Renqiao Monthly Perspective | The impact of the conflict will weaken

Source: Renqiao Asset Management Author: Xia Junjie

In March, the fighting in the Middle East caused violent fluctuations in global markets, and Chinese assets continued to correct. Among them, the SSE 50 fell 7%; the CSI 300 fell 5.5%; the CSI 500 fell 12%; the ChiNext index fell 3.8%; and the Hang Seng Index fell 6.9%. One wave did not end, and another wave began. The Russia-Ukraine war that has lasted four years still shows no hope of a ceasefire, and the fighting in the Middle East has also erupted with renewed force. Judging by developments, the lightning war that the U.S. and its allies expected clearly failed. This echoes Minister of Foreign Affairs Wang Yi’s remark: “War is a wicked instrument; it should not be used carelessly,” and war has an inherent unpredictability. Global capital markets then quickly entered a risk-off mode, and judging from the performance of each index, the market’s drawdown is even more pronounced where valuations and gains had been overestimated. Looking ahead, although the course of the fighting remains confusing, we firmly believe Chinese assets will gradually develop immunity and are likely to be among the first to see a turning point.

The fighting in the Middle East is not the core contradiction in Chinese assets’ trajectory, and we will always adhere to this view. China is not a direct participant in the war, so the direct impact is certainly none. As for the indirect impact, it mainly comes from two areas:

First is oil prices. High oil prices increase China’s import costs. Although China is a net importer of oil and natural gas, China’s energy supply sources are diversified, and China has the most complete new energy system and coal-to-chemicals industrial chain, and is continuing to carry out low-carbon transitions; these advantages are not available to other countries. At the same time, high oil prices may drive inflation, but for China, deflation remains the biggest challenge facing the domestic economy at present. Whether oil prices can drive domestic inflation is a question for another time—even if there is an impact, objectively speaking, we do not need to interpret all factors that can help ease the domestic deflation environment in the current stage negatively. History has repeatedly proven that it is easy to manage inflation, but it is always very difficult to manage deflation.

Second, prolonged fighting creates expectations of a global economic recession, which in turn indirectly affects China’s external demand or exports. In fact, every year we worry about exports, about trade wars, about tariff wars, but exports have exceeded expectations year after year. As long as the situation is not a sudden stop like a global financial crisis, the strong competitiveness of China’s manufacturing sector has already been validated many times. In addition, thanks to the most complete and comprehensive manufacturing production system and supply chain, if the war causes supply-side problems among all parties, China’s production capacity may become the most direct beneficiary. Recently, similar situations have appeared in electrolytic aluminum and some chemical products. So, while the direction of the fighting is indeed impossible to predict, there is no need to be overly pessimistic about ourselves at this stage.

Back to domestic conditions: recently, based on the latest statistics, after the Spring Festival long holiday, there are signs that domestic consumption has weakened at the margin again. On the one hand, after the concentrated spending during the holiday, ordinary people have returned to the weekday pattern of “saving, saving, saving.” On the other hand, with no incremental policy measures in place, the continued decline in home prices and the stock market’s adjustment have also weakened residents’ wealth effect. Looking forward, according to the public statements made by relevant ministries and commissions at the Two Sessions, under the assumption that there will be no further incremental policy measures, we can likely expect that there will be additional room for domestic long-term bond yields to move lower. Of course, the recent rise in oil prices and its transmission to inflation still needs to be observed, but it likely will not change the trend. If long-term bond yields return to a downward channel, the biggest impact on the stock market would be that high-dividend assets will again win favor from the market, and the market’s style is also expected to shift accordingly.

Finally, in the near term, AI stocks have seen a notable correction, and U.S. stocks may see an even more pronounced one. Many investors believe it’s only a short-term disturbance from the fighting in the Middle East. We certainly are not that optimistic. On the contrary, we worry that the narrative logic behind AI may have undergone a qualitative change. Stock tops are often unexpected. In our June report last year, “On Small-Cap and New Consumption,” we directly faced the bubble in new consumption, but objectively speaking, no one could predict when labubu would top. Looking back now, although the bubble’s performance kept exceeding expectations, the stock price is already a different world from what it used to be—everything happened so suddenly, yet everything was inevitable.

All bubbles and cycles will eventually return.

Disclaimer: This article is written by Renqiao (Beijing) Asset Management Co., Ltd. The contents of this report are based on currently publicly available information that our company considers reliable, but our company does not guarantee the accuracy and completeness of such information. The contents are for reference only. Under no circumstances do they constitute investment advice to any person, nor do they constitute advertising or an offer for sale. There are risks in the market; investors should exercise caution.

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Responsible editor: Shi Xiuzhen SF183