Global asset re-pricing under geopolitical conflicts: China's assets demonstrate resilience

Xinhua News Agency, Beijing, April 1—On April 1, the Economic Reference News published an article written by reporters titled “Global Asset Repricing Under Geopolitical Conflicts: China’s Asset Resilience Has Emerged.” The article says that from the violent fluctuations in energy prices to the chain reaction in stock and bond markets, from visible liquidity shocks to pressure on sectors such as technology, the tremors from the Strait of Hormuz are now sweeping through global capital markets like a storm.

In the view of industry insiders, the long-term nature of the conflict and the inflation expectations it has brought, as well as global central banks’ expectations of monetary policy tightening, are exposing global assets to the risk of systemic repricing. However, amid intense turmoil in global financial markets, Chinese assets have demonstrated notable resilience thanks to their unique advantages.

“Energy” Has Become the Most Critical Variable

At local time on March 30, Iran’s National Security Council of the Iranian parliament approved a bill on charging fees for ships transiting the Strait of Hormuz.

“Whether the bill can actually be carried out still needs to be observed. But if it is ultimately implemented, it will significantly raise geopolitical risk in the Middle East, change the global energy and shipping landscape, and have far-reaching impacts,” said Dong Xiucheng, a professor at the University of International Business and Economics.

The Strait of Hormuz—an “artery” that carries one-fifth of global oil transportation—has, since about a month after the outbreak of the U.S.-Israel-Iran conflict, directly affected the stability of global energy supply and prices through its navigational conditions. Since the conflict began, international oil prices have risen sharply. On March 30, New York crude oil futures closed at $102.88 per barrel, the first time since July 2022 they have stood above the $100 mark. As of now in March, the cumulative increase has reached 53%. London Brent crude oil futures briefly broke through $118 per barrel during trading on March 31.

This trend may continue. Recently, international investment banks including Goldman Sachs and UBS have all raised their forecasts for future oil prices. Industry insiders also generally believe that the duration of high oil prices may be longer than previously expected.

“The length of time that high oil prices will persist is expected to mainly depend on the pace of restoring navigation through the Strait of Hormuz and the ‘OPEC+’ strategy for increasing production,” Dong Xiucheng said. Unlike several previous oil crises in history, this conflict is not simply a supply embargo or production cut of the kind that comes down to “unable to buy” or “unable to afford.” Instead, it is a comprehensive shock caused by disruptions to shipping through the Strait of Hormuz, with wider-ranging effects and slower restoration.

Miao Yanliang, chief strategy analyst at CICC Research Department, said that since actual production cuts by oil-producing countries in the Middle East have already formed and have changed the previous oversupply situation, the oil price center is very likely to be significantly higher than before the conflict.

In fact, the impact of this energy supply shock triggered by geopolitics has already gone far beyond the energy sector itself.

Shi Lei, Director of Asset Allocation at Hangzhou Sujiu Private Fund Management Co., Ltd., said that changes in energy prices affect many areas, such as chemical products, agricultural products, and electricity supply. The shock to energy supply is gradually evolving into a systemic supply shock covering the entire chain from production to distribution to consumption.

“First, cost shocks and the divergence of profits. Higher energy prices bring direct or indirect upward cost pressures to most energy-importing countries, and the impact is particularly more direct on industries such as aviation and petrochemical chemicals, and may damage real demand. Second, the linkage effect between macro inflation and interest rates. A sharp rise in oil prices could exacerbate the U.S. risk of stagflation and alter the Federal Reserve’s prior pace of rate cuts, and the environment of easier dollar liquidity would change directly,” Miao Yanliang said.

Global assets are undergoing a significant round of liquidity shocks. “One of the themes in global financial markets this year is liquidity decline, which first showed signs in January and February, and this geopolitical event has further accelerated that tightening trend,” Shi Lei said.

Wind data shows that as of March 30, since March began, the Dow Jones Industrial Average, the Nasdaq Index, and the S&P 500 Index have cumulatively fallen by 7.68%, 8.27%, and 7.78%, respectively. In the Asia-Pacific market, the Nikkei 225 Index and the Korea Composite Index have fallen by 11.83% and 15.48%, respectively. COMEX (New York Commodity Exchange) gold has dropped from a high of $5,472.3 per ounce to a low of $4,128.9 per ounce. Driven by rising inflation expectations and risk-avoidance sentiment, the U.S. dollar index has remained strong and has risen to its highest level since last May.

“Risk-avoidance sentiment is transmitting into financial markets. Trading volumes shrink, and selling pressure finds no buyers—indicating that the ‘cash is king’ tendency is strengthening in step among both institutions and retail investors,” said Deng Zhijian, senior investment strategist at DBS Bank (China). On the one hand, holders of cash are watching from the sidelines and not entering the market; on the other hand, holders of positions are reluctant to sell and find it difficult to turn holdings into cash, resulting in a tense state of “high cash holdings plus low trading willingness.”

Yao Yuan, senior investment strategist at the Asia Research Institute of BNP Paribas Asset Management, said that the market logic is to sell all risk assets except energy, with cash being king. “Although gold can theoretically hedge against stagflation, because it rose too quickly earlier, trading has become overcrowded. When risk-avoidance sentiment surges, gold becomes a ‘money-withdrawal machine,’ so the price also shows volatility,” Yao Yuan said.

