CITIC Construction Investment: Keep a close eye on Middle East developments and leverage China's advantageous assets

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Source: CITIC Securities Research

By|Xia FanJie He Sheng

The situation of the conflict between the United States and Iran has cooled somewhat, and global markets have seen their panic sentiment recover. However, the latest U.S. military deployment plan targeting Iran still indicates an elevated risk of escalation of war, so market sentiment volatility over the coming month must be paid attention to. As for the A-share market, the adjustment has been relatively sufficient in recent times, so you can wait for signals to go long and position yourself at the right time. Going forward, the A-share market will focus on energy security and industries benefiting from high inflation, products with strong cash flow, growth sectors that are easily mispriced lower, and valuation-cheap cyclical sectors. Sectors to watch include coal-to-chemicals, new energy, energy storage, lithium battery materials, pesticides, chemical fertilizers, coal, hydropower, AI computing power, metals, innovative drugs, consumer, and more.

Recently, Trump has temporarily delayed his strike plan against Iran, and on top of that, some vessels have resumed passage through the Strait of Hormuz, bringing global markets a brief “breath of fresh air.” However, according to the U.S. military’s latest military deployment plan—“Plan Four for the final strike”—and Polymarket’s predictions, there is still a risk that the war will escalate. Market expectations in the future may fluctuate, so pay attention to taking contrarian actions. In terms of the A-share market, although overall funding expectations over the past month have leaned toward panic, the market already has signals showing that this medium-term adjustment is nearing completion. Also, the long-term logic of capital-market reforms during this bull market has not changed. Therefore, left-side capital can wait for long signals, grasp China’s advantaged assets, and position itself at the right time.

China is entering a new strategic window of opportunity. This refers not only to strategic initiative in geopolitics, but also to the strategic opportunities brought to China’s energy industry, manufacturing sector, and the entire RMB asset universe by the dual-pillar energy foundation of “coal + new energy.” Therefore, although the global economy and markets face the dual pressure of inflation and recession, China’s economy is relatively well positioned. The A-share market is expected to lead global stock markets, so it’s recommended to continue to seize China’s advantaged assets.

In terms of industry allocation, asset allocation can follow the following four approaches: First, closely follow the main line of energy security and high inflation. Under the pressure of an unstable supply chain, coal-to-chemicals and new energy can serve as substitute resources to reshape manufacturing. Pesticides and chemical fertilizers are expected to rise in price if input costs for raw materials such as natural gas increase; Second, stick to defensive assets with stable cash flow—for example, coal and hydropower that have high dividend yield and stable dividend characteristics; Third, mine for certainty in growth that the market sentiment has unjustly sold off—for example, AI computing power and innovative drugs that already have clear prosperity logic; Fourth, focus on potentially cyclical sectors with low valuations. They may become benefiting sectors under the current backdrop of tighter liquidity—such as consumer sectors that currently have lower trade crowding.

Key sectors to focus on include: coal-to-chemicals, new energy, energy storage, lithium battery materials, pesticides, chemical fertilizers, coal, hydropower, AI computing power, metals, innovative drugs, consumer, and more.

I. Global markets “catch their breath,” but uncertainties in the Middle East front remain

Recently, Trump has temporarily held back his strike plan against Iran, and combined with some vessels resuming passage through the Strait of Hormuz, global markets have seen a brief “breath of fresh air.” However, according to the U.S. military’s latest military deployment plan “Plan Four for the final strike” and Polymarket’s predictions, there is still a risk of escalation of the war. In the future, market expectations may fluctuate, so pay attention to contrarian operations. As for the A-share market, although funding as a whole over the past month has generally had expectations leaning toward panic, there are already signals in the market indicating that this medium-term adjustment is approaching the end. Moreover, the long-term logic of this bull market—capital market reforms—has not changed. Therefore, left-side capital can wait for long signals, capture China’s advantaged assets, and position itself at the right time.

The U.S. government has paused its strike plan against Iran, and the Strait of Hormuz allows some vessels to pass through, leading global markets to stop falling and oil prices to pull back. On March 26, Trump said on a social platform that “we will pause strikes against Iran’s energy facilities for 10 days.” Meanwhile, from March 23 to March 26, at least 12 vessels passed through the Strait of Hormuz. Global markets show signs of a pullback; among them, the Shanghai Composite Index rebounded 0.6% on March 27 in a single day, and the A-share market has stronger recovery elasticity. Oil prices have also declined. As of March 26, WTI spot had fallen from $98.71 per barrel on March 20 to $96.18 per barrel; Omani spot had fallen from $170.20 per barrel on March 23 to $113.20 per barrel.

