The immediate risks of war are receding, but maritime channels remain obstructed. While the negotiating demands of the US and Iran appear widely divergent, the probability of reaching an agreement on core issues is not low. As the tail risks of conflict diminish, the direct market impact of the war's progression and negotiations is weakening. The key variable for future markets will be actual shipping volumes. The prolonged closure of the Strait of Hormuz continues to accumulate economic and liquidity uncertainties. Following a broad, short-covering rebound, markets are likely to concentrate their focus rather than broaden it. This concentration is expected around four themes: AI hardware, resources, cyclical price increases, and high-dividend stocks. Among these few trends that have sustained their upward trajectory, the most significant expectation gaps exist primarily within domestic Chinese AI hardware and cyclical price increase segments. For portfolio allocation, the strategy remains focused around China's dominant manufacturing sectors.
Although US and Iranian negotiation positions seem far apart, the likelihood of a consensus on central demands is reasonably high. For the US, if Iran agrees to abandon uranium enrichment, it would represent a primary wartime achievement and a major "success" for the former administration to present domestically. The conflict has negatively impacted midterm elections, creating pressure for a swift exit. Since the Iranian Revolution, the US has lost control over Iran's nuclear capabilities, a persistent issue affecting its Middle East strategy. Compared to the significant political value of a "denuclearization" achievement, the indirect electoral impact of oil prices and inflation is likely smaller, potentially leading the US to compromise on issues like control of the Strait of Hormuz. For Iran, the conflict has demonstrated that blockading the strait and threatening regional infrastructure are powerful bargaining chips, more disruptive and flexible than nuclear threats. Using low-cost drones, Iran can significantly impact the US and global economy, creating an effective counterbalance. Repeated de-escalation near the brink of major infrastructure damage suggests a low probability of extreme conflict escalation, thereby reducing risks of extreme oil prices or severe recession/stagflation.
The elimination of tail risks means the actual impact of war and negotiations on markets is fading. The crucial factor for subsequent market pricing will be the recovery of real shipping volumes. 1) The reduction in tail risk is lessening the market's direct reaction to the conflict. After the late February clashes and the Iranian blockade, the implied volatility of CBOE crude oil ETF options surged to a high of 120.91% on March 11 before retreating to around 90%. Following the US-Iran ceasefire, it fell to 78%, dipping below 80% for the first time since March 5, indicating a significant market repricing of war-related tail risks. However, even with reduced war risk, the effects of high oil prices on the global economy and liquidity persist. For the US, achieving a resolution on the nuclear issue is paramount; the duration of high oil prices and their inflationary pass-through are secondary concerns, especially given the continued resilience of the US economy and stock market supported by AI-related infrastructure. For Iran, the strait blockade has a comparatively minor economic impact. According to LSEG data, Iran's March oil export revenue surged 37% year-on-year, compared to 26% for Oman, 4.3% for Saudi Arabia, while UAE, Iraq, Kuwait, and Qatar, with ports primarily on the Persian Gulf, suffered significantly. For the global economy, longer crude supply disruptions mean extended rebalancing periods, larger inventory rebuilds, and a structurally higher oil price floor, with impacts that are difficult to quantify.
2) The key variable influencing future market fund flows is tangible shipping volume, not ambiguous negotiation headlines. The strait remains closed, with Iran establishing a complex verification and fee mechanism via intermediaries, creating磨合 costs for shipping companies. Furthermore, war risks continue to depress crew morale. The shipping capacity agreement reached in the next two weeks of talks will determine whether market sentiment recovers quickly or remains subdued. Continued substantive blockade could lead to downward revisions in economic indicators, requiring months for physical and financial conditions to recover. A comparison of Brent crude spot and one-year forward contracts shows the spot discount widened rapidly after the conflict erupted, indicating the market priced a short-term supply shock but remained relatively optimistic about long-term supply gaps. Since April, as tensions eased, the spot contract declined noticeably, but the forward contract did not fall significantly, compressing the discount considerably. This suggests the market is now pricing in a prolonged strait closure.
3) Economic and liquidity uncertainties continue to accumulate. After the broad, short-covering rebound, markets are expected to narrow their focus rather than expand. At this juncture, the marginal direction of war and negotiations may be less critical for markets, as some consensus is highly probable. The market has partially priced this in, with A-shares showing clear short-covering characteristics this week. A constructed investor sentiment index surged from 25.0 on April 7 to 68.1 on April 8, stabilizing around 47 in the subsequent two trading days. Channel surveys estimate the ratio of margin deposits to market capitalization fell sharply this week. The previously high ratio indicated investor caution and latent buying power; the decline suggests some funds have re-entered the market. The subsequent market logic will shift from pricing war risks to pricing actual economic impacts—moving from pricing expectations to continuously pricing reality. The key determinant of reality is the actual shipping situation in the strait and the corresponding price feedback along the supply chain. From this perspective, the fundamental Middle East situation may not have improved, and the negative effects of supply chain disruption are still accumulating. For instance, LSEG data shows the North Sea Forties Blend benchmark spot price soared to nearly $146.7 per barrel by April 9, surpassing the 2008 pre-financial crisis high of $143.3. However, the ICE Brent crude futures settlement price that day was $95.9, a discount of $50.8.
