Zhongtai Strategy: How Might Major Asset Classes Evolve After Geopolitical Conflicts?

The geopolitical situation in the Middle East is rapidly deteriorating, becoming a key variable dominating global capital markets. Since last weekend, when the US and Israel launched a joint military strike against Iran, tensions between the US and Iran have sharply escalated, causing noticeable disruptions to major global asset classes. Crude oil prices surged significantly this week, and major stock markets in Japan, South Korea, Europe, and other economies heavily affected by the situation have experienced severe shocks.

A-shares gradually recover after being impacted by global geopolitical shocks, with major indices bottoming out and rebounding this week. Overall, value sectors performed relatively well this week. Resource sectors benefiting from the conflict, such as petrochemicals and shipping, showed better performance. The TMT sector experienced a significant pullback this week due to risk aversion caused by the war. However, in the long term, global geopolitical turmoil will inevitably deepen investments in technology and high-end manufacturing sectors, with the impact likely to be “short-term dip, long-term gain.”

Regarding the Two Sessions, the government work report released this week generally met market expectations. As annual reports and Q1 earnings are gradually disclosed, along with the release of Q1 economic data, the market may shift focus toward fundamentals. Previously hot sectors like AI computing power and robotics face annual report performance tests, with market attention likely to continue rising.

After geopolitical conflicts, how might major assets evolve?

This week, the US-Iran conflict escalated sharply, prompting a re-pricing of geopolitical risks in global capital markets. Historically, multiple military conflicts in the Middle East over the past decades have caused significant disruptions to global asset classes. The scale, duration, and economic impact of each conflict vary, and their effects on asset prices differ in magnitude and timing.

In the short term, conflicts will cause pulse-like increases in volatility across major assets, with markets dominated by “safe-haven trades,” lasting about a month, with relatively limited disturbance cycles. For example, on September 14, 2019, Houthi rebels attacked two Saudi Aramco oil facilities, claiming to expand attacks on Saudi targets. This event reduced Saudi oil output by 5.7 million barrels per day, over 50% of Saudi’s daily production and more than 5% of global supply. WTI and Brent crude prices opened with their largest single-day gains since 1991, with Shanghai crude futures hitting the daily limit-up and closing over 6% higher.

However, due to Saudi Arabia’s capacity recovery exceeding expectations and the absence of further regional escalation, crude oil prices’ sharp fluctuations lasted only about a week before returning to fundamental pricing. During this period, safe-haven trades mainly focused on the US dollar rather than gold: US Treasury yields declined significantly after the crisis, lasting about a month; gold prices only saw brief modest increases. In such scenarios, markets tend to view conflicts as one-time supply shocks, with risk assets quickly recovering after short-term adjustments, and safe assets mainly serving as event window hedges.

If military conflicts evolve into regional wars lasting over two months, supply gaps in oil markets will become more persistent, and safe-haven assets often enter trending phases. The Libyan civil war during the Arab Spring in 2011 provides a clear historical analogy: NATO military intervention from March to October led to the fall of Gaddafi, lasting about seven months, with Libyan oil production dropping sharply by approximately 1.6 million barrels per day, causing a significant rise in oil prices.

Besides oil, the prolonged fermentation of geopolitical risks has driven gold and US Treasury prices higher, with the trend lasting over six months. The Libyan civil war pushed gold prices upward from March to September 2011, reaching new highs at the time; safe assets like US Treasuries continued to be sought after, with 10-year yields falling below 1.9%. Global equity market volatility increased markedly, with the S&P 500 remaining under pressure. In such scenarios, sustained high energy prices through inflation expectations constrain central bank monetary policies, and the marginal tightening of liquidity environments coupled with systemic risk appetite decline often prolongs asset rebalancing cycles beyond six months.

When conflicts become prolonged over several years, their economic impact shifts from short-term supply shocks to broader global economic changes, with deeper implications. For example, the Russia-Ukraine conflict that erupted in February 2022 entered a long-term phase in mid-2022, with Western sanctions on Russia—including energy export restrictions, financial sanctions, and asset freezes—prompting drastic adjustments in Europe’s energy supply structure. Global natural gas, oil, and grain prices experienced substantial volatility.

