ETF Daily Report: Most sectors declined, with only communication, consumer electronics, and other sectors ending in the green. The largest declines were seen in building materials, coal, and biopharmaceuticals.

Today’s A-share market opened higher and then declined, moving lower amid choppy trading. By the close, the Shanghai Composite Index printed a medium-sized closing bearish candle, ending at 3,880.10 points, down 1.00%. The Shenzhen Component Index fell 0.99%, and the ChiNext Index fell 0.73%. At the individual stock level, more stocks fell than rose: more than 4,700 stocks declined, while only a little over 700 fell. In terms of trading volume, the combined成交额 of the Shanghai and Shenzhen markets was about 1.67 trillion yuan, nearly 200 billion yuan less than yesterday. With a strong risk-averse sentiment in the market, pessimistic expectations have not been fully released.

At the sector level, most sectors declined, while only sectors such as Communications and Consumer Electronics recorded gains; Building Materials, Coal, and Biopharmaceuticals saw the largest declines.

This week, the Shanghai Composite Index overall saw multiple reversals driven by overseas conflict-related expectations. It gapped up or down multiple times, significantly increasing the difficulty of short-term trading. On Monday, affected by expectations of an escalation in the situation, A-shares opened lower and dipped briefly, then gradually stabilized, with the 3,900-point level regained. On Tuesday and Wednesday, as the Trump administration released signals of easing, the Shanghai Composite Index filled last week’s gap on the back of bullish sentiment. However, Trump’s statement on Thursday did not provide a clear timetable for a ceasefire; instead, it threatened to further increase the intensity of military strikes. The Shanghai Composite Index slid throughout the day in a choppy downward move, and the upward trend line since the rebound was declared broken. On Friday, although U.S. stocks rebounded to green overnight, A-shares remained heavy with pre-holiday risk-avoidance sentiment, trading broadly lower throughout the day.

Recently, against the backdrop of a flood of even contradictory overseas conflict-related news, A-shares have shown the characteristics of gapping multiple times overnight and experiencing sharp intraday volatility. Many investors directly call it being “slapped in the face” repeatedly by a “monkey market”; so how should you invest?

Our view is: stay cautious and don’t go all-in, value outperforms short-term moves, and be patient—invest in China.

On positioning, in a market environment marked by repeated swings and significantly higher uncertainty, keeping a certain proportion of cash can provide an essential safety buffer and trading flexibility for the overall investment portfolio.

On one hand, cash acts as the portfolio’s “stabilizer,” effectively hedging the volatility risk of held assets. When the market experiences abrupt adjustments and risks are released quickly, it reduces the overall drawdown and helps avoid getting trapped in passivity under the pressure of a full-position exposure; on the other hand, ample cash also means having the initiative to seize opportunities. When quality names are miss-priced due to sentiment and present reasonable buying points, or when there is a phase shift in geopolitics and policy, you can lay out positions calmly and add at lower levels, truly achieving a contrarian strategy.

In terms of execution, short-term trading is difficult, so we do not suggest chasing or selling in response to market and sentiment fluctuations. Instead, investors should firmly hold to a value-investing philosophy, deeply mine investment opportunities that the market has mispriced, and focus on the long-term allocation value of assets.

Right now, chasing defensively lagging sectors that hold up better than the market during selloffs, or betting on near-term earnings, is not ideal. Because current asset prices are repeatedly buffeted by developments in the situation, while predicting the evolution and path of the conflict is beyond the capability of the vast majority of investors. Therefore, we suggest sticking to an allocation mindset, downplaying short-term trading. The market “Mr. Market” will reward investors who can stay rational amid volatility and hold fast to value amid risk.

From a directional perspective, Chinese assets have a certain valuation advantage and margin of safety, which makes them highly attractive when uncertainty keeps rising. On valuation, the CSI A500’s TTM price-to-earnings ratio is only 17x, far below the S&P 500’s 27x, showing a clear valuation advantage. This valuation advantage can, on one hand, effectively defend against the risk of valuation compression during a stagflation period; on the other hand, it can also attract global capital to keep allocating, forming a positive feedback loop of “valuation repair + inflows,” further strengthening the resilience and investment value of A-shares.

Combined with China’s relatively large fiscal and monetary policy room, the improved industrial chain supply-chain system, and a stable economic development environment, Chinese assets are expected to become the “anchor” and “safe harbor” for global capital. On one hand, China’s macro policies still maintain relatively large fiscal and monetary policy room; measures to stabilize growth are continuously implemented, providing a solid policy backstop for the market. On the other hand, China has a complete and highly resilient industrial chain and supply-chain system; economic operations are generally stable, and the development environment is stable, controllable, and offers a good foundation for corporate earnings to recover. In addition, RMB-denominated assets have relatively low correlation with overseas market risks, which can effectively diversify the tail risks of global portfolios.

