CICC has released a research report stating that the situation is highly likely to remain volatile in the short term, especially throughout April. From a medium-term perspective, an ultimate loss of control in the situation is still not the base-case scenario. Setting aside the Iran situation, the second quarter is inherently a weaker phase in China's credit cycle. The firm recommends a three-tiered approach in response: 1) For investors with light positions, consider contrarian investments in assets that have already fully priced in pessimistic expectations, such as the Hang Seng Tech Index, gold, and innovative pharmaceuticals. 2) For those with heavy positions, it may be prudent to moderately reduce exposure or hedge volatility with low-volatility, high-dividend assets. 3) Beneficiary sectors like energy storage and coal can be held, but due to high consensus and crowded trades, chasing excessive highs is not advisable. CICC's primary views are as follows:
1. Based on EPFR data (as of Wednesday), active foreign capital outflows from Hong Kong stocks amounted to $90 million (compared to outflows of $330 million last week), and outflows from A-shares were $110 million (vs. outflows of $90 million last week). Passive foreign capital outflows from Hong Kong stocks were $670 million (vs. inflows of $370 million last week), and outflows from A-shares were $970 million (vs. inflows of $820 million last week). By source, funds focused on China and Asia ex-Japan saw significant outflows.
2. Southbound flows remained volatile, with outflows on Monday and Wednesday, and inflows on Tuesday and Thursday. Total inflows reached HK$5.37 billion (compared to inflows of HK$25.1 billion last week), with average daily inflows of HK$1.34 billion (vs. HK$5.03 billion last week). The largest inflows were into TENCENT (00700) and XIAOMI-W (01810), while outflows were seen from CNOOC (00883), the Hang Seng Tech Index, and BABA-W (09988).
The Iran situation has now entered its sixth week. After the initial rapid release of sentiment, markets appeared to enter a relatively "calm period" over the past one to two weeks, but this tranquility could easily be broken. Firstly, there are less than two days remaining until April 7th, the date previously postponed by former President Trump for potentially resuming attacks. Secondly, as time progresses, if markets perceive the impact shifting from a "paper worry" at the sentiment and trading level to a "real shock" affecting production activities, repricing will be necessary. For instance, since the conflict began, earnings expectations for US and A-shares have actually been revised upwards by 4% and 1.5% respectively. Downward revisions for Hong Kong stock earnings are largely related to their own sector-specific drags, rather than being caused by high oil prices. This indicates that the pricing-in of earnings impacts from oil price shocks has not yet materialized, which is one reason suggesting equity markets are generally under-pricing pessimistic scenarios.
Looking ahead, April is a critical juncture. Beyond whether the situation itself escalates, close attention should also be paid to Southeast Asia. Estimating based on normal shipping speeds, oil tankers in East Asia will begin to face "actual supply disruptions" in early April. Monitoring whether production activities in Southeast Asia, as a "weak link," are affected is crucial. If disruptions occur, markets could quickly pivot to recessionary trading.
The US non-farm payroll data for March released last Friday again significantly exceeded expectations. However, a closer look at the internal structure reveals the data is not as strong as it appears on the surface: 1) The recovery was primarily due to the fading effects of strikes and weather-related factors. 2) Employment in the financial and information sectors continued to decline, reflecting the negative substitution effect of AI on jobs. 3) Wage growth declined both year-over-year and month-over-month. Therefore, for Federal Reserve policy, oil price trends remain the primary concern; the marginal impact of this jobs report is limited. As long as the conflict does not persist into the second half of the year, causing oil prices to stabilize above $100 per barrel, the Fed can still proceed with interest rate cuts.
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