The market is always changing, but the anchor remains unchanged. As Thomas Muscha, Wellington Investment Management’s geopolitics strategist, pointed out in a report released recently—“In this conflict, energy has been and will continue to be the most critical variable at the global macro level.”

Global Assets Face Systemic Repricing

In the view of industry insiders, the long-term nature of the conflict, the rise in inflation expectations it has caused, and global central banks’ expectations of tighter monetary policies together create the risk that global assets are facing systemic repricing.

“The prolonged conflict will export ‘stagflation-type’ institutional costs worldwide. For asset pricing, this means that valuation models over the past 20 years—based on low interest rates, globalization, and an emphasis on efficiency—are being systematically repriced,” said Tian Lihui, dean of the Financial Development Research Institute at Nankai University.

During last week’s so-called “Super Central Bank Week,” major global central banks including the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan held tightly scheduled monetary policy meetings. Judging from the signals released by the meetings, major global central banks have temporarily paused the easing process previously expected by the market in order to deal with potential stagflation risks.

In the view of Guan Tao, chief global economist at BOC Securities, global central banks are caught in a dilemma of “stable growth” versus “controlling inflation.” “From the perspective of financial asset pricing, at this stage global asset prices mainly price in inflation shocks, while ignoring the shock to economic growth from high energy costs. If the market later shifts to recession trading, the value of bonds for safe-haven allocation will stand out; equity assets face pressure for earnings downgrades; and commodity prices will be under pressure due to weakened demand,” Guan Tao said.

It is worth noting that among multiple asset categories, this energy supply shock has had a relatively large impact on technology stocks with high capital expenditures. “If rate hikes by central banks lead to tighter liquidity, market risk appetite will drop significantly, and technology companies will face challenges on the financing side, leading to capital expenditures falling short of expectations and affecting technological iteration,” Yao Yuan said.

In Miao Yanliang’s view, the impact of the energy supply shock on technology stocks with high capital expenditures mainly includes a risk premium shock, and at the real-economy level it also affects financing costs and supply chains to some extent. However, he said that for AI industry chains with relatively good medium- and long-term demand prospects, the current disruption may be more tilted toward the short term. Although AI has some bubbles, overall it remains relatively healthy and still has good investment value in the medium and long term.

Cao Liulong, chief strategy analyst at Western Securities, told reporters that investing in the technology sector is a major trend. But after a sustained rally in the technology sector, “conceptual narratives” alone may no longer be enough to move investors. Investors’ requirements for improvements in the fundamentals of technology companies and their ability to bring in “real money” will increase.

China’s Asset Resilience Is Gradually Emerging

It is worth noting that amid global financial market turbulence since March, China’s assets have shown clearly stronger resilience.

Wind data shows that as of March 30, the Shanghai Composite Index and the Shenzhen Component Index have fallen by 5.76% and 5.30%, respectively, since March, with declines significantly smaller than those of U.S. stocks and the markets in Japan and South Korea during the same period. In the currency market, the renminbi has appreciated by more than 1% against the U.S. dollar this year, outperforming other non-U.S. currencies.

Industry insiders generally believe that against the backdrop of increased uncertainty brought by geopolitical conflict, the certainty embodied in China’s economy and China’s assets will show clear advantages.

Meng Lei, China stock strategy analyst at UBS Securities, said that from a macro perspective, China’s dependence on oil and natural gas is lower among major global economies. Considering incremental macro policy, sparks of technological innovation, and ongoing reforms in the capital market and market capitalization management, the valuation of the A-share market is expected to be repaired in the medium term.

Tian Xuan, a Boya appointed professor at Peking University, said that Chinese assets, including the A-share market, will demonstrate unique advantages through relatively independent supply-chain resilience, a domestic demand market that continues to expand, and the advancement of technological innovation under policy leadership. “In particular, China has ample room in macro policy; its monetary policy is more flexible than that of other major economies; and fiscal policy continues to be strengthened to support technological innovation and industrial upgrading, providing more certain valuation support and long-term growth space for the A-share technology sector,” he said.

Miao Yanliang believes that in the long run, attention should be paid to how this geopolitical conflict affects the international order and overall configuration. Prolonged conflict means declining U.S. credibility and erosion of national strength. The status of U.S. Treasuries as a core safe asset may be shaken, and the logic that the safety of dollar assets declines may be further reinforced. Global capital flows will show a clear trend toward “fragmentation” and “diversification.” “Fragmentation” leads to funds returning to the home market, showing a strong home-country preference. “Diversification” encourages funds that were previously highly concentrated in dollar assets to seek new directions for allocation, and non-U.S. assets such as Chinese assets and gold may benefit relatively.

Huatai Securities’ latest research shows that among allocation-oriented foreign capital tracked by EPFR statistics, from March 18 to March 25, net inflows exceeded 5 billion yuan. Among them, active allocation-oriented foreign capital saw a net outflow of 630 million yuan, while passive allocation-oriented foreign capital saw a net inflow of 56.6 billion yuan.

“The core advantage of China’s assets in the current global chaos lies in providing ‘misalignment space’ at the macro cycle level and ‘certainty anchors’ at the institutional level,” Tian Lihui told reporters. “When Western major economies are deeply trapped in the dilemma of fighting inflation and recession, China has an independent monetary policy cycle and more room for fiscal efforts, which keeps Chinese assets from being subject to the extreme constraints of the global high-interest-rate environment.” (Reporters Zhang Mo, Wu Lihua, and Wang Lu)