Shenwan Hongyuan Strategy Weekly Review and Outlook | Under the US-Iran conflict, the macro scenario is about to converge

(Source: Shenwan Hongyuan Rongcheng)

Under the US-Iran conflict, the macro backdrop is about to converge

I. Current A-share pricing leaves room for upside and downside risks. It is a neutral valuation, but not yet a steady-state valuation. The market is still making large adjustments to mid-term scenario assumptions and the probability distribution based on the US-Iran conflict event catalyst. Short-term market volatility remains relatively high, and it is still not the moment to go “all-in”. Mid-term macro scenarios are gradually converging, but the final key convergence ( has yet to occur. Even if the United States begins ground operations, it will withdraw relatively quickly ). If the key convergence is realized, the moment when the US-Iran conflict has the greatest impact on capital markets will pass, and risk appetite may bottom out and rebound.

The pricing of the US-Iran conflict in A-shares is not yet steady-state in the short term, but it has reserved room for both upside and downside risks. It can be viewed as an “unstable neutral state”: if the Federal Reserve raises interest rates in response to a higher inflation core, and the economy falls into a stagflation cycle, global stock markets may “fall sharply, rebound, and then fall slowly”, and the capital market has not yet cleared the pessimistic expectation of stagflation. Meanwhile, the market’s positive valuation of China’s energy security and supply chain security is also insufficient. The validation of demand alpha in China’s export chain and the ability to price and sell overseas may resonate with Middle Eastern capital pricing + foreign capital inflows, leading to a reassessment of country-specific relative strength, which could drive A-shares to rapidly return to a strong state. With both upside and downside risks not fully priced in, the mid-term outlook scenario has not yet converged. Therefore, in the short term, A-shares are not in stable equilibrium, but they are in a neutral state.

In the short term, the market is still being catalyzed by the US-Iran conflict event, significantly adjusting the mid-term scenario assumptions and probability distribution. This is reflected in the market’s continued sensitivity to reactions to event catalysts, with volatility staying at a high level and risk appetite being suppressed. This implies that, at this stage, it is still not the time to make heavy bets based on the mid-term outlook.

The mid-term macro scenario has not fully converged, but some consensus is forming. We care most about 3 points: 1. The US-Iran game will be a medium- to long-term issue—this has already become a consensus. The market has already shown some reaction to changes in the mid-term asset pricing center. 2. The market’s expectations for mid-term monetary policy are becoming more objective: while the Federal Reserve responds to a higher inflation core, it also needs to deal with a relatively weak employment market + promote the return of manufacturing. We infer that, in the face of cost shocks, the US economy is “easy to stagnate, not easy to become inflationary”. Watching during stagflation-like phases, and cutting rates during recession-like phases, may be the baseline judgment. Correspondingly, the mid-term stagflation outlook is not the baseline assumption. Confirming stagflation expectations will at least need to wait until around the time of the Fed’s policy guidance confirmation in May by Wosh. 3. The US government’s understanding of potential landing-operation targets ( is to avoid getting stuck in a long-term conventional war, achieve tactical goals, and withdraw promptly after those goals are reached. The order in the Middle East still leaves room ), with no fundamental difference from the capital market. Once the US’s landing-operation scenario after it begins is in place, it is the main source of current mid-term uncertainty. If a short-term landing operation achieves tactical goals and the scenario of rapid withdrawal is realized, this constitutes the key convergence of the mid-term macro scenario. Correspondingly, the moment when the US-Iran conflict has the greatest impact on the capital market will pass; risk appetite may bottom out and rebound; and the confirmation of the mid-term bottom in the A-share market may follow.

II. With the realization of a second bottom + the key convergence of macro scenarios + the policy push to proceed with stability and aim for long-term progress, an important mid-term low may be just around the corner. Overseas value outperforms growth starting from 25 November. A-shares begin from mid-January 26, moving from natural-sector rotation and style switching, to HALO trading, and then to the US-Iran conflict—growth’s relative value-for-money has improved significantly. The new economy and strategic resources are still the inflation assets of the era. Once the moment when the US-Iran conflict has the greatest impact has passed, bottom-up stock selection effectiveness will gradually return. This time, the market bottom is also the bottom of the small-cap growth style.

