CITIC Securities: Several Key Deductions on the Iran Situation

CITIC Securities Research | Yang Fan | Yuan Yuan | Qiu Xiang | Xu Guanghong | Maxigawa

Zhang Yuting | Li Xiang | Zhang Liyang

The current Iran conflict is developing into a pattern with an upper limit on intensity but strong persistence. Overall, the conflict is in a war of attrition stage, with the focus on which side can hold out longer under pressure. Visibility is decreasing, and negative information is concentrated, but the trend may have already significantly exceeded the previous plans of the Trump administration. As it approaches the critical threshold tolerable by the U.S., the situation is more likely to suddenly change. Potential signals should be closely monitored. For the macroeconomy, if the conflict evolves into a long-term, full-scale war under extreme scenarios, the main impact on the domestic macroeconomy could be a significant increase in imported inflation. Exports may face short-term negative effects, but there are potential long-term positive factors. For the A-share market, China’s stocks remain the most resilient in the Asia-Pacific region. It is still recommended to hold core positions in chemicals, non-ferrous metals, electrical equipment, and new energy, while actively increasing allocations in insurance and brokerage sectors to enhance exposure to undervalued factors. Regarding Hong Kong and U.S. markets, geopolitical tensions may disturb market sentiment in Hong Kong, but a return to fundamentals and industry policies is expected; U.S. military and energy infrastructure sectors may benefit.

▍The current Iran conflict is developing into a pattern with an upper limit on intensity but strong persistence.

On one hand, we believe the intensity of the Iran war has an upper limit. According to UAE defense data, since March 2, the daily interception of Iranian ballistic missiles has been around 10, a significant decline from the initial two days of conflict when 165 missiles were intercepted, indicating a clear reduction in Iran’s ballistic missile launch capability. Meanwhile, the UAE still intercepts over 100 Iranian drones daily, showing Iran maintains a high attack frequency against Gulf countries. On the U.S. side, although Xinhua reports that Trump has not ruled out deploying special forces to seize Iran’s enriched uranium and the Khark Island oil port, we judge that the U.S. currently lacks the conditions for large-scale ground deployment. Legally, the U.S. Congress passed the War Powers Resolution in 1973, requiring that if Congress does not declare war or authorize specific actions within 60 days, military operations must be phased out within 30 days after the deadline. Geographically, most of Iran’s territory is highland and mountainous, unsuitable for mechanized warfare, and large-scale troop deployment would take time—similar to the Iraq War in 2003, when U.S. forces began gradually deploying to the Gulf from fall 2022.

On the other hand, the persistence of the war may surpass previous market expectations. First, the actual control of Iran’s new Supreme Leader, Muqtada, remains to be seen. Muqtada is the son of Iran’s late Supreme Leader Khamenei, and before taking office, he had close ties with the Islamic Revolutionary Guard Corps, representing a hardline faction in Iran’s politics, but he lacks practical governing experience. Historically, after Khomeini’s death, figures like Rafsanjani also held real power outside the Supreme Leader. Second, recent attacks have shifted from military facilities to civilian infrastructure, potentially intensifying hatred among parties and complicating the situation. For example, reports indicate that a seawater desalination plant in Bahrain was attacked by Iranian drones, and Israel has targeted fuel facilities in Tehran. Third, disagreements between the U.S. and Israel continue to deepen; Iran’s chaos has significantly weakened regional powers besides Israel, but an out-of-control situation does not align with U.S. Middle East strategic interests.

▍The current Iran conflict is in a war of attrition stage, with the focus on which side can hold out longer under pressure. Visibility is decreasing, and negative information is concentrated, but the trend may have already significantly exceeded the previous plans of the Trump administration. As it approaches the critical threshold tolerable by the U.S., the situation is more likely to suddenly change. Potential signals should be closely monitored.

Two weeks into the Iran conflict, Trump’s attempt to achieve a “Venezuela-style” quick victory through military risk-taking appears unlikely to succeed. According to Polymarket as of March 9, the probability of Republicans winning the Senate in the midterms has dropped from 60% before the conflict to 54%, indicating increasing political pressure on the Trump administration to act militarily against Iran. Recent developments show that the Trump administration has not prepared sufficiently for ongoing conflict. For example, in an interview with Reuters on March 5, Trump stated he was not worried about rising oil prices and had no plans to tap strategic reserves. However, by March 9, Brent crude hit a high of $119.50 per barrel, and the Financial Times reported that three G7 countries, including the U.S., supported releasing emergency oil reserves jointly.

Furthermore, the Trump administration has not adequately prepared for issues such as securing the Strait of Hormuz or responding to Iranian drone attacks. We believe there may be some “information bubble” within the administration regarding the current battlefield situation and its potential impacts. As the pressure from the Iran conflict approaches the Trump administration’s acceptable threshold, the situation could suddenly shift. Close attention should be paid to signals such as rising oil prices triggering domestic backlash, Muqtada’s actual control over Iran’s political landscape, progress in U.S.-Israel drone defense cooperation, and diplomatic channels.

▍For China’s macroeconomy, if the conflict develops into a long-term, full-scale war, the main impact could be a significant increase in imported inflation. Short-term negative effects on exports are possible, but there are long-term positive factors.

