Second, liquidity. The Federal Reserve remains in a rate-cutting cycle, with an expected rate of around 3% in 2026; domestically, liquidity remains ample, with rate cuts and reserve requirement reductions on the horizon.

Third, industrial trends continue. Downstream demand for AI is rising rapidly, and leading companies’ valuations are still relatively low. The industry growth cycle is still in its early stages.

In assessing the stock market, the focus will be on these three core variables. If any of these change, adjustments to the outlook may be necessary.

Pengpai News: The December 2025 Central Economic Work Conference emphasized “stability with progress” and “stimulating endogenous motivation.” How do you think this policy tone will impact the market structure (sector rotation) and investment styles (growth/value) of A-shares in 2026?

Li Jin: Stimulating endogenous motivation in China’s economy benefits from two major industrial directions: one is technological innovation, and the other is stimulating domestic demand.

Technological innovation is a key driver for unleashing social endogenous power and is also the main theme of the market.

As a core track of technological competition, the artificial intelligence industry is profoundly shaping the international landscape and industrial upgrading paths for decades to come. Countries are increasing their investments, which is inevitable. Currently, AI is still in the “big infrastructure” stage, with significant capital expenditure, directly benefiting the entire AI hardware supply chain—from GPUs and optical modules to PCBs—demand remains strong.

Meanwhile, the industry is developing with a clear rhythm of “hardware first, application follow.” In applications, AI has begun generating substantial revenue in cloud computing, AI advertising, and marketing, and is driving productivity changes in programming and other fields. In autonomous driving, driverless taxis without safety operators are expected to gradually operate in the US and China in 2026. Overseas, new-generation robots are entering mass production. Overall, AI applications are entering a rapid explosion phase.

Besides technological innovation, stimulating domestic demand is another key approach to unleashing endogenous power. Opportunities abound in sectors like consumer substitution and outbound consumption.

We observe that since December 2025, the number of second-hand homes listed has decreased while transaction volumes have increased, and some cities’ transaction prices have rebounded. If real estate sales can stabilize and recover, traditional consumption sectors may also see an uplift.

The policy tone of “stimulating endogenous motivation” will shift A-share investment styles from “growth dominance” in 2025 to a “growth and value resonance” in 2026, leading to more balanced investment opportunities.

Pengpai News: How do you foresee the divergence in the prosperity of various segments within the AI industry chain in 2026? Besides the currently heavily held optical modules, which other sub-sectors do you believe have the potential for unexpected growth, and what are the key catalysts?

Li Jin: The AI sector has always had differing opinions, but disagreement is a good sign—it indicates expectations are not uniform.

I personally think that investment in AI computing power will show clear differentiation this year. Last year’s sharp sector rally has brought most stocks’ valuations to reasonable levels.

Looking at downstream demand growth for computing power, the industry’s growth rate in 2026 is expected to slow compared to last year. This means some stocks relying on overall growth may have limited performance upside, and their valuation centers could gradually decline due to slower capital expenditure growth. Therefore, the focus should be on sub-sectors where demand growth significantly exceeds industry average—what we call inflation segments.

Apart from optical modules, two main inflation segments in computing power are:

First, some upstream raw materials and chips, which are difficult to expand capacity for and have long expansion cycles, causing supply to lag behind demand in the short term.

Second, storage. After application breakthroughs, demand for storage chips like DRAM and NAND has surged, with prices more than doubling. As AI applications scale, the importance of memory capacity has become evident, and prices are rising rapidly.

These two directions have strong potential for earnings surprises.

Pengpai News: You regard energy storage as a “second growth point.” Currently, the energy storage industry is in its explosive early stage. From an investment perspective, which core link in the industry chain do you favor most? How do you evaluate the speed and sustainability of its high growth in the coming years, and what are the key variables?

Li Jin: Driven by capacity electricity prices and peak-valley spreads, domestic independent energy storage projects are now comparable to overseas, entering a new stage of commercialization. I am optimistic about the industry’s sustained high-speed growth in the next few years.

Domestic energy storage faces higher requirements for lifecycle management. Once profitability is unlocked, independent energy storage units, unlike previous heavily policy-driven models, now have trading attributes (frequency regulation, spot trading), requiring a lifespan of over ten years and higher equipment standards. Transitioning from policy-driven to operational units, profitability prospects improve, increasing recognition and premiums for system integrators and cell manufacturers along the industry chain.

Regarding the sustainability of growth over the next few years, the key long-term issue is whether the problem of “abandoning wind and solar” in renewable energy development can be solved. If peak-valley price spreads continue to narrow, energy storage profitability will decline, impacting demand. However, in the near future, demand for energy storage is expected to remain high.

In the short term, close attention should be paid to upstream lithium carbonate prices. Recent sharp increases have raised battery cell costs, causing some industry players to hold back on new storage projects, temporarily dampening demand. As lithium carbonate prices stabilize, new projects will restart.

Short-term industry demand may fluctuate, but the long-term growth trend remains intact.

Pengpai News: In the second half of 2025, you reduced holdings in new consumer sectors and innovative pharmaceuticals, citing valuation overreach or short-term positive factors already reflected. At this point, do you think these sectors are fully overvalued? Under what specific conditions or signals would you consider increasing your allocations again to these long-term favored sectors?