In the short term, uncertainty from the US-Iran conflict continues to suppress risk appetite, and the second bottom is being realized. If, afterward, the mid-term macro scenario’s key convergence occurs, and it is combined with the “proceed steadily and aim for long-term progress” policy protecting the capital market’s stability and accelerating the clearing of pessimistic positions, we believe an important mid-term low may be near.

This low may be both the market bottom and the ( small-cap growth ) style bottom. Overseas, the value style has outperformed growth since November 25. Domestically, after the storyline of “computing power inflation,” commercial aerospace, and AI application rallies, in January 26, a correction rally for small-cap growth also began. Domestically and internationally, the market’s evolution process is basically consistent. Starting from natural-sector rotation and style switching, then experiencing HALO trading + the US-Iran conflict, the small-cap growth style is already at a relatively high valuation and value-for-money state. Once the moment when geopolitical conflict has the greatest impact on the capital market passes, the macro cycle and geopolitical conflict are no longer the main contradictions, and the original mid-term pattern gradually returns. The new economy and strategic resources remain the inflation assets of the era. Bottom-up stock selection effectiveness will gradually return, the profitability effect stabilizes, and a slow upward phase begins. Therefore, this time, the market bottom is also the bottom of the small-cap growth style.

After the mid-term low appears, the market will return to the path of a “two-stage rally”. The “volatility and consolidation phase between the two rallies” will still continue for some time. The core is to wait for positive fundamental signals to accumulate, with earnings and time digesting valuations. Under the condition that industrial trends make leapfrog progress, market-structure consensus re-gathers, and profitability accumulation drives a positive-circular feedback that brings in incremental funds, in 26–27 there is still a “second-stage rally” ( that may start in 26Q4 ). This will be a market driven by a resonance between fundamentals and liquidity, with the full upside space opening up.

III. During the period of volatility and consolidation in the middle of the two-stage rally, extending the technology mainline + expanding macro narratives are still the main sources of high-elasticity investment opportunities. In this stage, opportunities in sub-industries still have elasticity, but linkage across sectors is relatively weak, making it difficult for the profitability effect to spread broadly. In the technology “reality-check” direction that was strong before the US-Iran conflict, there is still opportunity in the short term—focus on optical communications, aero engines, and energy storage. In the next stage, new energy, new energy vehicles, and the export chain are directions that can verify improvements in fundamentals. In the short term, the hedging effect of buying is temporarily not strong; however, buying for fundamental improvement later remains an important opportunity.

In the volatility and consolidation phase, high-elasticity investment opportunities still come from extending the technology mainline + expanding macro narratives. Sub-sector independent trading opportunities still rise and fall one after another, but linkage across sectors is weak, and it is hard for the profitability effect to spread widely. We need to switch toward a small number of sectors with clear growth trends.

In the stage when risk appetite is hit by the US-Iran conflict, high-elasticity investment opportunities are generally suppressed. But once the moment when the US-Iran conflict has the greatest impact on capital markets passes, sector rotation among high-elasticity sectors remains effective. Specifically, in the technology “reality-check” directions that were strong before the US-Iran conflict, there is still elasticity in the short term. Focus on optical communications, aero engines, and energy storage. For the future rotation directions, we focus on investment opportunities in new energy, new energy vehicles, and the export chain. In a low risk-appetite stage, new energy is considered a hedging asset, but its effect is currently not good. In the next stage, once orders increase, supply and demand improve, and overseas pricing can be effectively achieved—entering a market phase of investing based on improving fundamentals—new energy, new energy vehicles, and the export chain will remain important investment opportunities. At the same time, new energy may become a structural basis for foreign capital to return, and for a reassessment of the relative strength by country; together, this forms a direction with upward elasticity and profit-effect diffusion.

Risk warning: Overseas economic recession exceeds expectations; domestic economic recovery falls short of expectations

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