Inflation-wise, crude oil prices heavily influence China’s PPI, and the country may face substantial imported inflation pressure. While CPI will also be affected, the overall impact is likely limited. Looking back at 2021–2022, amid global monetary easing post-pandemic, supply shocks from the Russia-Ukraine conflict, and a surge in oil prices from $50 to $120 per barrel, China’s PPI increased by 12.6%. However, due to weak domestic demand, upstream cost increases were not fully absorbed downstream, squeezing profits. In an extreme scenario where Brent remains above $90–100 per barrel throughout the year, PPI could rise by about 1.2%, and CPI by around 1.0%.

On the export front, the Strait of Hormuz is a key route for Middle Eastern exports, and the Middle East is one of China’s fastest-growing export regions. In 2025, exports to Middle Eastern countries (Saudi Arabia, UAE, Iran, Iraq, Kuwait, Qatar, Bahrain) are projected to account for 4.3% of China’s total exports. During the early pandemic, global shipping disruptions caused China’s quarterly export growth to fall about 14 percentage points below 2019 levels. Extrapolating this, in an extreme scenario, short-term monthly export growth could be reduced by about 0.5 percentage points. Long-term, if Iran’s situation evolves into a prolonged, full-scale war, oil prices could stay high, impacting manufacturing in Europe and Japan, which are heavily dependent on oil. China’s energy reliance and industrial advantages could help maintain stable supply chains, potentially boosting China’s share of global exports.

▍For the A-share market, China’s stocks remain the most resilient in the Asia-Pacific region. It is still recommended to hold core positions in chemicals, non-ferrous metals, electrical equipment, and new energy, while actively increasing allocations in insurance and brokerage sectors to enhance exposure to undervalued factors.

Recent market volatility highlights several new points. First, markets are beginning to price in a scenario similar to the 1970s oil crises and subsequent stagflation, which could be intense in the short term. However, these crises are historical events, and markets tend to overreact rather than underprice such risks. Second, China’s A-shares are the most resilient in the Asia-Pacific, and relying solely on historical dependence on oil to explain market reactions may overlook China’s accelerated electrification and the large strategic oil reserves built last year. Third, the possibility of TACO (Trade-Associated Capital Outflows) trading remains, and as the situation escalates, its probability increases—close monitoring is needed.

Strategically, if the conflict prolongs, overvalued sectors may cool down, and the relative advantage of undervalued factors will become more apparent. From a profitability perspective, China’s resource-based and traditional manufacturing sectors still have significant revaluation potential. The market may be underestimating China’s ability to pass on costs globally through its dominant market share—an aspect different from previous episodes. We continue to recommend core holdings in chemicals, non-ferrous metals, electrical equipment, and new energy, with active increases in insurance and brokerage sectors.

▍Regarding Hong Kong and U.S. markets, geopolitical tensions may disturb sentiment in Hong Kong, but a return to fundamentals and industry policies is expected; U.S. military and energy infrastructure sectors may benefit.

Geopolitical tensions amplify disruptions to Hong Kong and U.S. market fundamentals.

As a typical offshore market, historical geopolitical events like the Russia-Ukraine conflict have indeed impacted Hong Kong investor sentiment and valuation levels. However, since the “9.24 rally” in 2024, Hong Kong’s performance has been more reflective of domestic macroeconomic and policy expectations, as well as the fundamentals of constituent stocks. This is also the main reason why the Hang Seng Tech Index has significantly underperformed the Hang Seng Index since mid-January. Currently, the Hang Seng Index and Hang Seng Tech Index have P/E ratios of about 11.0 and 17.1, respectively—at the 60th and 29th percentiles historically. Since the third quarter of last year, earnings forecasts for 2025 and 2026 have been revised downward by about 8% and 13%, respectively, reflecting market adjustments. After the conclusion of the Two Sessions and the release of the “14th Five-Year Plan,” Hong Kong stocks are expected to return to fundamentals and policy orientation. In the short term, external shocks remain, so focus on: metals with strong industrial attributes like copper and aluminum; undervalued, high-dividend consumer stocks with bottomed-out fundamentals; and, after major tech giants like Tencent and Alibaba release earnings, combined with expectations of U.S.-China summit, Hong Kong’s tech and internet sectors may see valuation recovery by late March.

For U.S. stocks, rising oil prices combined with last week’s weaker-than-expected employment and retail data have heightened stagflation concerns, amplifying the “HALO + safe-haven” trade. First, the U.S. is a net oil exporter, and the recent economic slowdown was mainly due to severe weather. The effects of the “OBBBA” law, including subsidies and tax cuts for residents, only took effect in February. Coupled with potential tariff dividend checks, we expect the U.S. economy to maintain relatively high growth in the first half of the year. Second, the U.S. market continues to cycle through AI bubble concerns and private credit issues: layoffs caused by LLM/AI agents, declining software subscriptions, defaults on private sector loans, and rising default rates are all weighing on liquidity. The U.S. private credit market is about $2 trillion, with only 12.9% exposure in the software sector (S&P Global Ratings). Although smaller rating agencies dominate private securities issuance and tend to give higher ratings, the current default rate of 3.2% (Morningstar) remains manageable. Recent asset transfers, such as Blue Owl’s $1.4 billion credit assets, are only slightly discounted, indicating underlying assets are still relatively healthy. Overall, concerns about a vicious cycle of private credit and AI bubbles seem to be priced in. Under escalating geopolitical risks, U.S. defense and energy infrastructure sectors are expected to benefit.

▍Risk factors:

• Unexpected deterioration of Middle East geopolitical situation
• Unexpected shifts in U.S. Middle East policy
• Global geopolitical risks exceeding expectations