CICC: At a critical juncture, buy or sell?

Why does the Iran situation escalation trigger a deep correction in global markets?

On March 24, China International Capital Corporation (CICC) released a research report titled “Key Nodes: To Buy or To Sell?” predicting market trends amid the deep correction.

Market correction driven by external shocks, with the Shanghai Composite Index temporarily breaking below key levels.

On March 23, the A-share market experienced a sharp decline, with the Shanghai Composite Index, the Wind All A Index, and the ChiNext Index falling by 3.6%, 4.1%, and 3.5%, respectively. The Shanghai Index briefly dropped below the 3,800 level during the trading session. Stock markets across Asia-Pacific also saw significant declines, with the Korea Composite Stock Price Index (KOSPI) plunging 6.5%, and the Nikkei 225 and Hong Kong Hang Seng Indexes falling similarly to A-shares. The style and sector performance of A-shares also showed clear “valuation-cutting” characteristics: small and micro-cap stocks, which tend to have higher valuations, underperformed, with the Wind Micro Cap Index and CSI 2000 Index dropping 6.4% and 5.4%, respectively—more than the broader market. Sector-wise, stocks with inflation and energy substitution logic such as oil and petrochemicals, coal, electricity, batteries, and power grid equipment showed resilience. High-dividend-yield defensive stocks and sectors with better fundamentals like optical communications and PCB also held up relatively well. Conversely, consumer services and software sectors led the declines.

What is the market worried about? What is being traded?

We believe the primary reason for the sharp market correction is the escalation of the Iran situation. Recently, geopolitical conflicts have not eased but intensified. According to media reports, on March 21, U.S. President Trump demanded Iran open the Strait of Hormuz within 48 hours; otherwise, the U.S. would strike and destroy Iran’s power plants. Iran responded that if such threats were carried out, it would immediately take four punitive measures, including a full closure of the Strait of Hormuz. Since the U.S.-Iran conflict and the Strait of Hormuz blockade, crude oil prices have surged rapidly. Concerns about “stagflation” and even recession have influenced global trading behavior. From late February to now, the dollar index has risen, oil prices have climbed, and most risk assets globally have weakened, with gold prices also experiencing significant declines.

Market logic has shifted from initial emotional shocks to concerns about macroeconomic fundamentals and the real economy. In early March, when the geopolitical conflict first erupted, we published a report titled “How Will the Iran Situation Affect Chinese Assets?” analyzing the aftermath of 14 major geopolitical conflicts since 2000. We concluded that the initial impact on the stock market typically manifests as emotional shocks and risk premium jumps, characterized by increased volatility and capital reallocation from equities to safe assets.

After the emotional shock subsides, the focus will gradually shift to fundamentals and policy directions. The real changes in the global supply chain and macro environment driven by geopolitical conflicts will become the main logic. Recently, concerns in these two areas have risen: 1) Cost shocks and profit divergence. China, as a typical energy importer, faces rising energy prices that directly or indirectly increase costs across many industries. If these impacts spread to global trade, they could also affect China’s export demand. This concern has been heightened by rising oil prices, which has attracted increasing attention recently, affecting the capital markets and influencing profit forecasts for non-financial sectors of A-shares; 2) The linkage between macro inflation and interest rates. Rising oil prices boost inflation expectations, influencing the Federal Reserve’s monetary policy pace and direction. Historical experience shows that an early end to the global easing cycle would suppress equity market performance.

At this point, should you buy or sell?

In the short term, a rebound is possible, but attention should be paid to the evolution of the conflict and liquidity conditions in A-shares. As of the report release, there have been significant developments: media reports indicate that on March 23, Trump stated that the U.S. and Iran had engaged in “very good and productive” dialogue over the past two days, and the U.S. would “delay” strikes on Iranian power plants by five days. Subsequently, Iranian media cited the Iranian Foreign Ministry, stating that no dialogue exists between Iran and the U.S. Under these combined influences, oil prices have fallen sharply, gold prices have narrowed their declines, and U.S. stocks have rebounded. Short-term developments may trigger a rebound in A-shares, but ongoing developments and recent liquidity conditions—such as institutional redemption pressures—must be monitored. From a market stabilization perspective, it is important to guard against negative feedback from liquidity on the index.

Currently, the A-share market may be at a mid-term low point, and the deep correction has created a good opportunity for deployment. Although short-term trends remain uncertain, after the adjustment, risks in the A-share market have been further released. We believe valuations are at relatively reasonable levels. Using risk premium as a measure, as of March 23, the earnings yield of the CSI 300 index relative to the 10-year government bond yield was 5.5%, placing it at the 42nd percentile since 2010. The dividend yield of the CSI 300 is 2.7%, indicating a favorable risk-return profile. On a medium-term basis, the macro environment has not fundamentally changed, and the logic supporting a “steady advance” in A-shares remains valid. The risk release and correction may present good allocation opportunities. China’s manufacturing advantage is evident, and currently, AI is in a stage of technological iteration and application deployment. The demand for energy and costs in training new models is growing exponentially, supporting upstream demand and driving product price increases and profit improvements for related listed companies.

In terms of allocation, focus on several main themes: 1) Growth sectors benefiting from AI deployment, such as optical communications and storage; 2) Cyclical resource stocks—considering capacity cycles and supply-demand dynamics, sectors like power grids and chemicals that support price increases and earnings visibility; 3) High-dividend stocks may still perform well in a phased and structural manner this year, with attention to cash flow matching.