Shenwan Hongyuan: The present may be the most challenging phase; China's energy security and supply chain security could be the key to global alpha

Ping An Securities Research Team led by Fu Jingtao states that the deadlock in US-Iran conflict continues to weigh on market risk appetite. Short-term capital that supported the “Phase One rally” is retreating, leading to shrinking industry ETF sizes, pension fund reductions to avoid net asset losses, and “fixed income+” products reducing holdings and redemptions. This may be the most stressful phase currently. The medium-term uncertainties are underestimated: monetary tightening is not the optimal response to imported inflation; China and the US show stronger-than-expected economic resilience; China’s energy and supply chain security could become global alpha.

• 1. The deadlock in US-Iran conflict continues to suppress risk appetite. Focus on the short-term retreat of funds supporting the “Phase One rally” (industry ETF shrinking, pension reductions to avoid net value losses, “fixed income+” reductions and redemptions). This suggests we may already be in the most stressful phase. The “steady progress” policy is understandable, but attention should be paid to potential differences between the structural support for steady progress and absolute return reduction structures, which could pose tail risks.
• We still warn that medium-term uncertainties are underestimated: 1. For China and the US, monetary tightening to combat imported inflation is a bad strategy. Increasing inflation tolerance is highly probable. 2. The US economy remains resilient; China has room to maneuver; recession is not the baseline assumption. 3. Geopolitical deadlock may enhance China’s energy and supply chain security as global alpha. Even if the US-Iran conflict sees repeated fluctuations, the impact on A-shares is likely to gradually weaken.

The deadlock in US-Iran conflict leaves many sectors unprepared for a new Middle Eastern order. However, forming a new balance will require long-term negotiations. This is reflected in ongoing short-term event-driven disturbances, directly pressuring capital market risk appetite. Short-term market impact analysis mainly draws on experiences from two oil crises: rising oil prices and freight costs → inflation heats up → monetary tightening → recession, confirming stagflation cycle → stock market fundamentals and valuations resonate downward. This logical chain cannot be invalidated in the short term. Meanwhile, we observe that the short-term retreat of funds supporting the “Phase One rally” is concentrated: 1. Industry ETF sizes shrink, especially in non-ferrous metals, chemicals, computers, media, etc.

• 2. Absolute return funds see rapid gains narrowing, forcing reductions in equity holdings to avoid principal losses. Pension funds that previously increased equity positions face decreased stability in high short-term positions. Based on the holdings structure of active public funds and “fixed income+” products, sectors like non-ferrous metals, chemicals, communications, and electronics may face de-risking pressures. Equity allocations in this round have increased, with “fixed income+” products being key channels; redemption pressures are emerging. The overall fund retreat aligns with the “steady progress” policy. Pay attention to potential differences between the structural support for steady progress and the absolute return reduction structure (CSI 300 weight minus industry ETF weight, CSI 300 weight minus “fixed income+” holdings). Overall index risk remains controllable, but structural shocks may carry tail risks.

Regarding medium-term projections, we firmly oppose the view that “short-term sharp decline, medium-term slow decline, and the end of large-wave rallies.” The biggest impact of the US-Iran conflict may be imminent. Short-term market pricing uncertainty and reinforced adjustments from absolute return reductions suggest a correction phase. However, pessimistic scenarios that cannot be invalidated in the short term likely involve three major uncertainties, and medium-term expectations are probably more moderate than short-term forecasts: 1. Facing imported inflation, the optimal monetary policy choices for China and the US may not be tightening. China’s low inflation base and the unlikely scenario of oil price-driven policy changes make tightening less probable. With mature policy frameworks addressing structural economic issues, China is unlikely to tighten. The US, with relatively weak employment and limited inflationary feedback, is also less likely to tighten. The US has shifted from an oil importer in the 1970s to a major exporter now, making imported inflation pressures more controllable. The Fed needs to balance supporting employment, manufacturing return, and managing imported inflation. In short, the Fed is relatively hawkish, and a shift to tightening in response to imported inflation cannot be ruled out short-term, but medium-term expectations may differ significantly. 2. If sustained monetary tightening does not occur, economic pressures in China and the US remain manageable. 3. Over the medium term, relative shifts in country strength are becoming evident, increasing the probability of China alpha realization. Past major global shocks have often led to reassessment of China’s supply chain capabilities. This cycle, China’s ability to maintain supply chain, energy, and security resilience may be revalidated, providing a narrative boost for the stock market. It also raises the possibility of Middle Eastern capital flowing into Chinese assets. Short-term worries do not necessarily reflect medium-term trends; the worst may be short-lived. Stay vigilant against liquidity shocks in the short term, but maintain confidence and patience in the medium term.

• 2. The A-share market is in a “two-phase rally” consolidation stage. In the short term, the market may follow a pattern of “oversold → policy support → rebound.” The subsequent trend is likely to be range-bound, with leadership sectors rotating continuously. New thematic opportunities (such as short-term energy storage and optical communication driven by economic recovery) may challenge the upper limit of the range; if the rebound stalls, the market could test the lower bound of the range.
• 3. In the short term, the focus remains on “practicality,” with CPO and energy storage as strong directions. Under energy cost shocks, new energy and new energy vehicles benefit from diversification and supply chain resilience, potentially becoming key strategic resources alongside traditional energy. The “second phase rally” structure (AI industry chain + price cycle) is likely to see pullbacks but has limited short-term timing. Historical experience shows that two-phase rallies share similar style traits. During consolidation, styles tend to broaden rather than shift sharply from high to low. High-elasticity investment opportunities mainly come from extending core assets and expanding macro narratives.

Currently, the “practical” approach remains relevant, with CPO and energy storage confirming short-term prosperity. Under energy cost shocks, new energy and EVs benefit from diversification and resilience, possibly becoming important strategic resources, which could lead to profit diffusion. The market has already identified the strongest structures; how to judge their sustainability? We believe the pattern of “industry catalysis → valuation uplift → valuation reaching historical highs, then encountering resistance” still applies. When the rally stalls, sideways consolidation is expected, allowing for strategic patience. Besides continuously seeking new growth segments, the second major structure likely to persist in the medium term includes AI industry chain and cyclical alpha, which are good for low-buying points. However, these directions have limited short-term timing.

The medium-term style remains unchanged. Historically, the first phase of a rally (structural) and the second phase (broad-based) share consistent style features. The consolidation period in between is not about switching from high to low, but rather about the diffusion of core themes.

We reviewed historical cases from 2014 and 2018-19. We observe that the early strong styles during the buildup phase tend to stabilize before the second rally begins. The industry gains and losses during this phase are weakly positively correlated with both the first (structural) and second (broad) rallies, indicating no clear style switch. Therefore, the buildup phase is not a high-to-low switch but rather a dispersal of core themes. Leading sectors and key stocks enter high-level oscillation zones. The space for new opportunities diminishes as size shrinks, which is characteristic of the buildup phase. Nonetheless, high-elasticity investment opportunities mainly come from extending core assets and expanding macro narratives.

Mapping to the current situation, the “practical” feature will likely persist until the first quarter earnings season. Future AI industry trends may shift from hardware to applications, focusing on cloud computing, edge devices, and robotics, with domestic AI supply chains leading globally. Opportunities for AI to transform traditional industries (opposite to HALO trades) are also worth attention. Macro narrative expansion includes the potential for relative power shifts among countries, which could be an opportunity for manufacturing revaluation.

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