Open-Source Strategy: Historical Review of Overseas Shocks, A-Shares Recovery Market Full of Potential

Report Summary

The market is still further confirming its expectations gap.

The Middle East conflict has entered its third week, with intensity and spillover scope clearly expanding. It has evolved from a single strike to a multi-dimensional risk covering energy facilities, shipping, and regional political structures. As we clearly stated in our 3.2 report “The Largest Expectation Gaps in US-Israel-Iran Conflict—Duration and the Strait of Hormuz,” the market may be overly optimistic about a quick resolution of the US-Iran-Israel conflict: “The duration of the conflict and the Strait of Hormuz are likely the most apparent expectation gaps currently.”

From a total volume perspective: under external shocks, position management is both a response and an extra source of returns.

Since 2020, when facing public events that can trigger global equity resonance, A-shares have shown strong resilience, with negative drag typically ending within a week. When responding to short-term shocks, it is advisable to “stay calm and avoid action”; when shocks ferment over a longer period and impact scope is unclear, the priority should be “reducing positions and controlling risks.”

Once the impact boundary of an event becomes clear or the influence diminishes, it signals a re-entry opportunity. In our 3.15 report “The Next Signal: Volatility Convergence,” we proposed that the most important next signal is not the final level of crude oil prices but when their volatility converges.

At a higher level, indices are likely to recover to pre-shock levels. Therefore, even if there is an unexpected escalation, holding cash to gain excess returns can be gradually increased, and positions can be added.

Equity allocation: During adjustment periods, dividend stocks offer advantages; industry supply and demand are key factors for sector outperformance.

In the face of global equity volatility lasting over ten days, besides reducing positions and risk exposure, how should A-shares be allocated? Structurally:

1. Style: Dividend stocks dominate during adjustment periods, with the impact of shocks at the end of a bear market amplifying relative gains. However, dividend assets are still risk assets in essence, with poor absolute returns.

2. Industry: During overseas shocks and downturns, sectors with independent industry prosperity perform best. During the COVID-19 pandemic, sectors like healthcare (medical biology), energy security (coal), and policy support (coal) outperformed. The current Middle East situation has similar logic: rising industry demand (upstream AI computing power and grid equipment), energy security (coal, photovoltaics, hydropower, energy storage). During the rebound after the bottom: ① policy and industry supply-demand are key; ② there is some correlation with pre-shock market favorites. From 2019-2021, consumption was prominent, and after the Russia-Ukraine conflict, there was stronger recognition of prosperity.

Investment approach—mainly responding, focusing on repairing the market, with an emphasis on prosperity and policy opportunities:

(1) Before the next major signal (crude oil volatility convergence):

Defensive: smooth dividend base positions; consider high-dividend stocks like coal, non-bank financials, media, petrochemicals, transportation.

Offensive: focus on rising industry demand (upstream AI computing power and grid equipment), energy security (coal, photovoltaics, hydropower, energy storage).

(2) During index recovery (after crude oil volatility converges):

Prior to impact: sectors with strong industry logic unchanged, such as AI computing power (computing, storage, semiconductors, robotics), liquid cooling, power equipment, platform applications (AI4S).

Potential reversal: assets stabilized on balance sheets driving recovery in discretionary and service consumption (high-end commercial properties, outdoor sports, tourism, hotels, catering).

Risk warning: macro policy surprises; geopolitical risks exceeding expectations; past performance does not predict future results.

Market Overview

This week, market indices showed divergence. The Shanghai Composite fell 3.38%, Shenzhen Component rose 2.90%, ChiNext gained 1.26%, and the STAR Market declined 3.51%. Average daily turnover was 2.21 trillion yuan, about 287.6 billion yuan less than last week. Sector-wise, except for slight gains in communications and banking, most sectors declined, with non-ferrous metals, basic chemicals, and steel leading the decline.

On Friday, the market surged then retreated, with increased divergence. The Shanghai Index broke below 4,000 points; ChiNext temporarily surged 3%. Leading weights like new energy and computing hardware rose against the trend, while small and micro-cap stocks declined. Sector leaders included power equipment, communications, and coal, with photovoltaic, energy storage, and CPO sectors performing well. Computer, defense, and media sectors declined sharply.

