Zhongtai Strategy: What Impacts Might Prolonged Geopolitical Conflicts Bring? How Should We Allocate Assets?

Table of Contents

How to allocate when geopolitical conflicts become prolonged?

Investment Recommendations

Market Microstructure Observation for the Week (March 9–13, 2026)

Main Report

This week, the US-Iran conflict lasted longer than market expectations. On the 8th, Trump told Israeli media that a final decision to end military operations against Iran would be made at an “appropriate time,” sparking market expectations for the conflict’s resolution. Oil prices initially surged and then retreated on Monday. However, due to continued disruptions in the Strait of Hormuz, oil prices began rising steadily from Tuesday and broke through the $100 mark again on Thursday.

In the A-share market, risk aversion remained dominant this week. Amid ongoing geopolitical tensions and rising crude oil futures prices, the main trading themes focused on energy and defensive sectors. Heavy asset sectors such as coal, utilities, and power equipment, as well as alternative energy sectors, performed relatively well.

Looking ahead, the US-Iran conflict may have a “long-term” trend. Energy security assets are likely to benefit in the short term, while technology sectors should focus on avoiding negative impacts from overseas exposure.

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What impacts could long-term geopolitical conflicts bring?

The current US-Iran conflict may last longer than market expectations, with higher difficulty levels for TACO than before. On the 8th, Trump stated that there are “almost no targets left to strike” inside Iran, and that US military actions against Iran are “about to end,” which triggered market expectations for a “TACO” trade involving Trump, leading to a brief rebound in tech stocks. However, as the situation evolved and the Strait of Hormuz remained blocked, market expectations were continuously revised upward, and oil prices kept rising. Looking ahead, we believe the logic of war and trade may differ fundamentally, and the overall difficulty of this TACO cycle could be higher.

In trade friction, the underlying logic of Trump’s “TACO” strategy is based on bilateral negotiations where the US, as the demand side, holds a relatively advantageous position, with marginal costs of tariffs being controllable. However, this US-Iran conflict has entered a multilateral game, and the power to end the war may not lie with the US. On March 10, Iran stated it would not negotiate with the US, focusing all efforts on battlefield retaliation and making the US and Israel “regret and remember.” Even if Trump wishes to withdraw quickly, the negotiation thresholds are extremely high. Even under the most moderate scenario—if the US announces a ceasefire, Iran makes no conditions, and the Strait of Hormuz is immediately reopened—the legacy of this conflict will impose long-term constraints on US Middle East strategy. Iran could develop stronger nuclear deterrence within 2 weeks to 2 months, posing significant challenges to Israel, US interests in the Middle East, petrodollar dominance, and Trump’s mid-term election prospects.

On the other hand, prolonged conflict comes at a high cost. US military strategic resources will be depleted in a war of attrition, and rising oil prices will have nonlinear negative impacts on US corporate earnings, consumer prices, and economic growth over time. Last week, we discussed how the previous Russia-Ukraine conflict objectively pushed up oil prices and contributed to US inflation.

Recently, long-term US Treasury yields have risen significantly, reflecting inflation expectations priced into oil prices. The “safe-haven” attribute of US Treasuries has weakened overall. Although the dollar index has risen, indicating capital inflow into USD, Treasury yields continue to climb due to rising inflation expectations.

Considering core interests and the strategic game structure, we believe this conflict could last longer than market expectations. Once a “war of attrition” begins, the focus shifts to both sides “competing on costs and endurance,” with Iran holding the initiative to end the war, not the US. The ongoing conflict may benefit Iran domestically by boosting national unity and consolidating regime legitimacy, while internationally it continues to pressure Trump politically and build leverage for more favorable ceasefire terms.

If the conflict exceeds market expectations, oil prices may shift upward, with increased volatility and high-level oscillations. Correspondingly, the global risk asset pricing environment could face systemic tightening. Rising oil prices and inflation expectations, along with policy rate paths, will exert ongoing downward pressure on tech stock valuations.

In terms of sectors, we currently recommend maintaining balanced positions, prioritizing energy security-related sectors. The current US-Iran conflict and oil price dynamics differ from previous trade disputes. During technical corrections in energy and commodities sectors, consider buying on dips and gradually increasing allocations to energy, resources, and utility sectors that benefit from conflicts. Additionally, although the Shanghai Composite Index’s slow bull market driven by national policies is unlikely to reverse due to overseas risks, this does not mean all sectors will benefit equally. Instead, we may see a “stable index with significant structural divergence.” Defensive sectors may attract capital during periods of increased volatility in small- and mid-cap stocks.

In the technology sector, priority should be given to segments related to global energy shortages, military expansion, and manufacturing growth. Regardless of how geopolitical conflicts evolve, these segments have dual attributes of “risk hedging and industry support.” Under the backdrop of geopolitical tensions and energy supply uncertainties, countries are accelerating energy transitions and military expansions, which drive demand for new energy, high-end manufacturing, and related fields such as photovoltaics, energy storage, lithium batteries, wind power, non-ferrous metals, power equipment, rare earths, nuclear power equipment, low-altitude electronic components, and dual-use chemical products, maintaining medium-term industry prosperity.