Li Jin: I reduced holdings in new consumer sectors in Q2 2025 and in innovative pharmaceuticals in Q3, mainly because the valuations of leading companies in these sectors had become quite high, with some valuation premiums already overextended, and some companies’ earnings had fallen short of expectations.

However, after a half-year correction, these sectors are now more suitable for gradual deployment. For example, some stocks in new consumer have fallen back to a PE of around 20 times this year, with solid earnings growth.

Similarly, in innovative pharmaceuticals, many stocks have declined over 30% after a rapid rise before Q3, but their growth logic remains intact. China’s innovative drug approvals now account for nearly 40% of the global total, with clinical development leading globally. Several blockbuster drugs have gained recognition from overseas counterparts, entered late-stage clinical trials, and received hundreds of millions of dollars in licensing agreements.

However, the market capitalization of Chinese innovative drug companies is still relatively small compared to global giants. Therefore, we can look for some globally competitive innovative drug companies with strong product pipelines, especially those with overseas licensing or sales exceeding expectations.

I remain optimistic about the future prospects of consumer and innovative pharmaceutical sectors.

Pengpai News: Besides closely tracking known industry trends, how do you plan to build a forward-looking research system to identify early opportunities during the “0 to 1” or “1 to N” critical phases? Before including these opportunities in your portfolio, what key verification signals do you prioritize?

Li Jin: Researching emerging industries is indeed more challenging. For us, the key is to judge whether an industry is approaching a true outbreak—crossing the critical point of development.

Before reaching that point, the industry is in a “0-1” phase, characterized by themes rather than actual performance. It’s difficult to see earnings realization at this stage. Once the critical point is crossed, stock prices tend to stabilize and grow steadily, driven by earnings.

Determining whether the industry has reached this critical point involves assessing whether it has the foundation for rapid expansion. For example, photovoltaic industry evaluation, whether new energy vehicles are now economically viable compared to traditional fuel vehicles, or whether large AI models have achieved reasoning capabilities—these are indicators that the industry has crossed the threshold for rapid growth.

Main signals include: whether commercial aerospace rockets are economically viable, whether robotaxis in autonomous driving are economically feasible compared to traditional taxis, or whether humanoid robots are ready for commercial sales. These are the primary verification signals.

In addition, we closely monitor product validation, customer orders, and other fundamental data of relevant companies.

Pengpai News: You advocate a “balanced growth track allocation + focus on leading stocks + contrarian dynamic adjustment” portfolio management approach. In practice, how do you balance the contradiction between industry diversification and stock concentration? How do you avoid “fish tail” phenomena in certain sectors?

Li Jin: Industry diversification in a portfolio aims mainly to control drawdowns and volatility. When asset drivers differ, the portfolio tends to show orderly rises and falls, and can switch flexibly to more cost-effective sectors during bubbles.

Sector concentration aims to capture excess returns from rapid industry outbreaks. Without heavy positions in booming sectors, the portfolio’s growth can be slow.

Stock concentration is based on long-term industry logic: only a few companies with sustained competitive advantages can survive cycles, promote industry progress, and generate long-term excess profits. Therefore, stock selection must focus on quality—willing to pay reasonable or even premium valuations for core companies, rather than buying second- or third-tier firms at low prices.

The seemingly contradictory strategies of industry balance and concentration are actually unified at the stock level. Whether to overweight a sector depends on whether enough high-potential, high-quality companies can be found within it. The proportion of industry allocation should not come at the expense of lowering stock selection standards. Cross-sector comparison helps avoid late-stage sector risks.

When managing assets across different types and cycle stages, natural comparisons of valuation and risk are made. When a sector’s valuation bubbles, reducing positions and shifting to undervalued areas can avoid “fish tail” risks. If most holdings are overvalued, shifting to defensive assets or reducing positions can help mitigate systemic risks.

Pengpai News: For ordinary investors aiming to seize growth opportunities in 2026 while managing risks, what specific allocation strategies would you recommend?

Li Jin: In 2026, I believe there is still some room for stock market growth, with the main drivers continuing, and valuations of growth sectors not high.

For individual investors wanting to participate in market gains, there are two main ways: buying funds or selecting stocks themselves. For funds, focus on index funds with valuations below the historical median; if you know a fund manager well, you can choose their active funds. Active management essentially involves selecting the manager, so understanding their investment framework, style, and capabilities is important.

If choosing stocks directly, prioritize companies with clear competitive advantages, and adopt a long-term holding perspective—study their business models and core barriers.

In any case, it’s advisable to focus on industry leaders. Smaller companies are still doing well, mainly because they haven’t been in the market long enough to challenge the leaders. Only companies with core competitiveness can sustain excess profits over time.

Pengpai News: Looking ahead to 2026, what do you see as the main investment risks? Specifically, for your heavily held AI sector, is the core risk whether growth performance will meet expectations?

Li Jin: On the macro level, key factors are policy guidance and liquidity trends, which are crucial for stock valuations.

For the AI sector, the main investment opportunity lies in computing power. Industry-wise, it’s important to monitor whether downstream demand growth aligns with expectations—such as token call volume maintaining rapid growth; corporate capital expenditure continuing; and large models progressing steadily. If these core drivers change, we should be alert.