Autumn Equinox has arrived, and the market is still searching for direction amid volatility, yet the cyclical sectors have carved out some structural bright spots — nonferrous metals, agriculture, and coal have taken turns performing, and attention on resource commodities is quietly rising. The Great Wall Fund "Four Seasons Companion" autumn special event has arrived as scheduled.

We invited Chen Ziyang, fund manager of Great Wall Cyclical Preferred Mixed Fund, and Xiao Yong, co-chief analyst for metals and coal at Changjiang Securities. One uses capital expenditure as an anchor and excels at contrarian positioning at the bottom of the capacity cycle; the other has deep expertise in metals and coal research and a thorough understanding of the pricing factors across various commodities.

Starting from their respective perspectives, they point to the same conclusion: the traditional cyclical "endless cycle" is being rewritten, and supply constraints, deglobalization, and AI demand are quietly pushing the center of gravity for advantaged resource commodities upward.

On the cyclical investment framework

Chen Ziyang believes that capital expenditure is the most genuine statement an industry can make, and the core of cyclical investing is to take contrarian positions when the industry is down, waiting for the resonance between earnings and valuation brought by improved industry structure and ROE recovery.

On the new changes in cyclical commodity pricing

Xiao Yong believes that resource nationalism and supply chain restructuring have made the supply side far less controllable than in previous cycles, and combined with the trend toward broad monetization, the pricing logic of certain metals is undergoing deep-seated changes.

Understanding cycles is the key to composed positioning. We hope this conversation can add a measure of calm and foresight to your journey through the ups and downs of cycles.

On the investment logic and research framework for cyclical sectors

Chen Ziyang: Using capital expenditure as an anchor, contrarian positioning in the capacity cycle

"History does not repeat itself exactly, but it rhymes." Chen Ziyang believes that the formation of cycles in business activity often stems from supply's lagged response to demand: when demand improves, new capacity takes time to come online; when demand falls, existing capacity also takes time to exit — scarcity and surplus thus alternate.

Therefore, the core of cyclical investing is to go somewhat against the industry cycle — paying attention and positioning when the industry is down, or even when capacity is exiting, to obtain a higher margin of safety; as industry structure improves and profitability recovers, one enjoys the "double click" of ROE recovery plus the company's own alpha.

His investment scope covers cyclical industries such as metals, energy, chemicals, construction materials, and transportation, as well as broadly cyclical areas like agriculture, and upstream and downstream machinery equipment and advanced materials.

Among the many tracking indicators, Chen Ziyang values capital expenditure the most. He believes that only the real money companies put in can represent their true view of the industry. Taking the nonferrous metals sector as an example, in 2022, with macroeconomic headwinds, traditional thinking would suggest nonferrous metal prices should have fallen sharply, but in reality many commodities saw prices and profits at considerable levels. Deeper research revealed that the supply landscape had already undergone a massive change: the industry's previous capital expenditure peaked in 2011-2012 and bottomed in 2016. Even by 2022, when prices and profits were not low, industry capital expenditure remained very limited, and future supply increments were minimal.

Based on this judgment, Chen Ziyang focused on nonferrous metals, especially precious metals, over the past two to three years, and combined with last year's tailwind from US rate cuts, he captured this rally well.

On valuation, because cyclical industry earnings are highly volatile, traditional PE often fails at the cycle bottom. He prefers the PB-ROE framework, which essentially examines asset profitability, positioning, and judgment about earnings sustainability.

Xiao Yong: Coal, precious metals, and industrial metals have different pricing factors

Coal: It is a "cyclical in a cage," with the core being policy control over supply. Half of global coal supply is domestic, and as long as the government effectively controls supply, global supply can be well managed; thermal coal demand is rooted in energy and electricity, and electricity demand is highly resilient. Based on these two points, coal is mostly a dividend investment with low capital expenditure and high dividends, but when external shocks such as domestic safety inspections or overseas export restrictions occur, it returns to its cyclical nature with significant price elasticity.

Precious metals: Largely driven by two types of factors. One is the interest rate factor, which was the most important variable for capturing gold rallies over the past decade before this cycle — gold mainly fluctuates with the interest rate cycle. The other is the monetary credit factor, a longer-cycle variable, which has played a far greater role in the recent gold bull market than ever before.

Industrial metals: Short cycle looks at demand, medium cycle looks at supply. In the short cycle, the Fed-led interest rate cycle causes global economic fluctuations; in the medium cycle, first there is the 5-10 year capital expenditure super-cycle in the mining industry with a long time span, and second there is the administrative supply control factor — for example, electrolytic aluminum is not a mineral commodity strongly constrained by capital expenditure, but policy controls production in the smelting segment, resulting in a relatively good price structure.

On the pricing changes of cyclical commodities under deglobalization and the AI wave

Xiao Yong: Moving from "endless cycles" to a rising price center

Xiao Yong believes that the two biggest changes affecting cyclical sectors in recent years are, first, the increasingly obvious trend of deglobalization, and second, the development of AI technology, which together have caused major changes on the supply side.

