Source: CICC Insights
Authors: Li Qiuse, Wei Dong, et al.
Since the outbreak of the Middle East conflict, global markets have experienced volatility and adjustments.
As the conflict has now persisted for nearly a month, the market trading logic has gradually shifted from the expectation of 'short-term controllability of the conflict and rapid risk clearance' to global 'upward inflation,' while beginning to marginally factor in risks associated with weaker global growth.
A review of asset performance following 14 major geopolitical conflicts in the past reveals that, during the initial phase of geopolitical shocks, stock markets often face emotional impacts and rising risk premiums. This manifests as increased volatility and capital reallocation, with funds tending to shift from equities to safe-haven assets.
After the emotional impact subsides, the market focus will gradually shift to fundamentals and policy themes, with the substantive changes caused by geopolitical conflicts on global industrial chains and the macro environment becoming the dominant logic.
Market concerns in these two areas have both risen recently:
1. Cost shocks and profit divergence. As China is a typical energy-importing country, the rise in energy prices places direct or indirect cost pressures on most domestic industries. If the impact spreads to global trade, it could also affect our export demand. This concern, accompanied by rising oil prices, has gained increasing attention recently, reflecting on the capital market and influencing subsequent profitability assessments for A-shares, particularly in non-financial sectors.
2. The interplay between macro inflation and interest rates. High oil prices boost inflation expectations, which in turn influence the pace and direction of the Federal Reserve's monetary policy. If the global liquidity easing cycle ends prematurely, it could suppress equity market performance.
From an industry perspective, since the outbreak of the conflict on February 28, the market has primarily revolved around two main themes: 'defensive risk aversion' and 'energy substitution.' As of March 27, the utility, coal, banking, and power equipment sectors bucked the trend to close higher. Among them, utilities and banking are typical defensive sectors, while coal, power, batteries, and energy storage benefited from the logic of energy substitution. Other sectors experienced widespread declines, especially those with significant prior cumulative gains such as non-ferrous metals and defense.
Notably, the petrochemical and basic chemical sectors, which are directly linked to the crude oil industry chain, have experienced heightened volatility due to short-term speculative factors and long-term demand concerns, increasing the difficulty of portfolio allocation.
Rising oil prices present both 'risks' and 'opportunities'.
Generally speaking, the emotional impact brought about by geopolitical events tends to diminish as the event cools down or market attention wanes, and risk appetite is likely to recover after uncertainty gradually dissipates and new expectations form. However, the substantial impact of rising energy prices on global supply chains and the macro environment often persists in the medium term. This round of conflict has already disrupted key global energy infrastructure and transportation channels: navigation through the Strait of Hormuz remains restricted, oil-producing countries like Saudi Arabia and Iraq have cut production, some LNG facilities in Qatar have shut down, and global refinery operating rates have declined. According to comprehensive views from industry analysts, even if the conflict eases subsequently, the restoration of the global energy supply chain will be difficult to achieve quickly, meaning that the oil price may remain relatively high for an extended period.
Logically, oil prices affect corporate profits through three core pathways, presenting both 'risks' and 'opportunities':
1) Cost shocks and redistribution of profits within industrial chains. Rising oil prices will first drive up costs in energy, chemical raw materials, and transportation, reshaping the profit distribution structure within industrial chains. The main beneficiaries are concentrated in resource and substitute sectors: upstream oil and gas extraction, as well as oil services and transportation, directly benefit from price increases, while coal and coal chemicals receive support due to improved economic viability of substitutes. Correspondingly, industries that rely heavily on crude oil as a direct raw material or are highly sensitive to fuel and logistics costs, such as aviation, transportation, certain petrochemicals, and energy-intensive manufacturing, will face pressure.
2) Supply substitution and export share increase. On one hand, constrained supply in the Middle East creates an export substitution window for certain domestic industries. For example, reduced supply from the Middle East and rising natural gas prices have pushed up overseas urea prices, while sharply rising sulfur prices have driven up phosphate fertilizer production costs. If overseas prices for urea, sulfur, and related commodities remain persistently high, and domestic export policies relax marginally, companies holding export quotas for urea and phosphate fertilizers are expected to benefit.
3) The importance of long-term energy security is increasing, accompanied by a reshaping of the global competitive landscape. Rising geopolitical risks further underscore the significance of supply chain security. In the medium to long term, energy security and the autonomous control of industrial chains are likely to become central themes. Strategic resources such as oil, gas, and rare metals exhibit strong long-term demand rigidity, while sectors like power grid equipment, energy storage, and wind power are expected to see accelerated market penetration, further enhancing China's competitive edge in new energy exports.
How to allocate at the current juncture
Looking ahead, we believe that although short-term uncertainties remain and risk appetite is unlikely to recover substantially before the situation becomes clearer, from a medium-term perspective, the macro environment in which the market operates has not undergone fundamental changes. Risk release and downward adjustments may present attractive allocation opportunities. Artificial intelligence is currently at a stage of new technological iteration and application implementation. The exponential growth in energy and cost demands for training new models supports upstream demand, driving price increases and profit improvements for related listed companies' products.
In terms of allocation, we recommend focusing on high-growth, high-certainty themes:
1) High-growth sectors driven by AI technology rapid iteration: focus on highly promising areas such as cloud computing infrastructure, optical communications, batteries, energy storage, semiconductors, etc. On the application side, pay attention to autonomous driving and robotics. Additionally, the importance of AI strategic security directions may further increase.
2) Cyclical price increases: taking into account geopolitical situations and positions within the capacity cycle, we suggest paying attention to sub-sectors supported by supply-demand dynamics, with strong profit certainty, such as energy, power grids, electricity, non-ferrous metals, chemicals, and oil transportation.
3) Low-volatility dividends: high-dividend stocks may still represent phased, structural opportunities this year; focus on alignment with cash flow.
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Editor/Melody