Changes in Geopolitical Pricing and How A-Shares Should Respond?

1. After confirming the two major changes, A-shares are expected to become more “dominated by myself”

Our summary of the four stages of asset price impact driven by supply shocks during six historical oil price upcycles:

1. Panic trading:** Risk aversion dominates, defensive assets outperform;
2. Reversal trading:** As conflict intensity decreases, structurally showing “oversold rebound” and “dominated by myself” (economic advantage & policy tilt) features in liquidity-sensitive industries;
3. Stagflation expectation trading:** If oil prices remain high, the market will gradually shift to trading stagflation expectations, favoring inflation-hedged assets;
4. Reality trading:** Once the long-term trend of oil prices and policy responses become clear, the market returns to fundamentals and policy-based reality trading.

This week, the market has transitioned from the early conflict “panic trading” to a “reversal trading” with easing conflict pricing. However, with Iran’s tough stance, the situation has become deadlocked, triggering “stagflation expectation trading” again. Early in the week, Trump’s “take profits when good” TACO statement sparked expectations of conflict de-escalation or even resolution, leading to falling oil prices and rebounds in growth assets like US tech stocks and Korean indices. But as Iran maintained a tough stance on confrontation and strait blockade, the market realized the deadlock might last longer. Oil prices rose again, and stagflation expectations began to dominate once more.

The shift in market trading direction mainly stems from the geopolitical deadlock, leading to expectations that oil prices will stay high longer, increasing inflation pressures and tightening policy expectations, which in turn influence the underlying logic of asset prices. Previously, we summarized that whether oil prices remain high long-term and ultimately transmit to economic and policy orientations is a core variable affecting asset prices over the long run. Rapid fluctuations impact short-term risk appetite but have limited medium- to long-term effects on the economy, policies, and asset prices; sustained high oil prices, however, can fundamentally alter the asset price dynamics by affecting economic growth, inflation, and monetary policy, creating lasting and profound impacts. Currently, as the situation approaches deadlock, the ongoing high oil prices’ influence on the economy and inflation, and the subsequent policy and asset price transmission chain, warrants continuous monitoring and attention.

However, as deadlock drives oil prices higher again, it may trigger a second, larger “TACO” from Trump, which could become a future “expectation gap.” For Trump, high oil prices and an uncertain outcome are negative assets, with rising military spending and fiscal pressures. The urgency to control oil prices increases daily; the window for regime change has passed, and the cost-benefit of escalating conflicts is decreasing. If oil prices rise again to an unacceptable threshold for Trump, it could trigger a second, larger “TACO,” leading to another reversal in asset pricing.

Currently, as signals of conflict peaking emerge, the market’s core trading focus is shifting from “rising intensity” to “repeated negotiations,” implying that future A-shares may become more “dominated by myself.” With the political goal of “regime change” between the US and Israel ending, and military objectives like “precision strikes” gradually completed, the US no longer has political or military incentives to escalate conflicts. If oil prices further surge and Trump is more likely to accept a TACO that Iran can tolerate, the trading focus will shift from “rising intensity” to “repeated negotiations.” Drawing from the 2022 Russia-Ukraine conflict experience, after the initial escalation, market reactions to negative news diminished, and in a deadlocked situation with a second oil price surge, A-shares rebounded (later weakened due to internal shocks like pandemic restrictions). Structurally, besides the price increases in coal, agricultural products, and other commodities, sectors benefiting from domestic growth policies, such as real estate and travel, also led gains, as the market began to “dominate itself” by seeking clues.

Furthermore, as the market begins to price in the impact of high oil prices on the economy and policy orientations, domestic policy certainty will become a key support for A-shares’ “dominated by myself” outlook. China’s current inflation remains low, policy interest rates are at historically low levels, and tolerance for imported inflation from rising oil prices is high, leaving ample policy space. The overall policy stance is likely to remain focused on “stabilizing growth,” maintaining reasonably ample liquidity. The certainty of policies and a plentiful liquidity environment will be crucial in helping A-shares withstand external shocks.

In summary, as the conflict evolves, two major changes are occurring in market pricing: first, the core trading focus shifts from “rising intensity” to “repeated negotiations”; second, the market begins to price in the impact of high oil prices on the economy and policies. After these changes are confirmed, and as market reactions to negatives diminish and domestic policy advantages become clearer, A-shares are expected to become more “dominated by myself.”

2. March-April, “dominated by myself” with two main strategies

From a calendar perspective, as the market begins to trade on fundamentals in March-April, rising prices and earnings become the two main structural drivers.

On one hand, with the post-holiday start of peak work season and the “Golden March and Silver April” economic activity, domestic price-inflation signals have further strengthened, leading to strong excess returns in the price-inflation chain during March-April. The current cycle, catalyzed by external geopolitical factors, further reinforces the inflation logic, consolidating market consensus on trading inflation-driven assets.

On the other hand, starting in March, as new economic data is released and the earnings season approaches, the correlation between stock prices and fundamentals will gradually increase, reaching its peak in late April, with prosperity becoming the core market theme.

3. Under high oil prices, two “dominated by myself” strategies

Considering that high oil prices will remain a key variable influencing global asset prices in the near future, two strategic directions are recommended:

• First, in the price-inflation chain, identify sectors whose prices can link with oil prices and are expected to benefit from rising oil prices;
• Second, among sectors with strong economic fundamentals, find those less affected by oil price increases and with independent prosperity.

Primarily, industries whose prices or profits are expected to correlate with oil prices will be an important clue in the “price-inflation chain.” Reviewing the correlation of absolute/relative returns of various industries with oil prices since 2010, the most positively correlated sectors include: non-ferrous metals, coal, oil & petrochemicals, chemicals, steel, machinery, new energy, agriculture.

The logic of benefiting from rising oil prices can be summarized into three categories:

• Direct profit enhancement: Rising oil prices directly increase profits for upstream energy industries such as oil extraction, oil services, shipping, etc., providing profit elasticity;
• Energy substitution: High oil prices make coal, natural gas, coal chemicals, new energy more economically attractive, boosting demand through energy substitution;
• Cost-driven increases: Rising crude oil prices push up costs for fertilizers, pesticides, which then transmit to agricultural product prices through increased planting costs.

Second, identify sectors with independent prosperity and less affected by oil price increases. Industries supported by technological trends and policies, such as AI and advanced manufacturing, are prime examples. These sectors, after short-term devaluation due to geopolitical risks, are less influenced by oil prices and may benefit from independent prosperity, especially under geopolitical risk environments. Based on earnings forecast revisions since the start of the year, key areas include:

• AI: Hardware (consumer electronics, components, computing and communication equipment, electronic chemicals), software (gaming, digital media, IT services).
• Advanced manufacturing: New energy (batteries, motors, PV equipment, wind power equipment), military (naval and aerospace equipment), machinery (rail transit, specialized equipment, construction machinery), home appliance parts, commercial vehicles, medical services.

Among these, sectors with relatively low gains since the beginning of the year include: North American computing chain (communication equipment, components), mid-to-lower stream AI (gaming, digital media, computers), new energy (motors, batteries), military (aerospace), machinery (construction machinery, specialized equipment), and pharmaceuticals.** From the perspective of benefiting from rising oil prices, new energy—combining both prosperity logic and energy substitution—is likely to be a more certain area. Additionally, the upcoming NVIDIA GTC conference may serve as a catalyst for North American computing chains (CPO, PCB, liquid cooling, power systems), so increased attention is warranted.

Source: XYSTRATEGY

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