Western Securities Cao Liulong: The long-term bullish trend of A-shares remains unchanged; it is recommended to focus on undervalued, pro-cyclical sectors.

Ask AI · Why does Cao Liulong refer to the adjustment of A-shares as a “golden pit” in a long bull market?

Text | Wang Ligang

Editor | Liu Peng

After three consecutive days of declines, the three major indices of A-shares finally rebounded on March 24. By the close, the Shanghai Composite Index was up 1.78%, the Shenzhen Component Index rose 1.43%, and the ChiNext Index increased by 0.5%. The total trading volume in the Shanghai and Shenzhen markets was 2.08 trillion yuan, a decrease of 348.7 billion yuan compared to the previous trading day.

On the market, hotspots rotated quickly, with over 5,100 stocks rising. In terms of sectors, the power sector surged, the military industry sector strengthened, while oil and gas stocks performed poorly.

Regarding the recent adjustment in the A-share market, Cao Liulong, chief strategist at Western Securities, believes that a significant reason for the adjustment is the high uncertainty surrounding the US-Iran conflict. Many investors are concerned that a sharp rise in oil prices may lead to global economic stagflation, which could also drag down China’s manufacturing exports.

Cao Liulong stated that the essence of this round of the A-share bull market is the return of cross-border capital. After the Federal Reserve cuts interest rates in September 2024, the renminbi will return to a long-term appreciation trend, and the return of cross-border capital will drive A-shares back to a bull market. Although the US-Iran conflict may cause short-term emotional and liquidity shocks leading to market adjustments, it will not reverse the trend of cross-border capital flowing back into China. It may even accelerate the global capital flow back into China’s core and safe assets. This adjustment is the “golden pit” in the long bull market of A-shares, and the long-term bullish trend of China’s capital market will not change.

Cao Liulong emphasized that there is no need to be overly concerned about global economic stagflation. China has entered a mature phase of industrialization, and the past few years have confirmed that China’s manufacturing sector has strong export capabilities. From a structural perspective, taking new energy vehicles as an example, China’s large-scale investments in the new energy supply chain over the past decade are expected to leverage the current high oil prices to further increase the global penetration rate of China’s new energy economy.

For future market investment opportunities, Cao Liulong believes attention can be paid to the oil supply chain, agricultural products, liquor, and real estate sectors, which are undervalued and cyclical. He emphasized that undervalued cyclical sectors have typical characteristics; when a bull market continues, it will eliminate undervaluation, allowing these sectors to rise. However, when a bull market experiences high-level fluctuations, undervalued sectors can relatively resist volatility and avoid risks.

Regarding the recent adjustments in precious metals like gold, Cao Liulong indicated that this significant drop in precious metals reflects “liquidity trading,” rather than “stagflation trading.” By 2026, the world may face a “super cycle of oil prices,” and when inflation truly arrives, gold will regain its upward momentum.

As for the future trend of the US dollar, he believes that after the outbreak of the US-Iran war, the market seems to have started to view the dollar as a core pricing anchor again. At the same time, discussions about the return of the “petrodollar” mechanism have resurfaced, seemingly constructing a new asset transmission logic: rising oil prices → upward inflation expectations → lowered interest rate cut expectations → a stronger dollar → suppression of risk assets. However, this is actually a “reversed logic”—the appreciation of the dollar is merely the result of various assets being sold off, rather than the reason for suppressing these assets. The foundation of the petrodollar is US debt, and regardless of how the war unfolds, the objective problem of US debt cannot be avoided, leading to an inevitable significant depreciation of the dollar.