From a positioning standpoint, fundamental data constrains today’s行情, but it is also the target. Taking the CSI A500 and CSI 300 as examples, the indices have not yet recovered the 2021 highs. The market still has demand and momentum to probe higher target levels. Fundamental data is relatively lagging. Although it may suppress the pace of an upside move in the short term and become a constraint during market consolidation and adjustments, it also points the direction for subsequent breakthroughs, becoming a target that the market will gradually work through. Investors can pay attention to the CSI A500 ETF (159338) and the CSI 300 enhanced ETF (561300) for their medium- to long-term investment value.

It has been over a month since the outbreak of the conflict. Oil prices have stayed at elevated levels, and investors must take a more cautious approach toward their outlook for the future.

If the intensity of the conflict continues to spiral upward, the harm of “high oil prices and low risk appetite” to the economy is far more than just inflation. Pressures on corporate operations, contraction in residents’ consumption, and rising market risk aversion can all gradually drag the economy into a stagflation quagmire.

• Pressures on business operations: Transportation and raw material costs for enterprises may face another wave of sharp surges. For energy-intensive industries such as manufacturing, transportation, chemicals, logistics, and so on, the share of energy costs will rise significantly, directly squeezing the limited profit space enterprises already have. As a result, many companies may be forced to cut production capacity, delay investment and expansion plans, and even resort to layoffs or shutdowns, which in turn would weigh on the stability of the employment market and weaken the core engine of economic growth.
• Contraction in residents’ consumption: Oil price increases directly push up refined oil prices, which then transmit across channels such as logistics and retail, driving up the prices of necessities like food and daily-use goods. This creates a chain reaction of “oil prices up → consumer prices up,” further compressing residents’ disposable income. Residents will be forced to cut back on non-essential spending; consumption willingness will remain weak, and the momentum for a recovery in domestic demand will be thoroughly curbed.
• Rising market risk aversion: Escalation of geopolitical conflict will intensify the market’s worries about the future economy. Businesses dare not invest, and residents dare not consume. Large amounts of funds will flow into safe-haven assets such as gold and the U.S. dollar, tightening liquidity in capital markets. Volatility in risk assets such as stocks and bonds will increase, and investment vitality will continue to decline.

Stepping back, even if, as Trump claims, the conflict can end abruptly in a few weeks, this absurdly started and hastily ended farce would completely destroy geopolitical balance. It would peel away the final shroud over the empire’s twilight, causing irreversible, fundamental changes to the baseline assumptions in traditional valuation frameworks regarding U.S. hegemony and energy security.

• As for U.S. hegemony: Previously, the U.S., backed by its absolute advantages in military, economic, technology, and other areas, played the role of “the leader of the global order.” Many people regarded it as an “unshakable hegemony.” Its military deterrence, the status of dollar hegemony, and its control over global logistics routes together formed the core support of its hegemony, and also led the international community to form a fixed belief of “order stability under U.S. leadership.”
• As for energy security: Predictability has been completely broken. Energy supply disruptions caused by the conflict made the market realize that the risk of energy shortages is not something far off. Uncertainty in global energy supply has risen sharply, and fluctuations in energy prices are no longer just short-term pulses—they may become a long-term norm.

In addition, our outlook for negotiations and their impact on the capital market is not optimistic.

On one hand, there are major differences in the demands of the conflicting parties, and the prospects for negotiations still carry significant uncertainty. Capital still needs to price the probability and consequences of a negotiation breakdown. Moreover, the possibility that Iran’s neighboring countries might join in could further worsen the situation—this is another incremental risk that needs to be highlighted. As the saying goes, “What you can’t get on the battlefield is even less likely at the negotiating table.” Iran’s demonstrated ability to blockade the straits during the conflict, and the U.S. military’s retreat without fighting—or possibly a further increase in regional countries’ sense of insecurity—set the stage for potential escalation of the situation in the Middle East. Under such circumstances, the market is unlikely to form a sustained, stable risk appetite. Any sudden development could again trigger funds to rush for safety, suppressing both the height and the duration of the overall rebound.

On the other hand, for the market, the seeds of chaos, turmoil, and doubt have already been planted. Expecting a “restoration of the broken mirror” in terms of risk appetite is unrealistic. The baseline assumptions in traditional valuation frameworks regarding U.S. hegemony and energy security have undergone irreversible, fundamental changes. In the globalized era, an environment of low volatility and low risk premium is gone for good. Even more worth worrying about is that over the past several decades, the underlying foundation that global capital markets’ traditional valuation frameworks relied on—an American-led unipolar order, a stable global energy supply system, and a smooth globalized trade chain—is continuously being shaken and undermined.