From a priority perspective, domestically driven tech segments outperform overseas exposure. For example, segments benefiting from IPOs of key storage companies, such as semiconductor equipment, are more attractive. The escalation of US-Iran tensions, by boosting inflation expectations and interest rate centrality, may suppress valuations of overseas tech assets and impact related A-share sectors through valuation mapping. Conversely, if Gulf energy and geopolitical risks rise, petrodollar inflows from the Gulf could constrain global computing power investment and disrupt data center expansion plans. In this context, future demand for overseas computing chains may fall short of previous expectations.

For Hong Kong stocks, resource and high-dividend sectors may benefit. The Hang Seng Tech Index is most sensitive to global liquidity and risk appetite changes and may face some shocks. However, valuations of the Hang Seng Tech sector have already adjusted downward, limiting further downside.

Additionally, sectors with high dividend yields, resource companies, and Hong Kong local property and real estate stocks may benefit temporarily amid ongoing geopolitical tensions. If the Middle East situation becomes prolonged, international capital might reprice offshore financial centers, reallocating funds from the Middle East to more stable and secure financial hubs. Hong Kong, as a mature offshore financial market with a high proportion of high-dividend assets, could become a key beneficiary of such capital reallocation.

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Investment Recommendations

Main Theme 1: Energy Security and “Conflict-Benefiting” Assets. The current US-Iran conflict may last longer than expected. Focus on energy, resources, and utility sectors that benefit from conflicts. During technical corrections in energy and commodities sectors, consider buying on dips. High-dividend, resource, and local property sectors in Hong Kong may also benefit temporarily under ongoing geopolitical tensions.

Main Theme 2: Energy Transition and Military Expansion-Driven Tech Exports. Focus on photovoltaics, energy storage, wind power, non-ferrous metals, rare earths, nuclear equipment, electronic components, and dual-use chemical sectors. These segments have dual attributes of risk hedging and industry support.

Main Theme 3: Internal Structural Differentiation in Tech—Prioritize Domestic-Driven Segments. Internally, domestically driven segments outperform overseas exposure. The US-Iran conflict boosts inflation expectations and interest rates, potentially suppressing overseas tech valuations and affecting related A-share sectors. In contrast, segments driven by domestic industry cycles and capital market events (e.g., semiconductor equipment benefiting from IPOs of key storage firms) are more attractive for allocation.

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Market Microstructure Observation for the Week (March 9–13, 2026)

3.1 Broad Market Index Performance

This week, the market showed mixed performance. The ChiNext Index rose significantly by 2.51%. The CSI 500 Index declined by 1.44%. Large-cap growth sectors performed relatively well, while small- and mid-cap growth sectors faced pressure.

3.2 Market Sentiment and Risk Appetite Tracking

Market risk appetite rebounded this week. The PE_ttm of the CSI 300 was 14.21x, up 0.02x from last week, in a high historical percentile (86.20% in 10-year percentile). Risk premium was 5.22%, down 0.04%, in a mid-range historical percentile (48%).

3.3 Market Financing Changes

Market financing activity increased this week. By Thursday, financing balance reached 2.65 trillion yuan, about 2.03% of total A-share market capitalization, up 121 billion yuan week-on-week. Over the past five trading days, the total net buy-in via financing accounted for approximately 9.2% of trading volume, roughly unchanged from five days prior.

3.4 Sector Rotation and Valuation Changes

Sector turnover rates mostly declined this week. Construction & decoration, computers, and basic chemicals saw increased crowding. Major declines in turnover rates were observed in agriculture, forestry, animal husbandry, non-ferrous metals, and defense & military sectors, decreasing by 3.94%, 6.02%, and 7.91%, respectively. Conversely, sectors like construction & decoration, computers, and basic chemicals saw increased crowding.

Valuations mostly retreated, with coal, agriculture & forestry, and light industry manufacturing seeing valuation rebounds. Only 10 major sectors saw rising P/E ratios last week, notably coal, agriculture & forestry, and light industry manufacturing, up 1.10x, 0.71x, and 0.70x, respectively. Sectors like computers, electronics, and defense & military declined by 1.83%, 2.58%, and 9.32x.

In relative terms, electronics, computers, and real estate currently have P/E ratios at very high levels (above 90% in 10-year percentile). Conversely, agriculture & forestry, non-bank financials, and consumer staples have low P/E ratios (below 30% in 10-year percentile).

From a P/B perspective, valuation dispersion is evident across sectors. Mechanical equipment, communications, and electronics have P/B ratios in the 98%+ percentile over the past decade, indicating very high valuations. Household appliances, biomedicine, and consumer staples have lower P/B ratios, with consumer staples below 20%, at historically low levels.

Risk Warning: Unexpected tightening of global liquidity, increased complexity in market negotiations, and unpredictable policy changes.