Sector-wise, focus may narrow to four themes: AI hardware, resources, cyclical price increases, and high dividends. Within the A-share market, only these four themes possess solid fundamentals and have maintained their uptrends after March's adjustments. Using A-share ETFs as a sample, excluding duplicate index trackers and constructing equal-weighted portfolios, the net values of AI, Resources, Cyclical Price Increases, and High Dividend portfolios have risen by approximately 5.5%, 7.1%, 6.5%, and 1.3% respectively since March 23. These themes show no significant crowding-out or mutual exclusivity, as each is supported by fundamental logic and a stable investor base. Other sectors and themes, lacking such stable valuation anchors and dedicated capital, experience higher two-way volatility, rising sharply in favorable sentiment but falling significantly when sentiment cools. Beyond these four, innovative drugs represent a relatively independent theme, also meeting the criteria of industrial logic, fundamentals, and a fixed investor base, with prices generally returning to long-term uptrend lines. The main challenge here is the high barrier to selecting alpha-generating stocks within the sector, especially in the absence of strong beta momentum.
Among the four sustained uptrend themes, the primary expectation gaps exist in domestic AI hardware and cyclical price increases. 1) The North American AI supply chain is relatively fully priced within the AI theme, whereas the expectation gap for the domestic Chinese chain is widening. The baseline logic for the North American chain is "earning at least from earnings," as a typical cycle-driven segment. Its pricing has concentrated on memory and optical communication, the segments with the tightest supply-demand dynamics and most direct price signals. Until a clear price inflection point emerges in these tight segments, a systematic unwind of positions is unlikely. Conversely, domestic Chinese AI is the less priced segment. After DeepSeek's release last year, expectations were high, but the North American chain's superior returns widened the performance gap, keeping investors cautious towards domestic AI. However, after over a year of development, the domestic AI ecosystem has advanced significantly, with a self-sustaining open-source community and engineering innovations bypassing memory and process limitations. Data from the ATOM Project indicates China now accounts for 70% of global fine-tuned and derivative models, far exceeding the US (26%) and Europe (4%), with a 72.7% token share. Even if investors remain cautious about profit margins, the sheer "volume expansion" phase is sufficient to support a typical cyclical growth investment approach. Domestic AI hardware is well-positioned to attract capital spillover from the North American chain.
2) The resources sector has undergone substantial pricing since last year. The "resource nationalism" narrative is widely recognized, and precious metals have added significant sentiment and liquidity premiums, making it difficult to identify a clear overall expectation gap. Therefore, opportunities in the resources sector this year may be more about structural alpha than systemic beta. The core idea is to identify segments supported by volume growth logic, rather than relying solely on price volatility for profit elasticity. Base metals and energy metals remain worthy of core allocation without assuming overly strong liquidity or macro conditions. Precious metals, more dependent on liquidity and narrative, present increased operational difficulty, with the sector's overall expectation gap no longer significant.
3) The transmission chain from "crude oil -> PPI -> cyclical corporate profits" represents a theme with expectation gap, high certainty, and potential upside for the full year, essentially corresponding to the broad cyclical price increase theme. Changes in the oil price floor and global demand may affect the breadth of PPI-to-profit transmission, but the Middle East conflict has already triggered localized supply-side capacity reduction. Market share at the supply chain's end is shifting to companies with sufficient inventory or diversified raw material sources. This process will likely amplify the upcycle for segments like large-scale refining and coal chemical. Furthermore, as long as oil prices stabilize, basic chemicals also offer considerable profit elasticity. While investors have some consensus on this logic, "consensus without stable positioning" itself constitutes an expectation gap. The March conflict prompted significant selling by absolute return funds. Given that sectors like chemicals, non-ferrous metals, and new energy are predominantly priced by absolute return capital, they are highly susceptible to position fluctuations. Consensus does not preclude an expectation gap; positioning structure truly reflects market expectations.
For allocation, the strategy remains focused and concentrated around China's dominant manufacturing sectors. The core portfolio construction logic should be based on the re-rating of pricing power in China's advantaged manufacturing, primarily in chemicals, non-ferrous metals, power equipment, and new energy. Among these, chemicals may be the most directly catalyzed by Middle East supply disruptions and subsequent cyclical price increases. Non-ferrous metals are expected to gradually reprice their resource attributes after liquidity shocks subside. Following the State Council's regulations on industrial and supply chain security, the key marginal change in new energy is the discussion around export controls for photovoltaic equipment. Similar to lithium battery equipment, technical reviews for key equipment exports—rather than comprehensive bans—are likely a trend aimed at safeguarding supply chains and preventing rapid overseas capacity substitution. While potentially negative short-term, this is crucial for maintaining long-term competitiveness, supply-side consolidation, and the recovery of leading companies' pricing power. Beyond these four core industries, close attention should be paid to progress in domestic AI, particularly the "volume" logic in hardware, which currently presents a significant expectation gap within the AI chain, especially after last year's underperformance led many investors to exit. Additionally, increasing allocation to undervalued sectors like brokers and insurance is advised. For cyclical price increase plays, large-scale refining may benefit most visibly from the Middle East conflict. Other areas to watch include: 1) Chemical products with alternative raw material/process routes under oil price shocks (Chinese producers often have higher "coal content" than overseas competitors); 2) Products with significant existing capacity in the Middle East/Western Europe, where supply disruptions could create additional supply-demand gaps and price increase expectations; 3) Products where substitute goods see cost-driven price hikes, boosting demand and creating supply-demand gaps; 4) Products already in a price increase cycle, where cost rises provide a window for price pass-through in tight supply-demand balances.
Risk factors include intensification of Sino-US friction in technology, trade, and finance; domestic policy effectiveness, implementation results, or economic recovery falling short of expectations; unexpected tightening of domestic or global macro liquidity; further escalation of conflicts in regions like Russia-Ukraine or the Middle East; and slower-than-expected digestion of China's real estate inventory.
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