CITIC Lin Rongxiong on A-share pullback: "Dodging" is understandable, but not to the point of "fleeing"

Based on recent exchanges with market investors, reviewing this week’s global and A-share market conditions, the following features are noteworthy:

Major U.S. stock indices declined across the board this week. The Nasdaq fell 2.07%, the S&P 500 declined 1.90%, and the Dow dropped 2.11%. On the sector level, the energy sector was the only one to rise, with a weekly increase of 3.69%. Materials led the declines with a 7.17% drop, while industrials and consumer discretionary fell 1.95% and 3.04%, respectively. Financials performed relatively steadily, down only 0.31%. Healthcare and information technology declined 2.67% and 1.56%, respectively, and real estate fell 3.54%. Communications dropped 1.42%, while consumer staples and utilities saw larger declines of 4.51% and 4.65%. Overall, the market showed a weak trend this week.

The weakness in the U.S. stock market was mainly driven by two core factors: First, the ongoing escalation of Middle East geopolitical conflicts. The U.S. military dispatched three warships and about 2,500 Marines to the Middle East this week, and media reports indicate the U.S. is evaluating plans to occupy or blockade Iran’s oil hub, Hormuz Island. In response, Iran’s Islamic Revolutionary Guard Corps announced attacks on multiple Israeli and U.S. military bases in the Middle East and fully closed the Strait of Hormuz. Second, the Federal Reserve’s March FOMC meeting signaled a clear hawkish stance. The dot plot showed the median federal funds rate remaining at 3.4% through the end of 2026, implying only one rate cut for the year. The SEP significantly raised inflation expectations, with core PCE for 2026 revised from 2.5% to 2.7%. Powell explicitly stated at the press conference, “If we do not see progress on inflation, there will be no rate cuts,” and revealed that the committee had indeed discussed the possibility of further rate hikes.

This week, the energy sector was the only one to rise among U.S. stocks, while materials led declines with a 7.17% drop, mainly due to soaring oil prices causing significant increases in industrial production costs, with nearly all constituent stocks weakening. Overall, as Middle East conflicts extend beyond expectations and uncertainty persists, coupled with the Fed’s renewed focus on fighting inflation, market risk appetite has cooled markedly. In the short term, U.S. stocks are likely to continue fluctuating under the dual pressures of high energy prices and tightening rate expectations.

Major Hong Kong stock indices declined this week. The Hang Seng Index fell 0.74%, and the Hang Seng Tech Index declined 2.12%. The market saw mixed gains and losses, but more sectors declined. The industrial sector led with a 2.54% increase, followed by finance and conglomerates, up 1.83% and 1.62%. Energy also posted gains, up 0.94%. The most significant declines were in materials, which fell 10.10% overall. Information technology dropped 3.04%, and real estate and consumer discretionary declined 2.39% and 1.86%. Telecommunications, utilities, healthcare, and staples saw smaller declines of 1.62%, 2.04%, 0.70%, and 0.47%, respectively.

The weak performance of Hong Kong stocks this week was driven by: First, the escalation of Middle East conflicts, with U.S. troop increases and Iran’s response of closing the Strait of Hormuz, along with reports of attacks on Qatar’s Ras Laffan LNG terminal, causing a sharp rise in oil prices. Second, the Fed’s March FOMC signaled a hawkish stance, with Powell stating “no rate cuts without inflation progress,” dampening expectations of rapid easing. Third, Alibaba’s latest earnings showed a 66% drop in net profit attributable to shareholders, raising concerns about the capital-intensive “burn money for users” model in AI. Fourth, market reports indicate Beijing is tightening reviews of offshore-listed Chinese companies planning to go public in Hong Kong, casting a shadow over IPO prospects.

The industrial sector led Hong Kong stocks higher this week, supported by China’s unexpectedly strong industrial value-added growth, attracting funds into manufacturing and domestic demand stocks. Financials and conglomerates rose as funds shifted toward high-dividend, low-volatility defensive sectors. The energy sector’s gains were directly benefited by rising oil prices amid Middle East tensions. Overall, Hong Kong’s market displayed a “macro risk aversion with some regional highlights” pattern, with southbound funds acting as a stabilizer amid market adjustments, but with increased competition between foreign and domestic investors at the bottom.

