Persistent tensions between the US and Iran continue to unsettle global markets, causing significant volatility in oil prices and suggesting a potential peak. Historically, once war-induced oil price surges reach their zenith, the subsequent trajectory follows one of two patterns: a prolonged high plateau or a rapid decline. The pricing logic for equities, gold, industrial metals, and energy commodities differs markedly between these two scenarios. Recent developments in US-Iran relations have introduced new uncertainties. However, after a period of geopolitical-driven trading in March, market risk appetite has shown signs of recovery. Investors are becoming less reactive to negative news, with pricing dynamics increasingly leaning towards expectations of a ceasefire. Analysis from GF Securities' strategy team indicates that equity markets are likely to rebound under either oil price scenario, but the timing of the rebound is determined by the peak in inflation, not the peak in oil prices. A scenario of oil prices plateauing at high levels would fuel stagflation fears, benefiting gold and energy commodities, whereas industrial metals would face pressure if a recession materializes. Conversely, a rapid decline in oil prices would likely negate a sustained upward trend for gold, with industrial metals only beginning to rise after clear signs of demand recovery emerge. Examining the recovery progress of major asset classes since the conflict began reveals significant divergence. The S&P 500, Nasdaq Composite, Chinext Index, and Nikkei 225 have fully recouped their losses. In contrast, the Shanghai Composite Index, Hang Seng Tech Index, South Korea's KOSPI, 10-year US Treasury bonds, and gold have not yet completed their recovery.
The patterns of price plateauing or rapid decline, along with pre-war macroeconomic fundamentals, are key determinants. Historically, peaks in oil prices triggered by warfare typically manifest in two forms. The first involves prices maintaining a high plateau after the peak. The second sees prices rapidly retreating to pre-conflict levels. GF Securities reviewed five major geopolitical conflicts: the First Oil Crisis (1973), the Second Oil Crisis (1979), the Gulf War (1990), the Kosovo War (1999), and the Russia-Ukraine conflict (2022). This review identified systematic differences in asset performance depending on the oil price path. The plateau pattern is exemplified by the two Oil Crises and the Kosovo War, while the rapid decline pattern corresponds to the Gulf War and the Russia-Ukraine conflict. The state of the macroeconomy prior to the conflict is a critical variable influencing the depth of the shock. Before the First Oil Crisis, the US manufacturing PMI had been persistently above 50, even exceeding 60, indicating an overheating economy. The supply shock combined with robust demand significantly amplified stagflation risks. Before the Gulf War, US GDP growth had already slowed from over 4% in 1988 to 2.41% in the quarter preceding the conflict, as the economy was heading towards recession. This context made the oil price shock easier to absorb rapidly.
Equity Markets: Inflation Inflection is the Core Signal for Rebound Historical data shows that equity markets eventually rebound under both oil price scenarios, but the path and timing differ. A plateauing oil price environment typically leads to a slower but more robust rebound. A scenario of rapidly falling oil prices generally prompts a quicker rebound initiation. The crucial signal for the rebound timing is not the peak in oil prices, but the peak in inflation. The impact of oil prices on equities is tied to the transmission chain of "high oil prices → high inflation → erosion of corporate profits and monetary tightening." This chain has been validated across all five conflict periods: The peak in oil prices consistently leads the peak in inflation. Equity markets face pressure during the late stages of rising inflation. A sustained bull market typically only begins once the Consumer Price Index (CPI) year-on-year growth starts to decline from its high point. Notably, strong industrial sector momentum can disrupt this traditional chain. During the Kosovo War, despite oil prices plateauing at high levels, the booming internet/tech revolution, coupled with preemptive interest rate hikes by the Federal Reserve that effectively anchored inflation expectations, resulted in only a modest rise in US CPI. This provided substantial inherent support for the equity market.