At the initial outbreak, markets followed typical geopolitical risk pricing logic, mainly affecting oil, gold, and US Treasuries, lasting about a month. In March 2022, Brent crude prices surged sharply, European natural gas prices hit historic highs, and safe-haven demand boosted gold prices, which approached historical peaks by mid-March. The US dollar’s safe-haven attribute led to inflows into US Treasuries, with 10-year yields falling in the short term; the overall impact cycle lasted about a month. The asset performance during this phase was similar to short-term conflict scenarios but more intense, reflecting deep concerns over Europe’s energy security and global inflation expectations.

If the crisis persists beyond three months, its impact on supply chains will gradually become evident. After peaking in March, oil prices temporarily declined but then rose again in April and May as the EU advanced sanctions on Russian energy and OPEC+ limited output increases, combined with high global energy demand driven by economic recovery. Oil prices remained high into mid-2022. This “second wave” of energy prices was not merely geopolitical premium but indicated a fundamental shift in global energy trade patterns—Russia’s energy exports shifted toward Asia, Europe accelerated LNG imports, and market pricing shifted from event-driven to fundamentals-driven.

After six months of conflict, supply chain shocks will impact economic fundamentals. Driven by post-pandemic demand recovery and inflationary pressures from high oil prices, the Federal Reserve began aggressive rate hikes, with 10-year US Treasury yields rising after March. Between June and August 2022, oil prices and Treasury yields moved downward in tandem, reflecting supply chain recovery and easing inflation expectations. However, markets later realized that the inflation surge caused by the conflict could not be alleviated solely by oil price correction. Despite oil prices continuing to decline after August, US inflation remained persistent, causing US Treasury yields to diverge from oil prices, driven partly by pandemic-era fiscal policies and demand factors, with war-related oil price increases also fueling inflation.

During this phase, the impact on economic fundamentals also affected other assets: US stocks faced continued pressure amid liquidity tightening and downward earnings revisions, with the Nasdaq index declining persistently. The sustained high energy prices, through inflation channels, systematically altered global liquidity conditions and risk asset valuation centers.

For A-shares, external shocks mainly have short-term impacts, with medium- and long-term trends driven by domestic logic. In the short term, geopolitical conflicts typically first influence risk appetite and sentiment, as seen in 2019 when the Saudi Aramco attack caused a sharp rise in the oil and petrochemical sectors, but this was quickly reversed as supply recovery expectations grew. External shocks can also affect market sentiment; during the Russia-Ukraine conflict and this round of US-Iran tensions, high-leverage sectors like TMT experienced significant declines. In the medium term, the impact mainly manifests as risk premium fluctuations and volatility in commodity prices, disrupting market structure. As long as conflicts do not evolve into systemic shocks to global supply chains or energy systems, A-shares tend to follow their own logic.

Investment Recommendations

In the short term, the escalation of US-Iran tensions mainly causes temporary shocks in A-shares through risk aversion, with defensive sectors outperforming and high-elasticity sectors experiencing phased corrections—a “see-saw” pattern—though overall downside is limited. Beneficiary assets: crude oil, natural gas.

The medium-term outlook hinges on whether the conflict affects the Strait of Hormuz. Markets will focus on energy prices, shipping costs, and supply chain risks, leading to intense structural differentiation and capital battles, with increased volatility. Beneficiary assets: shipping, utilities, military industry.

In the long run, external geopolitical disturbances will not alter the overall trend of A-shares returning to domestic fundamentals. Instead, they will act as strategic catalysts, reinforcing long-term investment themes such as energy security, national defense, and domestic technological substitution. Beneficiary sectors: domestic substitution, national security, industrial upgrading.

Risk Tips: Unexpected tightening of global liquidity, market complexities exceeding expectations, policy change uncertainties, and other unforeseen factors.

(Source: Zhongtai Securities)