Cinda Strategy: Price Increase or a Bull Market Signal

This week’s Middle East geopolitical conflicts are the key variable affecting market risk appetite. Global equity markets declined, the US dollar strengthened, and crude oil prices surged significantly. Market trading logic focused on defensive demand and energy price increases. After sufficient short-term trading, attention should be paid to how long supply constraints in crude oil last and whether they will lead to long-term changes in the supply-demand landscape. From a medium-term perspective, the combination of rising commodity prices and falling interest rates is actually favorable for a bull market. Statistically, it is rare for commodities to rise while stock markets fall. Since 1968, commodities have experienced 10 price increases, but only 3 times were accompanied by a correction in the US stock market. Overall, whether in US or Chinese markets, ROE has generally benefited from rising commodity prices. Unless inflation pressures rapidly increase, causing significant liquidity tightening. Currently, geopolitical conflicts are still uncertain in their duration; if they do not cause systemic shocks to global energy supply, the temporary premium on oil prices is likely to fall, and the probability of reversing the overseas rate-cut cycle remains low. On the other hand, domestic deflationary pressures are currently greater, so there is no need to worry about negative inflation impacts for now. Without further positive signals in fundamentals, the probability of a sharp rise in interest rates is low. The combination of rising ROE and falling rates creates a favorable environment for stocks. Short-term market volatility may be tested by geopolitical conflicts, pre- and post-two sessions fund outflows, economic data, and quarterly earnings reports, but the overall outlook remains optimistic. After sufficient trading in defensive sectors and energy price increases, the market is expected to return to more sustained themes with strong growth support (such as new productive forces attracting incremental funds or PPI trading).

(1) The overall tone of the Two Sessions policy remains stable. Short-term, there are limited surprises in easing policies, but policies that support long-term economic efficiency improvement and transformation may not be weak. According to the 2026 government work report, this year’s economic growth target is 4.5%-5%, emphasizing efforts to achieve better results in practice. The growth target has been revised to a range, with CPI, new employment, and deficit ratio targets remaining the same as 2025. Overall, there is no clear increase in cyclical easing policies. Historically, unexpected stabilizing growth policies often overlap with short-term stabilization and long-term goals, such as the 2008 stimulus package promoting infrastructure investment. When short-term and long-term goals differ, policy intensity tends to be moderate. Based on the “14th Five-Year Plan,” the long-term goal of economic development emphasizes steady progress, quality, and efficiency, with a focus on high-quality growth and new momentum cultivation, rather than GDP growth rate alone. Short-term policy stimulus expectations have cooled, but policies aligned with long-term quality and structural transformation may still be strong and effective, such as expanding service capacity, commercializing “AI+,” building new infrastructure, enhancing software service value, and accelerating capital market reforms.

(2) Under the influence of Middle East geopolitical conflicts, short-term trading in defensive demand and energy price increases may be quite active. Medium-term, attention should be paid to how long crude oil supply constraints last and whether they will cause long-term changes in the supply-demand pattern. This week’s Middle East conflict developments are the core variable influencing market risk appetite. In terms of market trading, short-term pricing of geopolitical risks causes significant volatility in major asset prices, with global equities falling, the US dollar strengthening, and crude oil prices rising sharply. Sectors with notable gains include oil and petrochemicals, coal, utilities, and agriculture, forestry, animal husbandry, and fishery. The trading logic centers on defensive demand and energy price increases. Looking at the performance of major assets since the Russia-Ukraine conflict erupted on February 24, 2022, within two weeks, crude oil prices rose 30%, gold increased 7%, and US stocks weakened. In the month after early March 2022, geopolitical risk premiums eased, oil prices retreated, and US stocks rebounded. From mid-April to June 2022, oil prices rose again, driven mainly by global energy supply and demand tensions, including OPEC+ actual output below targets, slow US production increases, and a global economy entering a weak recovery phase. Geopolitical risk pricing and Western sanctions on Russian energy amplified price volatility. In July-August 2022, markets gradually digested the risk premiums, oil demand expectations weakened, and oil prices oscillated downward, with US stocks rebounding. After September 2022, energy transition policies and inflation expectations rose amid Fed rate hikes, causing US stocks to decline again. For A-shares, although current static valuation levels are relatively high and medium-term geopolitical uncertainties may cause fluctuations, the domestic economic fundamentals remain “primarily domestic,” energy security is relatively assured, and A-shares have shown resilience globally.

(3) The combination of rising commodity prices and falling interest rates is actually beneficial for a bull market. The rise in crude oil prices has triggered global easing expectations and concerns about stagflation. We believe that the medium-term outlook for oil prices still depends on the extent of geopolitical conflict escalation and the transportation situation through the Strait of Hormuz. Historically, stagflation is a rare economic phenomenon; only during very special periods do we see commodities rising while stock markets fall. From the US experience, most times when commodity prices rise, it corresponds to a bull market, with only a few periods (1968-1969, 1973-1974, 1987) where commodities rose and stocks fell simultaneously. Although rising commodity prices can structurally impact downstream profits, in most cases they drive overall ROE higher. The few exceptions mainly occurred during periods of rapid interest rate hikes, especially during the 1973-1974 bear market, where the negative impact of rising rates far outweighed the positive effect of increased ROE.