The market needs a longer consolidation cycle to re-anchor its valuation framework. “Digesting sentiment through volatility, and trading time for space” will still be the core logic governing the market going forward.

This week, gold mainly showed a pattern of trading with a strength-leaning bias. London spot gold prices fluctuated repeatedly within the 4400-4800 point range. Over the past five trading days, the Gold ETF (518800) recorded net inflows totaling nearly 1 billion yuan.

Overall, the medium- to long-term logic supporting gold remains solid, and pullbacks may well be a good opportunity to add positions.

In the real economy, the outlook for the U.S. economy is not exactly optimistic. The sustainability of AI’s high capital expenditures is being questioned, and concerns about “stagflation” have been gradually building in the market. The U.S. Q4 GDP year-over-year at seasonally adjusted annual rate was revised down by 0.7pp to 0.7%; private investment plus consumption growth was revised down by 0.5pp to 1.9%; residents’ consumption growth was revised down by 0.4pp to 2.0%. While equipment and software investment still maintained high growth, the decline in manufacturing plant investment widened. The U.S. faces “stagflation” risk—“inflation and economic stagnation coexisting.” Once stagflation appears, it would further constrain the Federal Reserve’s monetary policy room. Under these circumstances, investors have a stronger demand for protecting their assets from erosion in value, which makes gold—an asset for “preserving value”—more favored by investors.

In terms of geopolitics, the situation in hotspot areas is difficult to ease, and market risk-averse sentiment is elevated, providing some support for gold prices. In the Middle East direction, the Iran-U.S. conflict escalated quickly into a regional military confrontation, showing signs of intensifying further and further. On the Russia-Ukraine front, although the U.S. and Russia previously restarted diplomatic contacts and the Russia-Ukraine conflict may enter a new phase of negotiations, there have been some recent reversals. In addition, Trump has claimed that Cuba is already on the action list, further intensifying market concerns about his unpredictability. With geopolitical tensions high, market risk aversion leads to gold prices being more likely to rise than to fall.

The market’s main concern about gold is that after inflation resurges, the Federal Reserve may be forced to enter a rate-hiking cycle, which would be bearish for gold. But we believe that under liquidity constraints, the room for Federal Reserve tightening may be lower than market expectations. The fiscal sustainability “red line” of more than 35 trillion U.S. dollars in federal debt, the financial fragility of regional banks and commercial real estate, and weak underlying economic momentum have fundamentally locked the space for further rate hikes. Moreover, this round of inflation rebound is mainly driven by geopolitical supply-side shocks, so the effectiveness of rate-hike policy is limited. Combined with political constraints during the election cycle, it will be difficult for the Federal Reserve to step up policy against the tide.

Looking ahead, from a medium- to long-term perspective, factors such as continuously accumulating risks of U.S. re-inflation and even “stagflation,” a weakening U.S. economy, and rising systemic risks including global sovereign debt oversupply and global geopolitical tensions provide long-term positive support for precious metals prices. The Gold ETF (518800) tracks the AU9999 price on the Shanghai Gold Exchange; investors are advised to pay attention. In addition, the Gold stock ETF (517400) may also benefit from gold price increases, and investors can also keep it on their watchlist.

Risk disclosure: Investors should fully understand the differences between fund regular investment plans (dollar-cost averaging) and savings methods such as zero-balance installment savings (lump-sum periodic deposit). Regular investment plans are a simple and easy investment approach that guides investors to make long-term investments and average their investment costs. However, regular investment plans cannot avoid the inherent risks of investing in funds; they do not guarantee that investors will earn returns, nor are they an equivalent wealth-management method that replaces savings. Whether it is a stock ETF/LOF/closed-end graded funds, they are securities investment fund products with relatively high expected risk and expected returns. The expected return and expected risk levels of funds are higher than those of hybrid funds, bond funds, and money market funds. When fund assets invest in stocks listed on the STAR Market (科创板) and the ChiNext board (创业板), investors will face unique risks arising from differences in the investment targets, market systems, trading rules, and so on; investors are reminded to pay attention. The short-term percentage changes of sectors/funds are shown only as supplementary materials for the article’s analytical viewpoints and are for reference only; they do not constitute any guarantee of fund performance. The short-term performance of individual stocks mentioned in the article is only for reference and does not constitute a stock recommendation, nor does it constitute a forecast or guarantee of fund performance. These views are for reference only and do not constitute investment advice or commitments. If you need to purchase related fund products, please refer to the relevant regulations on investor suitability management, complete risk assessments in advance, and purchase fund products with risk levels that match your own risk tolerance. Funds carry risk; investment requires caution

Special contributor: Guotai Fund

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