Plunge, massive震！The Strait of Hormuz Engulfing the World! How Should Investors Respond to This Conflict?

Recently, anxiety over the Strait of Hormuz has engulfed global capital markets, leading to rare volatility in countries such as South Korea and Japan since the pandemic, with A-shares also experiencing increased fluctuations; the Shanghai Composite Index briefly fell below 3,800 points.

We should rationally recognize that the volatility of A-shares is more driven by trading factors. The Shanghai Composite Index has basically not had significant adjustments since April of last year, surging from 3,300 points to nearly 4,200 points in one go. Profit-taking, coupled with crowded trading in overvalued sectors, financing pressures, and automatic stop-losses in quantitative trading, has all contributed to the intensified market fluctuations.

From the perspective of the fundamentals of A-shares, the current valuations are at historical lows, with dividend yields far exceeding risk-free rates. Share buybacks and dividend payout ratios are both on the rise, while tens of trillions in time deposits are seeking alternative yields. Global funds are also searching for safer havens; China is seen as the world’s “cornerstone of certainty” and “harbor of stability,” with the slow appreciation of the renminbi ensuring that A-shares will become a destination for global risk-averse capital.

Moreover, investments should not be held hostage by anxiety over the Strait of Hormuz. Currently, oil is generally in a state of oversupply, with no substantial basis for a supply shortage, and investments should avoid overreacting to geopolitical conflicts. It is worth noting that during the two oil embargoes in the 1970s, inflation and unemployment soared, with interest rates reaching double digits; Buffett also fully invested through such dire macro conditions.

Buffett said, “Every 10 years or so, dark clouds will hover over the economic sky, and during this time, a ‘golden rain’ will suddenly fall. When this happens, you must rush out with a bathtub, rather than just a spoon.” For investors, it is precisely this series of difficulties that brings the stock market’s valuations to extremely low levels, and these difficulties will eventually become a thing of the past, but the window for buying at extremely low valuations will not always be open.

Panic is the greatest enemy of investing, and investors should maintain composure. As seasoned investors firmly believe, the sky will not fall; if it does, then nothing can be done about it. Since that’s the case, it’s better to take advantage of the cheap prices to buy stocks.

Four Factors Leading to Increased Volatility

The recent volatility in A-shares can be attributed to four main reasons:

First, the 2.6 trillion yuan financing has been very sensitive to market fluctuations; the market’s decline has forced some financing to sell, amplifying both upward and downward movements.

Second, the 2 trillion yuan of quantitative funds automatically execute stop-losses when volatility occurs, and the concentrated selling from automatic stop-loss orders has increased the amplitude of fluctuations.

Third, some sector stocks have high valuations and crowded trading; once the wind changes, selling can be extremely swift, driving overall market volatility.

Fourth, it has been nearly ten years since A-shares last reached their peak in 2015, and the market has gradually forgotten the pain of the decline. New investors are actively entering the market, and their tolerance for declines is limited.

However, these are merely trading disruptions and do not affect the investment value of A-shares. The valuations of A-shares are at historical lows, with many low-disruption sustainable asset companies trading at low valuations, providing a long-term stable dividend yield for China’s “hard assets.” Statistical data shows that as of March 27, the dynamic price-to-earnings ratio of the Shanghai Composite Index was 16.52 times, with a dividend yield of 2.54%; the dynamic price-to-earnings ratio of the Dividend Index was 8.86 times, with a dividend yield of 4.32%; the dynamic price-to-earnings ratio of the Shanghai 180 Index was 11.92 times, with a dividend yield of 3.27%.

In terms of yield, major asset classes can be compared, revealing who is more attractive. The annualized yield of the stock market is roughly equal to the dividend yield plus the economic growth rate, currently around 8%; the current yield on ten-year government bonds is 1.8%, and bank deposit rates are about 2%; the rent-to-sale ratio for properties in first-tier cities is about 2%. However, the stock market’s annualized yield is achieved over the long term and through volatility.

Assets such as gold and Bitcoin have recently shown weak performance, as non-yielding assets are purely speculative; the most intense conflicts may mark the peaks of such assets. However, “hard assets” with stable dividend yields have a solid foundation, and during the most intense conflicts, stock prices may have already passed their lows, as price declines only make these inherently attractive companies even more appealing.

Against the backdrop of a stable and improving Chinese economy, a slowly appreciating renminbi, and ample liquidity, investors’ anxiety over the Strait of Hormuz may be overblown. Yi Yingnan, a researcher at Renmin University’s Chongyang Institute for Financial Studies, recently stated that America’s strategic dilemmas dictate that war will not escalate long-term, and currently, oil is generally in a state of oversupply. Our country’s diversification strategy for import sources has been in place for over a decade, continuously reducing dependence on any single source.

Cheap is the Hard Truth

Recently, the conflict between the U.S. and Israel has triggered market associations with the two oil embargoes of the 1970s. The two oil embargoes indeed brought severe shocks to the global economy at the time, such as double-digit inflation, double-digit interest rates, and nearly double-digit unemployment rates.

However, Buffett maintained a full stock position during both oil embargoes. Particularly during the first oil embargo that began in October 1973, Buffett had left the overvalued U.S. stock market in 1969, but he returned to the market in 1973. He had so many stocks he wanted to buy and so little capital that he borrowed against interest rate bonds to expand his capital.

In 1973, he invested a total of $10.62 million to acquire a 9.7% stake in The Washington Post. The intrinsic value of The Washington Post was around $400 million, but at that time, its market value was only $100 million. This investment became one of Buffett’s classic triumphs, yielding him over a hundredfold returns later.

Investing is counterintuitive; when the stock market is cheap, a series of difficulties often deter investors from buying. But looking back, being cheap is the hard truth.

However, going against the grain during market panic requires immense courage. The book “Where Are the Customer’s Yachts?” published in 1940 described Wall Street during the 1929 crash. At that time, the author observed: “You can’t ask an experienced Wall Street trader to buy stocks when shipping volumes have just dipped below new lows, unemployment is at its peak, steel production is less than half of normal, and a big shot confidently tells him that a large Midwestern underwriter is in crisis.” “Unfortunately for everyone, this is precisely the time when stocks are falling.”

In the long run, the market will reward the courage and patience of contrarian buyers. “How can I buy stocks at extremely low prices?” The late global “contrarian investing master” John Templeton asked himself this critical question when he was very young. His answer was, “Unless someone is eager to sell, no other factors can drive a stock’s price down to extremely low levels.” This answer led him to borrow money to buy $10,000 worth of stocks during the harshest times of World War II, which he sold four years later for three times the return.

(Source: Securities China)