First, the Shanghai Composite Index fell 3.38%, the CSI 300 declined 2.19%, the CSI 500 dropped 5.82%, and the ChiNext Index rose 1.26%. Growth stocks outperformed value stocks, with large-cap stocks leading gains. Industry-wise, the racing concept and tech innovation new stocks led the rally. The average daily trading volume of all A-shares was 22,091 billion yuan, slightly lower than last week.

Second, on incremental funds: since 2026, southbound capital has resumed inflows. As of March 20, the total inflow into Hong Kong stocks since 2025 reached 1.4761 trillion yuan, with net inflows of 181.8 billion yuan this year. Structurally, since January, southbound funds favored internet giants (Tencent, Xiaomi, Meituan-W, Alibaba, Kuaishou-W) and financial stocks (Construction Bank, ICBC, China Life). Outflows mainly concentrated in telecom operators (China Mobile), precious metals (Zijin Mining, China Hongqiao, Luoyang Molybdenum, Jiangxi Copper, Aluminum Corp of China, Minmetals Resources). The rebalancing of inflow and outflow reflects recent obstacles faced by the Hong Kong market:

On the supply side, concerns over lock-up pressures (e.g., large lock-ups for CATL, Hengrui Medicine) and deviations from benchmark funds’ rebalancing, along with rate hikes by the Bank of Japan and the Fed’s hawkish stance, have slowed southbound inflows since November last year. Additionally, strong performances in other Asian markets like Japan and Korea have also suppressed liquidity in Hong Kong stocks.

On the demand side, traditional industries are hindered by weakening PPI and real estate downturns, while tech sectors face profit outlook constraints due to capex prospects (chip restrictions) and industry competition, making Hong Kong stocks less attractive from a fundamental perspective.

ETF funds: this week, ETF capital showed net inflows overall, with CSI 300 ETF leading at 6.563 billion yuan. The CSI 500, SSE 50, and CSI 1000 recorded net inflows of 4.715, 3.057, and 2.381 billion yuan, respectively. The CSI A-500 saw net outflows of 6.153 billion yuan, while CSI A-50, ChiNext, and STAR Market ETFs experienced slight net outflows. Thematic ETFs such as dividend, healthcare, and brokerage ETFs saw net inflows of 4.175, 1.533, and 1.059 billion yuan; consumer ETFs saw net outflows of 0.75 billion yuan. Hong Kong internet and Nasdaq ETFs recorded net inflows of 1.041 and 0.082 billion yuan.

Third, recent U.S.-Iran conflicts have intensified since February 28, with the Strait of Hormuz blockade lasting over two weeks. Despite global strategic reserves being released to stabilize oil prices, the ongoing conflict shows no signs of easing, and oil prices continue to rise, with Brent surpassing $100 per barrel. Risks assets are accelerating declines. Following the killing of Qasem Soleimani and attacks on Iranian gas fields, Iran’s revenge actions have expanded to Gulf oil and gas infrastructure. The U.S. has indicated plans to seize Iran’s oil export hub Hormuz Island and has further deployed ground forces to the Persian Gulf. The core market concern is that short-term U.S. and Israeli responses to the Strait blockade are ineffective, and the conflict has exceeded U.S. control, with high oil prices raising stagflation fears. U.S. Treasury yields are rising, and the dollar is strengthening, leading to a collective correction in precious metals and equities.

Since the outbreak of the U.S.-Iran conflict on February 28, Chinese assets have been relatively resilient globally, but this week still saw declines. Structurally, tech and small-cap stocks led the declines amid risk aversion and liquidity shocks, with the STAR 50 falling 11.41%, CSI 500 down 10.38%, CSI 2000 down 9.82%, and CSI 1000 down 9.08%. The only index with positive returns was the ChiNext, up 1.26%, reflecting sharp sector divergence and shrinking growth opportunities. Software sectors sensitive to liquidity, such as computers, media, and AI applications, weakened, while manufacturing-oriented large-cap stocks with policy support and fundamental certainty, like communications and power equipment, attracted funds.

Defense-oriented large-cap value stocks like dividend indices and A50 performed relatively better. Benefiting from rising oil prices, coal and chemical sectors led gains (+6.33%), and utilities rose 4.09%. Conversely, metals and tech growth sectors declined sharply.