This week’s market was still driven by events, with risk aversion rising due to geopolitical tensions over the weekend. The conflict entered its third week, with intensity and spillover scope expanding from a single strike to multi-dimensional risks affecting energy infrastructure, shipping, and regional politics. As we stated in our 3.2 report “The Largest Expectation Gaps in US-Israel-Iran Conflict—Duration and the Strait of Hormuz,” the market’s previous underestimation and ongoing recognition of three main expectation gaps are:

1. The mismatch between “AI surprise attack” and “mosaic quagmire” in terms of duration.

2. The “physical rigidity” of the Strait of Hormuz blockade versus “production increase illusions.”

3. US strategy of “watching and fighting” and the Middle East map’s “support for the US.”

Historical Reflection: How Did A-shares Perform During Global Public Events?

Reviewing history, how did Chinese capital markets perform during global equity volatility? How to respond?

First, since 2020, A-shares have shown increasing resilience to overseas shocks. Second, in most cases, index recovery occurs within one month after the shock bottoms out. All external shocks except for the Russia-Ukraine conflict were recovered within three months.

Therefore, current uncertainties in the Middle East, even with potential escalation, can be viewed as an opportunity to hold cash for excess returns, gradually increasing equity positions.

From a structural perspective:

During the adjustment phase caused by overseas shocks: ① style—when shocks last longer, dividend stocks outperform; at the end of a bear market, this effect is magnified. Dividend assets are still risk assets, with poor absolute returns; ② industry—sectors with independent prosperity are more resilient.

During the rebound phase after bottoming: ① sectors—policy and industry supply-demand are key; ② sectors—contrary to market intuition, technology growth does not always benefit from risk appetite recovery, and sectors like communications, computing, electronics, defense, and power equipment show higher proportions of negative returns and lower high-return (over 10% or 20%) stocks.

We believe this phenomenon relates to prior market favorites, not style-driven. From 2019-2021, consumption and blue chips outperformed, with stronger prosperity recognition.

In the medium term, technology remains a priority, following the “redistribution” logic driven by AI reshaping global wealth and controlling distribution channels; also, identifying high-elasticity sectors with potential for expectation reversal, with growth at the production end and narrowing investment drag, and moderate price center rebound, accelerating service consumption recovery.

(1) Pre-shock dominance, unchanged industry logic: AI computing power (computing, storage, semiconductors, robotics), liquid cooling, power equipment, platform applications (AI4S).

(2) Potential expectation reversal: stabilized balance sheets driving recovery in discretionary and service consumption (high-end commercial properties, outdoor sports, tourism, hotels, catering).

Investment Strategy—Mainly Responding, Focusing on Repair and Policy Opportunities

Compared to the Russia-Ukraine conflict, the A-shares’ resilience under the current Iran situation is stronger. Short-term market turbulence caused by escalation risks is expected to recover. Sector and stock distribution shows that deep declines are lower than during historical extreme shocks, with overall controlled declines and structural differentiation.

The impact of this geopolitical risk on China is mainly indirect. Iran’s situation features non-localized, non-participating characteristics; its influence mainly transmits through energy prices, supply chains, and transportation. China’s energy dependence is relatively manageable, limiting the persistence of external shocks.

From a market environment perspective: the shock occurs during a bull market phase, with the index center capable of upward movement and risk appetite resilient. Additionally, regulatory authorities continue to signal stability, with measures like maintaining stable markets for stocks, bonds, and forex, and establishing liquidity support mechanisms for non-bank financial institutions under specific scenarios, boosting market confidence.

Sector allocation suggestions:

Before the next major signal (crude oil volatility convergence):

• Defensive: smooth dividend base positions; consider high-dividend stocks like coal, non-bank financials, media, petrochemicals, transportation.

• Offensive: focus on rising industry demand (upstream AI computing power and grid equipment), energy security (coal, photovoltaics, hydropower, energy storage).

During index recovery (after crude oil volatility converges):

• Prior to impact: sectors with unchanged industry logic, such as AI computing power (computing, storage, semiconductors, robotics), liquid cooling, power equipment, platform applications (AI4S).

• Potential expectation reversal: assets stabilized on balance sheets driving recovery in discretionary and service consumption (high-end commercial properties, outdoor sports, tourism, hotels, catering).

Risk Warning

• Macroeconomic policy surprises.

• Geopolitical risks exceeding expectations.

• Past data does not predict future performance.

(Source: Kaiyuan Securities)