(4) Historically, in the Chinese A-share market, ROE has mostly benefited from rising commodity prices. The negative impact of rising prices is the potential increase in inflation pressures, forcing major central banks like the Fed to reassess the balance between inflation control and economic growth, which could tighten liquidity. However, currently, geopolitical conflicts are still uncertain in duration; if they do not cause systemic shocks to global energy supply, the temporary premium on oil prices is likely to fall. Meanwhile, domestic deflationary pressures are greater, so there is no need to worry about negative inflation impacts for now. Current government bond yields remain at historically low levels. Without further positive signals in fundamentals, interest rates are unlikely to rise sharply. The combination of rising ROE and falling rates creates a favorable environment for stocks.

(4) Current outlook: In the short term, markets may continue to fluctuate. After defensive sectors and energy price increases have been sufficiently traded, the market is expected to return to more sustained themes with strong growth support. Possible positive factors include: continued implementation of structural policies supporting domestic demand, technological independence, and self-reliance; relatively stable US-China relations; the RMB’s continued appreciation reducing short-term trade tensions; the potential for macro liquidity to stabilize and for micro liquidity to flow back; and evolving economic and earnings expectations. The current rapid market rise is constrained by high valuations and policy guidance. Short-term volatility may be influenced by geopolitical conflicts, pre- and post-two sessions fund outflows, economic data, and quarterly earnings reports, but the overall outlook remains optimistic. During the test period, it is advisable to buy on dips.

Tactically, the foundation for a bull market remains solid, with potential for profit improvement and capital inflows resonating over the year. Short-term market fluctuations over the next year may be driven by regulatory policies and supply dynamics. Over the past year, policy and capital factors have had a greater impact on turning markets from bear to bull than earnings. The current bull market scenario is shaping up as follows: (1) supportive policies for capital markets continue to strengthen, with a loose macro liquidity environment; (2) industry capital (buybacks, dividends) and national team funds continue to contribute incremental capital, supporting market bottoms; (3) long-term funds such as insurance, wealth management, and trusts still have room to enter, and new regulations for mutual funds help smooth volatility; (4) the accumulation of liquidity-driven opportunities, such as asset scarcity and profit effects, is maturing. Adjustments and end of liquidity-driven bull markets may be affected by regulatory changes in channel funding, so monitoring policy developments is important. The core of liquidity-driven markets is the shift in supply and demand in the stock market; if equity financing accelerates and the supply-demand pattern weakens again, volatility may increase.

(5) Recent allocation views: If geopolitical conflicts between the US, Israel, and Iran recur, sectors like oil and petrochemicals, non-ferrous metals, and utilities may repeatedly present opportunities. The evolution of conflicts may continue to reinforce energy security and inflation narratives. We remain optimistic about opportunities based on PPI trading. The macro narrative of commodities stems from re-pricing driven by de-globalization and supply chain restructuring, mainly led by key resource prices, which tend to move together long-term. Resources like non-ferrous metals and oil & gas face supply constraints, with conflicts acting as catalysts. Black commodities benefit from capacity management post-March reopening. Additionally, inflation driven by new AI-driven growth sectors, such as basic chemicals, storage chips, and power grid equipment, is worth关注。

Industry outlook for allocation: (1) Non-ferrous metals & military industry: Policies, performance, and thematic logic are generally smooth; after short-term overheating, volatility may increase, but they could perform well during risk appetite recovery. Metal capacity structures are favorable, benefiting from new and old growth drivers and global economic resonance, with strong earnings realization. Precious metals are sensitive to liquidity easing and geopolitical influences. Military industry tends to perform well in late-stage bull markets, especially when profits are not strong but capital is abundant. Themes like commercial aerospace and satellite chains are catalyzed by policies, technology, and capital markets, with ongoing activity. (2) Oil & petrochemicals: Geopolitical conflicts and rising oil prices resonate. International oil prices, driven by risks in Iran and broad commodity rallies, have risen significantly, leading upstream oil & gas stocks higher, with downstream refining and chemical companies also benefiting from a rebound in chemical prices. The valuation of petrochemical assets is shifting from “low valuation cyclical goods” to “growth + price increase expectations.” (3) TMT: Industry catalysts remain abundant, but profit concerns under the “light asset” model and lower long-term expectations lead to high volatility. Sectors with relatively stable performance include semiconductors, storage, and GPUs, especially during periods of strong earnings verification and active trading. AI applications continue to offer opportunities, but rotation may be rapid. Surprising industry events could improve win rates and risk-reward ratios. (4) Machinery & equipment: Engineering machinery is a good direction for overseas expansion during the economic cycle. Robotics themes are active, with many industry catalysts for commercialization. (5) Power equipment: Benefiting from global competitive advantages and improved fundamentals, valuations are attractive, and a bottom-up allocation is recommended during growth phases. (6) Basic chemicals: Policies to curb overcapacity (“anti-involution”) constrain supply, while demand benefits from new energy and new materials, with some varieties driven by price increases improving the outlook. (7) Steel, coal, and building materials: Supply constraints driven by “anti-involution” policies improve supply-demand patterns and profit expectations, with PPI improvement expectations supporting strong performance and valuation safety margins. (8) Non-bank financials: Benefiting from premium growth and investment performance recovery, insurance companies are expected to show resilience first. The probability of a bull market increases, with high performance elasticity likely. As resident funds accelerate inflows, excess returns are more certain. (9) Consumer sectors: Policy-driven incremental demand and expectations are high, with valuations safe. Focus on service consumption sectors that benefit from policy catalysts, base effects, and cyclical reversals, such as travel, duty-free, and education. For Hong Kong stocks, wait for overseas market volatility to subside before increasing allocations.

(Article source: Cinda Securities)