Under the impact of war, metals have retraced all gains since March, and tech sectors’ gains have also contracted significantly. Since early 2023, coal (+22.86%) and oil & gas (+17.53%) have been the top performers. Among the sectors with notable gains are utilities, environmental protection, construction, and chemicals—value-oriented industries. Only hardware manufacturing sectors like electronics, communications, and power equipment, with strong fundamentals, remain in positive territory.

Regarding concerns about stagflation in the current market, we evaluated potential impacts on A-shares. From the Shanghai Index perspective, since the “924” rally, the index has risen from 2,800 to 4,100 points, with top contributors being electronics, nonferrous metals, power equipment, machinery, and communications—representing “tech + outbound” themes. These two main lines will likely be affected during stagflation: outbound sectors may see a slowdown due to “stagnation,” while tech may face liquidity tightening due to “inflation.”

Using June 23, 2025 (the acceleration phase of this bull market) as a starting point, the top sectors include chemicals and petrochemicals, with three of the top six sectors being cyclically sensitive resource industries, along with banks and non-bank financials for defense and stabilization. The current A-share market may still show resilience under stagflation, but structural divergence could intensify.

Fourth, regarding the potential impact of sustained high oil prices, we reviewed five historical episodes since the 1970s caused by geopolitical conflicts leading to oil price surges, noting similarities and differences:

• The most similar case to today is the second oil crisis in 1979: Iran’s Islamic Revolution erupted in 1979, followed by the Iran-Iraq War in 1980. Iran’s regime change caused crude oil output to plummet from 6 million barrels per day to less than 1 million. During the Iran-Iraq War, “ship attacks” began in 1981, with both sides using anti-ship missiles to attack neutral oil tankers in the Persian Gulf, aiming to cut off economic lifelines, drastically reducing Strait capacity and causing global inflation spikes. This prompted Fed Chairman Volcker to implement aggressive rate hikes (federal funds rate approaching 20%), deliberately inducing recession to curb inflation. Note that even during the Iran-Iraq war, the Strait was not as “completely blocked” as today.

• The biggest impact on the global economy was the first oil crisis in 1973, triggered by the Yom Kippur War, when OAPEC imposed oil embargoes on supporting Israel, causing oil prices to soar from about $3 to nearly $12 per barrel—an almost 300% increase. At that time, Western economies were at their post-war peak, with high energy demand. This crisis ended the “Golden Age” of capitalism, leading to a decade of stagflation in the U.S.

• Short-term price spikes followed by quick declines occurred during the Gulf War in 1990 and the Russia-Ukraine conflict in 2022: the Gulf War’s rapid price correction was due to no blockade of the Strait, swift U.S. military victory, and Saudi Arabia’s release of spare capacity. The 2022 decline was driven by Russia’s continued oil exports despite sanctions and the Fed’s fastest-ever rate hikes to curb demand, pushing prices back to pre-war levels.

• The 2011 Libyan civil war caused oil prices to surge and then plateau at high levels for years. The demand-side boost was from China’s industrial and infrastructure boom, while supply was constrained by Libyan conflict and Iran sanctions. The price did not further spike because U.S. shale oil ramped up from 2012, filling the supply gap.

Today, global oil supply faces unprecedented challenges:

First, the Strait of Hormuz blockade has cut off about 20% of global oil capacity. Unlike 1979, the Strait has been continuously blocked, and Middle Eastern oil reserves are nearly full. Iraq’s oil output has been cut by about 60%, and UAE and Kuwait are also reducing production. Even if hostilities cease immediately, it will take a long time to restore supply chains.

Second, global spare capacity is limited; U.S. shale production is near its maximum, and OPEC+’s incremental capacity is constrained under the blockade. The world is now in a phase of strategic reserve consumption.

Third, sustained high oil prices will significantly influence asset pricing. If high prices persist into the second half of the year, the Fed may abandon rate cuts or even hike rates, further strengthening the dollar and U.S. yields. This could suppress precious metals and equities, and reverse the recent optimism in AI-related capital expenditure, leading to sharp valuation corrections in tech stocks.

Beyond oil and natural gas, other chemical products exported via the Strait, such as sulfur and fertilizers, may also see price increases:

• Approximately 44-50% of global sulfur exports pass through the Strait, essential for producing DAP and MAP fertilizers. Reduced energy exports decrease sulfur production, raising fertilizer prices and potentially causing a global food crisis due to reduced fertilizer application and crop yields.