Gold, Industrial Metals, and Energy Commodities: Divergent Paths for Three Asset Classes Gold tends to see more significant medium-to-long-term gains in a plateau scenario. Against a backdrop of persistently high oil prices, stagflation expectations intensify, making gold's performance more certain. Notable rallies occurred during the First and Second Oil Crises and the Kosovo War. In the cases of the Gulf War and Russia-Ukraine conflict, where oil prices fell rapidly, gold primarily recovered losses previously incurred due to interest rate hike expectations, rather than embarking on a new sustained upward trend. Regarding industrial metals, using copper as an example, prices initially rise due to inflation expectations in a plateau scenario but subsequently fall as an emerging recession opens up a supply-demand gap. In a rapid oil price decline scenario, copper prices tend to fluctuate initially, only rising after clear signals of economic recovery emerge. For energy commodities like LNG, the correlation with oil prices is strong. LNG prices continue to rise if oil prices plateau; they fall rapidly if oil prices decline swiftly. The US Dollar Index shows limited overall correlation with oil prices, with no strict inverse relationship observed over the long term. In a plateau scenario, the dollar tends to trade with a strengthening bias amid volatility before weakening as recession risks and rate cut expectations grow. In a rapid decline scenario, the dollar generally exhibits weakness.
Post-Conflict Policy Response: A Dynamic Balance Between Inflation Control and Recession Fight Following the dissipation of geopolitical shocks, policy responses in developed economies show systematic patterns. When high oil prices and high inflation persist, a sequence of interest rate hikes followed by cuts is common. If oil prices and inflation fall rapidly, monetary policy tends to move directly towards easing. During the First Oil Crisis, the Fed initially adopted "accommodative" easing to counter economic slowdown. However, combined with the supply shock, this led to unanchored inflation expectations, sending PPI and CPI into double digits by 1974. The Fed was then forced into aggressive tightening, which ultimately curbed inflation but also deepened the subsequent recession, after which a rate-cutting cycle began. After the Gulf War, facing a combination of "supply shock + weakening demand," the Fed's policy focus swiftly shifted from inflation control to mitigating recession and credit contraction risks. As CPI began to fall and oil prices retreated from highs, the pace of interest rate cuts accelerated, facilitating a relatively swift economic recovery. On the energy and industrial policy front, both Oil Crises triggered energy structure transformations in Western nations. Post-crisis, nuclear power generation saw sustained rapid growth in the US, Europe, and Japan. France launched the "Messmer Plan" for large-scale nuclear plant construction, and Japan strategically embraced nuclear power to reduce oil dependency. Considering recent US March inflation data, the actual impact of high oil prices on inflation has been weaker than anticipated. Subsequent policy may prioritize addressing recession risks, with rate cuts likely accelerating once inflation pressures ease further.
Outlook for Major Asset Classes: HK Stocks Offer Value, Gold's Medium-Term Case Strengthens From an asset outlook perspective, GF Securities provides the following assessments: US equities continue to exhibit strong fundamental underpinnings, supported by the ongoing upward trend in AI-related industries, making sustained medium-term strength probable. However, short-term technical indicators suggest overbought conditions. Furthermore, the recent recovery has been partly driven by short covering and inflows from CTA trend-following strategies, rather than active new long positioning, warranting caution regarding potential earnings disappointments in some tech sectors. Hong Kong stocks currently appear relatively attractive from a valuation standpoint. The Hang Seng Tech Index has not yet fully recovered its post-conflict losses, and valuations have dropped to low levels. Should a ceasefire materialize, the potential rebound could be substantial. In the A-share market, the Chinext Index has recently significantly outperformed the Shanghai Composite. This is primarily due to strong first-quarter earnings from growth sectors like AI infrastructure and new energy, with the index's top seven weighted stocks concentrated in high-growth areas like lithium batteries and optical modules. Portfolio structure is deemed more critical than overall market exposure. Four key themes are recommended for allocation: energy storage/lithium batteries; domestic AI data centers (including semiconductors); overseas AI infrastructure supply chains; and AI-powered short-form video/drama content. The fundamental case for a medium-to-long term bullish outlook on gold continues to strengthen. On one hand, central banks' monthly net gold purchases remain stable and positive, showing a marginal increase. On the other hand, any potential weakening of US control over the Strait of Hormuz could undermine the petrodollar system and the dollar's store-of-value status, thereby benefiting gold.
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