However, judging from the U.S. military’s latest military deployments and Polymarket’s predictions, there is still a risk that the war will escalate in the future. On March 26, the U.S. military’s Iran military action plan “Plan Four for the final strike” was exposed. It involves controlling the Strait of Hormuz and capturing important islands such as Larak Island to achieve the goal of cutting off Iran’s external oil transportation. On March 28, the U.S. and Israel carried out what was the largest-scale bombing against Tehran in recent times, and on the same day, the Houthis launched missiles at Israel, showing that they have officially joined the war. The long-term expectation that the oil-price center of gravity will rise also makes the Federal Reserve place even more importance on the economic consequences brought by inflation. Compared with a week earlier, the Fed’s probability prediction for a September rate hike this year increased from 6.1% to 20.4%. At the same time, according to Polymarket’s predictions and Trump’s May 15 visit to China arrangements, the war is expected to last at least 1 month. During this period, market expectations may experience multiple fluctuations, so pay attention to contrarian operations.

Under the globally synchronized adjustment over the past month or more, overall market expectations have leaned toward panic, but at present the market already shows signals that this medium-term adjustment is nearing an end. Looking back at past medium-term adjustment cases, the total A-share trading amount would be adjusted to anywhere from 40% to 80% of the previous peak, and the Shanghai Composite Index has mostly fallen below the 60-day moving average. At the moment, all three major indices meet the above conditions. Also, this month the Shanghai Composite Index’s maximum drawdown reached 8.8%, and the number of A-share limit-downs on March 23 was 144. Panic selling is typically a sign that the medium-term adjustment phase in a bull market has ended. Therefore, the current adjustment is relatively sufficient. It’s recommended to wait for long signals and deploy positions at the right time.

In addition, the long-term foundation of this bull market is the re-rating of China’s assets driven by capital market reforms, and this logic has not changed. From September 2024 to now, capital market policies have been issued intermittently, such as guiding insurance funds and increasing the entry efforts of social security funds, and lowering risk factors related to certain businesses for insurance companies, etc. Meanwhile, the frequency of active interventions by regulators is also higher, for example, last April’s national team supporting the market during the tariff war, and this January’s regulatory cooling of overheated trading. Left-side capital can gradually initiate its allocation timeline and capture China’s advantaged assets.

二. Seize China’s advantaged assets

In our strategic reflections over the past few issues, we have repeatedly emphasized that China is entering a new strategic window of opportunity. This refers not only to strategic initiative in geopolitics, but also to the strategic opportunities brought to China’s energy industry, manufacturing sector, and the entire RMB asset universe by the dual-pillar energy foundation of “coal + new energy.” Therefore, although the global economy and markets face the dual pressure of inflation and recession, China’s economy benefits relatively more. The A-share market is expected to lead global stock markets, so it’s recommended to continue to capture China’s advantaged assets.

In terms of industry allocation, asset allocation can follow the following four approaches: First, closely follow the main line of energy security and high inflation. Under the pressure of an unstable supply chain, coal-to-chemicals and new energy can serve as substitute resources to reshape manufacturing. Pesticides and chemical fertilizers are expected to rise in price if raw-material costs such as natural gas increase; Second, stick to defensive assets with stable cash flow—for example, coal and hydropower with high dividend yield and stable dividend characteristics; Third, mine for certainty in growth that the market sentiment has unjustly sold off—for example, AI computing power and innovative drugs that already have clear prosperity logic; Fourth, focus on potentially prosperous sectors with low valuations. They may become the beneficiaries of the current environment of tighter liquidity with valuation shifts from high to low—such as consumer sectors that currently have lower trade crowding.

Closely follow the main line of energy security and high inflation

China’s coal-to-chemicals assets can substitute for petroleum in terms of raw material applications, alleviating shortages caused by war and political turmoil. The International Energy Agency (IEA) divides oil consumption into fuel use and feedstock use. Globally, they account for approximately (80%-85%) and (15%-20%), respectively. Among them, fuel uses of oil—such as gasoline/diesel and aviation kerosene—lack large-scale physical substitutes in the short term when the strait is blocked and oil is scarce. But for feedstock uses—such as producing olefins and aromatics from naphtha—China’s modern coal-to-chemicals industry has potential for substitution.

Within the downstream chemical products gap created by naphtha production, the aromatics gap cannot currently be effectively replaced at scale by coal-to-chemicals, while the olefins sector can be replaced by coal-to-chemicals, and coal-to-olefins production in 2026 will come with larger-scale capacity launches. Moreover, if oil prices remain high, higher capacity utilization of coal-to-ethylene glycol, and coal-based PVC via the calcium carbide method, etc., will also bring additional incremental demand for coal.

Given the logic that China has formed advantages across the entire power equipment industrial chain, North America’s AI computing investment continues to increase, Europe’s energy urgently needs to transition, and lithium batteries face tighter supply and demand, sectors such as new energy, energy storage, lithium batteries, and power grids are expected to rise. The domestic energy storage market-oriented mechanism has been fully implemented, and governments in multiple provinces and cities have listed energy storage as a key annual work item; Europe’s energy vulnerability, accelerated by the U.S.-Iran conflict, is shifting from diversified oil and gas toward fully embracing renewables. In the U.S., AI computing investment is favorable for power construction and transmission sectors, benefiting new energy, energy storage, and grid-related sectors. Meanwhile, as the power grid promotes “using energy storage to build and delaying some construction with storage instead of building,” driving up lithium battery demand, together with Zimbabwe pausing lithium exports, supply and demand for lithium battery materials is tightening.