• Natural gas, a key raw material for nitrogen fertilizers like ammonia and urea, is heavily supplied by Qatar and the Gulf region, which account for about one-third of global fertilizer trade. The blockade could cut urea supply by 10-15%, severely impacting farmers in the Northern Hemisphere, especially Brazil and India, which rely heavily on imports. Shortages could cause prices to spike sharply, as seen with U.S. port prices rising 60-80 USD/ton in a few days.

Finally, we emphasize the significant impact of oil prices on asset allocation, a key point in our annual strategy: 2026 is unlikely to see a weak dollar scenario throughout the year. Historically, oil prices and the dollar index have been negatively correlated because: first, rising oil prices worsen U.S. trade deficits, weakening the dollar; second, oil is dollar-priced globally, so a weaker dollar boosts real demand and oil prices.

However, this relationship has changed fundamentally due to the maturity of U.S. shale oil technology, which turned the U.S. from a net importer into a net exporter around 2019. Now, high oil prices benefit the U.S. directly through increased exports, restoring trade balance and supporting the dollar. High oil prices also push the Fed to keep rates high, with the dollar’s safe-haven appeal intact. We believe the dollar will not weaken significantly in 2026 as previously expected.

Analyzing the “gold-to-oil ratio” historically reveals a shift: over the past 30 years, it mainly served as a leading indicator of economic cycles, reflecting demand strength (oil-driven). Currently, with excess oil supply and weakening global demand, the rising ratio indicates a “dollar credit crisis” and “fiscal sustainability” concerns (gold-driven). In extreme cases, the ratio can surge, approaching the highs seen during the 2020 negative oil price episode, driven by persistent low oil prices and gold’s weak dollar narrative. The recent outbreak of U.S.-Iran conflict has reversed these trends: it has increased oil’s upside potential and raised long-term inflation expectations, ending the weak dollar cycle and causing the ratio to fall sharply from historical highs.

Fifth, the prevalent HALO (“Heavy Assets, Low Obsolescence”) trading reflects a terminal valuation based on AI technological disruption. We believe that AI’s current phase is one of competition and differentiation, still in a “cooperative” golden era (see Carlotta Perez, “Technological Revolutions and Financial Capital”). Using terminal valuation at this stage risks disconnecting asset values from fundamentals, replacing cash flows with sentiment and stories. The “HALO” trades in A-shares have hit record highs, but the more pragmatic explanation is that rising prices are driven by PPI stabilization, which constrains tech and cyclicals’ divergence, allowing certain price-inflation stocks to outperform. This suggests a need for rebalancing toward 2026, moving away from the 2025 “one-sided tech” bias. Portfolio management becomes more critical. Since PPI stabilization is mainly driven by geopolitical and dollar weakness factors, lacking sustained domestic and global economic momentum, prices are volatile at high levels, making it difficult for cyclicals to dominate over tech. A “new-old dance” in asset allocation will be the key theme.

The U.S. 3-month Treasury yield closed at 3.74%, up from 3.72%; the 10-year Treasury yield closed at 4.39%, up from 4.28% last week. The reasons for this week’s rise include: first, the Pentagon’s deployment of three warships and about 2,500 Marines to the Middle East, and Iran’s response of “completely closing” the Strait of Hormuz; second, the hawkish signals from the Fed’s March FOMC, with the dot plot raising 2026 inflation forecasts from 2.5% to 2.7%, and Powell’s statement that “no rate cuts will occur without inflation progress,” along with discussions of further rate hikes, sharply revising market expectations for rate cuts, with CME’s probability of rate cuts this year dropping from 38.6% to 12.8%.

The transmission mechanism shows that this cycle’s rise in U.S. bond yields breaks the traditional geopolitical risk-off pattern: normally, tensions in the Middle East lead to safe-haven flows into Treasuries, pushing yields down. This time, because the conflict is in a core oil-producing region, the market’s primary reaction is “oil shock → inflation expectations → hawkish Fed → rising yields.” Additionally, the U.S. debt surpasses $39 trillion, and increased military spending exacerbates concerns over fiscal deficits, further suppressing long-term bond demand.