This impact is reflected at three levels: At the monetary level, precious metals represented by gold have clearly broken away from the previously simple interest rate cycle volatility in this cycle, showing an upward trend in the price center. At the industrial supply level, under resource nationalism, various countries intervene in resource development conditions, tax policies, and export controls from the perspective of national security in ways more obvious and frequent than in previous cycles. At the demand level, new energy and AI development have brought incremental demand for related metal materials compared to traditional cycles, and also brought resilience to electricity demand growth, with notable demand pull effects on copper, aluminum, thermal coal, and minor metals such as tin, tantalum, and tungsten.

After these changes, cyclical commodity prices still rise and fall, but the center is moving upward. The valuations of some advantaged commodities have not yet fully reflected this, and may gradually materialize in subsequent investment evolution.

Chen Ziyang: Resource commodities may deserve a certain security premium; nonferrous metals are the cornerstone of AI

Chen Ziyang believes that many commodities have highly concentrated supply, including oil, coal, and certain minor metals, with global supply often concentrated in a few countries or regions. Against the backdrop of frequent geopolitical conflicts, the risk of supply disruption intensifies. Therefore, for companies with resource layouts domestically that can effectively avoid geopolitical conflict risks, valuations may deserve a certain security premium — this is "self-reliance and controllability" in another sense, and from the perspective of strategic security and self-sufficiency, the value of domestic resource commodities awaits revaluation.

Regarding the view that "nonferrous metals may become the new crude oil," he pointed out that since 2022, major countries globally have invested trillion-dollar-level capital expenditure in AI, and these investments have all been converted into physical AI infrastructure assets such as power grids and data centers. Nonferrous metals play a key role in computing power, storage, interconnection, and power transmission, and are indispensable advanced materials. Therefore, many nonferrous metals and new materials in a sense constitute the cornerstone of artificial intelligence.

On the research and judgment of cyclical sub-sectors after rate hikes materialize

Chen Ziyang: Bullish on cyclical sectors, watching for opportunities in sub-sectors

Chen Ziyang believes that the cyclical sector's standout performance during the recent market correction stems from dual support from fundamentals and valuation. Looking ahead, structural opportunities in the sector are worth watching.

Gold: This year's trajectory has been full of twists and turns. The interest rate cycle factor has been fairly fully priced in, and the logic has returned to its hedging attributes. In terms of allocation value, gold has two layers of logical support: 1) The interest rate side is not pessimistic: rate hikes do not mean the Fed has entered a new hiking cycle. Judging from US economic drivers, inflation, and employment, there is no basis for starting a new rate hike cycle, and subsequent tracking of inflation decline and AI capital expenditure sustainability is needed. 2) The US Treasury credit side has catalysts: long-end US Treasury yields hitting new highs, US Treasury interest expenses exceeding defense spending, and market concerns about US Treasury sustainability and dollar credit intensifying — gold may subsequently ferment the US Treasury credit logic.

Industrial metals: Although current profitability is already at a high level, copper supply actually declined rather than increased in the first half, constrained by multiple factors including geopolitical disruptions and long-term lack of exploration investment, with supply-side increments still limited. Aluminum is more subject to policy control, and the domestic electrolytic aluminum capacity ceiling is currently difficult to break through, with great uncertainty in overseas capacity replacement.

Minor metals: Strategic minor metals such as tungsten, tantalum, and tin, driven by AI investment, have good long-term investment opportunities.

Chemicals: The entire sector has reached the bottom of the capacity cycle, and many sub-sectors will see investment opportunities emerge in the future. Current focus is on refining and chemicals, refrigerants, phosphorus and potassium, as well as the more rigid-demand fiber segment.

Others: Sub-sectors such as shipping and coal are also worth watching.

Xiao Yong: Prefer coal and precious metals

Coal: One or two rate hikes do not mean the Fed is starting a continuous hiking cycle; it is better positioned as "hiking to a peak," and subsequently there may be a return to a rate-cutting channel. Policy pace can mainly be judged by tracking oil price-driven inflation data. Against this backdrop, the coal sector has a solid foundation for dividend asset allocation; at the same time, this round of performance has been affected by external supply-side shocks and has partially broken through the traditional pure dividend framework. Limited supply release supports the coal price center, and upward price elasticity is stronger than before, with elastic targets also showing allocation value. Coal has evolved into an investment category of "dividend as the base, with a cyclical upside option."

Metals: Currently most bullish on precious metals. The core assumption is that this round of rate hikes is difficult to sustain continuously, and gold may be in a positioning window during the middle of a bull market, with good returns expected over a longer time dimension. The price center of industrial metals like copper and aluminum, whose supply-demand structure is optimizing, is rising over the long term and stock valuations are already low enough, but the short cycle is also driven by interest rate cycle catalysts, while precious metals are more leading in the pricing transmission of the interest rate cycle.

Cycles rotate, and investing requires conviction. Great Wall Fund will continue to deeply cultivate cyclical industry research, providing long-term, warm investment companionship for investors through the changing seasons.

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