Benefiting from rising raw-material costs, pesticide and fertilizer companies have a cyclical upswing logic. Global fertilizer production is highly dependent on natural gas and mineral resources such as potash and phosphate. High energy prices directly increase fertilizer production costs, while geopolitical conflicts affect trade flows of key raw materials. China has a relatively complete coal-to-chemicals industrial chain at the “coal head” and some assurance of potash fertilizer resources. The pesticide technical-grade supply chain is also relatively complete. Against the background of rising global agricultural input prices and increasing anxiety about food security, related sectors are expected to benefit.

Keep to defensive assets with stable cash flow

In the stage when the market is looking for support and risk appetite is declining, high-certainty cash flow and dividend assets are important “stabilizers.” The coal sector’s profitability is stable under tight supply-demand balance, and its high dividend characteristics are prominent. Utility sectors such as hydropower have stable cash flow and are less affected by fluctuations in fuel costs, making them classic defensive choices.

Mine for certainty in growth that the market sentiment has unjustly sold off

A rapid decline in market sentiment may lead to indiscriminate selling of some high-quality growth sectors, while some industries may also release short-term negative news fully or have their prosperity cycle nearing a turning point, giving them rebound potential.

The logic for AI computing power infrastructure remains unchanged and is strong. Global AI computing capital expenditures in 2026 have already seen substantial and continuous upward revisions since 2025. Recently, the incremental pace of capital spending has slowed, and raising prices in the chain is becoming the sector’s main driver instead of capex. Against the backdrop of a global AI boom, demand across multiple links in the industrial chain is outstripping supply—bringing definite positive support to storage chips, PCB materials (glass-fiber electronic fabric, MLCC), optical modules, liquid cooling, advanced packaging and testing, and data center power supplies (grid equipment, gas turbines), etc. Short-term adjustments do not change the long-term trend.

The innovative drugs sector has recently received multiple positive signals and has strong upward momentum. Although the sector saw some period-by-period adjustments earlier, the global competitiveness of domestic innovative drugs continues to improve. The process of going overseas is accelerating continuously. In the past two years, the number and value of out-licensing BD transactions for external parties have repeatedly hit new highs. As overseas Phase III clinical trials are gradually advanced, the上市 certainty for related products and the potential peak sales have been significantly strengthened, and valuation increases as well. At the same time, the prosperity level across the innovative drugs industrial chain has fully rebounded. Domestic-demand-based CRO orders show a trend of both volume and price increasing. After overseas geopolitical risks are gradually cleared, the irreplaceable position of domestic CDMOs in the global supply chain is further consolidated. In addition, demand in new molecule areas such as ADCs and bispecific antibodies has surged. With strong growth certainty in companies’ performance across the industrial chain, all of these together form a solid foundation for the sector’s long-term positive outlook.

Focus on potentially prosperous sectors with low valuations

Due to geopolitical conflicts pushing up oil prices and inflation triggering liquidity concerns, when liquidity tightens, funds often switch from high-valuation sectors to low-valuation sectors. At the same time, the consumer sector’s valuation is relatively lower and is not affected by rising oil prices, so it is recommended to pay attention.

The consumer sector has a clear recovery trend recently, and allocation value remains strong. As domestic consumer sentiment warms up and the domestic demand market steadily recovers, consumer healthcare has become the core track that will lead efforts first. The demand space in the medical services field is broad. Companies like Aier Eye Hospital and Tongce Medical, as leading enterprises, are expected to release substantial growth elasticity after consumer confidence recovers, thanks to their strong competitive advantages. The food and beverage sector also has some companies whose annual report performance exceeded expectations. For example, Haitian Flavor Industry’s 2025 full-year revenue surpassed 28.8 billion (RMB), and attributable net profit reached 7.038 billion (RMB). At the same time, the consumer sector is not affected by rising oil prices. Under unstable conditions in the Middle East, it has stronger attractiveness.

（1）The effect of domestic demand-support policies is weaker than expected. If subsequent domestic real-estate sales, investment, and other data still fail to recover, and inflation remains subdued and consumption does not show clear improvement, with companies’ profit growth continuing to decline, then the economy’s recovery would ultimately be falsified. In that case, the overall market trajectory will face pressure, and overly optimistic pricing expectations will need to be corrected.

（2）Risks from intensified strategic game between China and the U.S. Increase. Be alert to the risk of expansion and intensification in the areas of strategic competition between China and the U.S. For example, strategic competition could expand from trade into multiple domains such as technology, critical resources, finance, shipping, logistics, and the military. If full-scale strategic conflicts emerge, it may affect normal economic activities and also hit equity markets.

（3）Volatility in the U.S. stock market exceeds expectations. If the U.S. economy deteriorates more than expected, or if the Federal Reserve’s easing is less than expected, it may lead to significant volatility in the U.S. stock market. At that time, it will also spill over into domestic market sentiment and risk appetite.

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