This week, the dollar index closed at 99.51, down from 100.50 last week. The dollar’s movements were driven by several key factors: first, during the “Super Central Bank Week” (March 17-20), the ECB, BoE, and BoJ maintained rates but signaled hawkish outlooks—ECB raised 2026 inflation forecast to 2.6%, markets priced in four rate hikes; BoE kept rates unchanged, with no rate cuts expected this year; BoJ signaled continued rate hikes. In contrast, the Fed was the only major central bank not expected to hike this year. Second, the escalation of Middle East conflicts created a complex “safe-haven vs. inflation” dynamic. As U.S.-Iran military actions entered the third week, Strait of Hormuz disruptions and attacks on Gulf energy infrastructure boosted the dollar’s safe-haven appeal, but rising oil prices also heightened inflation fears, prompting other central banks to tighten faster, which limited the dollar’s upside.

The short-term trend shows the dollar index’s oscillation reflects market uncertainty about global monetary policy. Despite the usual safe-haven demand during geopolitical tensions, the unique aspect of this conflict in a core oil region has driven oil prices higher, prompting hawkish moves by non-U.S. central banks, while the Fed remains cautious due to domestic factors. The dollar briefly exceeded 100.54 in mid-March but retreated as expectations shifted. Future movements will depend heavily on Middle East developments and the pace of non-U.S. tightening. If oil remains high, hawkish signals may strengthen, capping dollar gains.

London gold: latest price $4,491.67/oz, down from $5,018.10 last week; COMEX gold futures: $4,492.00/oz, down from $5,023.10. This week’s gold was mainly affected by: first, the escalation of Middle East conflicts boosting oil prices and inflation fears, shifting the market from “safe-haven” to “inflation-tightening” logic; second, hawkish signals from the Fed; third, the dollar index briefly exceeding 100.50, with 10-year U.S. yields rising to 4.39%, reducing gold’s appeal; fourth, technical triggers such as stop-loss and profit-taking, as gold had been at historically high levels, with crowded long positions. Once gold broke below the $5,000 psychological level, it triggered a cascade of stop-losses and forced liquidations, amplifying the decline.

This week, gold’s “safe-haven attribute temporarily weakened.” The conflict in the core oil-producing region caused a chain reaction: “oil shock → inflation expectations → hawkish Fed → rising dollar and yields → gold under pressure,” leading to a synchronized decline in risk assets, with gold’s safe-haven demand offset by tightening expectations.

WTI: $96.60/barrel, down from $99.35; Brent: $109.55/barrel, up from $103.89. The oil market saw a tug-of-war: first, U.S. military buildup and Iran’s attacks caused oil prices to surge; second, near-weekend, supply signals emerged—Trump told Netanyahu to “avoid attacking Iran’s energy facilities,” and Netanyahu responded with a “pause” request; third, U.S. Treasury Secretary Yellen hinted at possible easing of Iran sanctions; fourth, IEA announced a release of 400 million barrels of strategic reserves, which began hitting the market. U.S. EIA data showed a surprise increase of 6.2 million barrels in crude inventories to 449.3 million barrels, the highest since June 2024.

The Brent-WTI spread widened sharply, mainly due to different sensitivities: Brent, as a global benchmark, reflects Middle East risks, while WTI, as a North American benchmark, is constrained by high U.S. inventories and resilient shale output. The “rollercoaster” pattern saw prices spike early in the week on Iran attacks and Strait closures, then retreat after Trump’s “pause” and strategic reserve releases.

LME copper: $11,925.73/ton, down from $12,780.50. Copper’s decline was driven by: first, U.S. troop deployments and Iran-Israel attacks, with the Strait of Hormuz effectively blocked, raising fears of economic slowdown and metal demand; second, hawkish Fed signals, with the 2026 inflation forecast rising sharply; third, high copper inventories—over 330,000 tons on LME, 530,000 tons on COMEX, and about 540,000 tons on SHFE—adding supply pressure.

The current trade logic has shifted: instead of traditional risk-off driven by geopolitical tensions, the chain now is “oil shock → inflation expectations → hawkish Fed → rising yields → copper price pressure,” leading to synchronized declines with gold and equities. Despite macro headwinds, supply tightness and resilient demand at the spot level support copper’s fundamentals.

This article is sourced from: Lin Rongxiong Strategy Lounge

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