【Strategy】 Market Trading "Stagflation" Rather Than Actual Stagflation - Weekly Observations on Hong Kong Market Strategy 1. We believe the current US-Iran conflict is driving oil prices higher, but it is unlikely to escalate into 1970s-style stagflation. Its impact is more likely to manifest as temporary inflationary disturbances rather than a macroeconomic loss of control. The current oil price increase is related to escalating Middle East tensions, transportation security concerns, potential supply disruptions, and associated cost increases. The market's pricing of energy supply uncertainty has risen, but the transmission path of its macroeconomic impact may differ significantly from the 1970s. 2. Regarding inflation formation mechanisms, rising oil prices do not necessarily equate to broad-based inflation. Over a longer cycle, US inflation in the 1970s remained above 10% multiple times, peaking around 14.6% near 1980, with prolonged duration. In contrast, current inflation, after briefly reaching approximately 9% in 2022, has significantly retreated to around 3%, with both the overall level and persistence lower than the 1970s. 3. We believe the sustainability of energy supply constraints is the key condition determining whether oil price shocks translate into macroeconomic inflationary pressure. Close attention should be paid to potential damage to Middle East energy infrastructure from a US-Iran war. 4. The US labor market is showing marginal weakness, with the unemployment rate having crossed above its three-year moving average. Historically, this signals an impending economic downturn phase. Post-crossing the trendline, the unemployment rate has historically risen by an average of approximately 2.6 percentage points, indicating that once the labor market enters an adjustment phase, it typically exhibits some inertia.
Risk warnings: 1) Overseas liquidity improvement falls short of expectations; 2) Escalation of geopolitical conflicts and energy supply disruptions; 3) Increased risk of exchange rate volatility.
【Fixed Income】 Convertible Bond Periodic Strategy - April: Clarity Emerging for Convertibles? Outlook and strategic portfolio for the convertible bond market in April: The market still expects and anticipates a substantive de-escalation or conclusion of the US-Iran conflict. The disturbance from inflation risks on corporate performance is relatively controllable, implying the stock market is not directly turning pessimistic. For convertible assets: Valuation risks have seen minor releases, but this does not imply an imminent significant rebound. Support from underlying stocks has also weakened. Furthermore, convertible bond valuations are not particularly low, suggesting price volatility remains possible. We lean towards the view that the external market environment will become clearer around May. For early to mid-April, a defensive operational stance on convertibles is recommended. From late April onwards, aligning with the performance improvement rhythm of mid-stream industries, gradually shift focus to opportunities in oversold, high-conviction convertibles with rebound potential, and equity-like convertibles. For specific allocation strategy, continue prioritizing "ballast" type low-price, low-premium convertibles, and selectively choose high-price, equity-like convertibles with weak redemption tendencies and moderate valuations. For repositioning core holdings, focus on medium-to-large cap convertibles in sectors with domestic demand support like utilities, photovoltaics, aquaculture, steel, transportation, and coal. Also, monitor convertibles in sectors showing marginal improvement under "anti-involution" trends, such as energy, agricultural chemicals, industrial gases, glyphosate, lithium batteries & materials, silicone, and construction machinery. Additionally, pay attention to small-cap, high-elasticity convertibles in areas like AI computing power, semiconductors, aerospace, humanoid robots, quantum technology, new materials, and innovative drugs.
Risk warnings: 1) Macroeconomic growth falls short of expectations; 2) Underlying stock market volatility exceeds expectations; 3) Risk of delisting for individual bonds; 4) Risk associated with preliminary earnings reports.
【Quantitative】 April Allocation Strategy: Awaiting the Subsidence of Overseas Risks Liquidity risks have concentrated over the past month. Current noteworthy logic includes: 1) This risk episode is a global liquidity risk: We highlighted extreme USD liquidity tightening at the end of January; various asset classes have now reflected this risk. 2) The current A-share market is not comparable to April 7, 2025: Current valuations are higher (86th percentile vs. 19th percentile), and the current VIX is lower (49th percentile vs. 95th percentile). Therefore, whether judged by long-term valuation levels or short-term risk release extent, the current A-share market is weaker than on April 7, 2025. 3) Since the decline is caused by overseas risks, overseas indicators should be used to determine buying points: Recommend using the FedNLP index, market-implied rate hikes, the Merrill MOVE index, and sovereign CDS as high-frequency indicators to gauge the subsidence of overseas risks. Currently, all four indicators suggest overseas risks have not yet subsided; investors are advised to patiently await a turning point. April allocation recommendations are as follows: Major asset classes: 10-year government bonds > A-shares > Convertible bonds > US stocks; Style: Value > Growth, Small-cap > Large-cap; Sectors: Automotive, Electronics, Chemicals, Utilities, and New Energy.
Risk warnings: The above conclusions are based on historical data and statistical models. If the future market environment changes significantly, model failure cannot be ruled out.
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