Open-Source Strategy: Historical Review of Overseas Shocks, A-Shares Recovery Market Full of Potential

Report Summary

The market is still further confirming its expectations gap.

The Middle East conflict has entered its third week, with intensity and spillover scope significantly expanding. It has evolved from a single strike to a multi-dimensional risk covering energy facilities, shipping, and regional political structures. As we clearly stated in our 3.2 report “The Largest Expectation Gap in US-Israel-Iran Conflict—Duration and the Strait of Hormuz,” the market may be overly optimistic about a quick resolution of the US-Iran-Israel conflict: “The duration of the conflict and the Strait of Hormuz are likely the most apparent expectation gaps at present.”

Total Perspective: External shocks—position management is both a response and an extra source of returns

Since 2020, when facing public events that can trigger resonance across global equity assets, A-shares have shown strong resilience, with negative impacts usually ending within a week. When responding to short-term shocks, it’s better to “stay calm rather than act”; when shocks ferment over a longer period and impact scope is unclear, the priority is “reduce positions and control risks.”

Once the impact boundary of an event becomes clear or influence diminishes, it signals a re-entry. In our 3.15 report “The Next Signal: Volatility Convergence,” we proposed: The most important next signal is not the final level of crude oil prices, but when the volatility of crude oil prices converges.

At a high level, indices are likely to recover to pre-shock levels. Therefore, even if there is an unexpected escalation, holding cash to gain excess returns can be gradually increased, and positions can be added.

Equity Allocation: Dividend strategies dominate during adjustment periods; industry supply and demand are key factors for sector outperformance

In the face of global equity price fluctuations lasting over ten days, besides reducing positions and risk exposure, how should A-shares be allocated? Structurally:

(1) Style: Dividend assets are favored during adjustment periods, as the impact at the end of a bear market amplifies relative gains. Meanwhile, dividend assets are still risk assets in essence, with poor absolute returns.

(2) Industry: During overseas shocks and downturns: Sectors with independent industry cycles perform best. During the Russia-Ukraine conflict, sectors with strong demand included: medical and biological needs during COVID-19, energy security, and policy support for supply and stable prices (coal). The current Middle East situation follows similar logic: rising industry demand (upstream AI computing power and power grid equipment), energy security (coal, photovoltaics, hydropower, energy storage). Post-bottom rebound: ① Policy and industry supply/demand are critical for sector selection during rebound; ② There is a correlation with sectors that outperformed before the shock, such as consumer sectors from 2019-2021, which gained stronger recognition during the Russia-Ukraine crisis.

Investment Strategy—Mainly response, layout for recovery, focus on prosperity and policy opportunities

(1) Before the next key signal (crude oil volatility convergence):

**Defensive: **Smooth volatility with dividend base holdings. Consider high-dividend ΔG stocks: coal, non-bank financials, media, petrochemicals, transportation.

**Offensive: **Focus on rising industry demand (upstream AI computing power and power grid equipment), energy security (coal, photovoltaics, hydropower, energy storage).

(2) During index recovery (after crude oil volatility convergence):

Pre-shock sectors and unchanged industry logic: AI computing power (computing, storage, semiconductors, robotics), liquid cooling, power equipment, platform applications (AI4S); Potential reversal sectors: Asset-liability stabilization-driven consumption and service recovery (high-end commercial real estate, outdoor sports, tourism, hotels, catering).

Risk Warning: Macroeconomic policy surprises; geopolitical risks exceeding expectations; past performance does not guarantee future results.

Main Body of the Report

01

The market is still further confirming its expectations gap

This week, market indices showed divergence: Shanghai Composite -3.38%, Shenzhen Component +2.90%, ChiNext +1.26%, STAR Market -3.51%. Daily average trading volume was 2.21 trillion yuan, about 287.6 billion less than last week. Sector-wise, except for slight gains in communications and banking, most sectors declined, with non-ferrous metals, basic chemicals, and steel leading the downturn.

On Friday, the market rose then fell back, with increased divergence. The Shanghai Index broke below 4,000 points; ChiNext surged up to 3%. Leading gains were in energy and computing hardware weights, while small and micro-cap stocks lagged. Sector leaders included power equipment, communications, and coal, with photovoltaic, energy storage, and CPO sectors performing strongly. Computer, defense, and media sectors declined sharply.

This week’s market was still driven mainly by events, with risk aversion rising due to geopolitical concerns over the weekend. The conflict has entered its third week, with intensity and spillover scope expanding from a single strike to multi-dimensional risks affecting energy infrastructure, shipping, and regional politics. As we stated in our 3.2 report “The Largest Expectation Gap in US-Israel-Iran Conflict—Duration and the Strait of Hormuz,” the market’s previous underestimation and ongoing recognition of the expectation gap mainly involve three aspects:

(1) The duration mismatch from “AI surprise attack” to “mosaic quagmire.”

(2) The “physical rigidity” of the Strait of Hormuz blockade versus “production increase illusions.”

(3) US strategy of “watching and fighting” versus Middle East map support for the US.

02

Historical review: How has the Chinese A-share market performed during global public events?

Looking back, how did Chinese markets perform during global equity fluctuations? How did they respond?

First, since 2020, A-shares have shown increasing resilience to overseas shocks; second, most shocks saw index recovery within one month after bottoming out. All external shocks (except Russia-Ukraine) were recovered within three months to pre-shock levels.

Thus, even with the current uncertainty in the Middle East, if shocks escalate unexpectedly, holding cash for excess returns during position management is feasible, and equity positions can be gradually increased.

In terms of equity structure:

During the adjustment phase caused by overseas shocks: ① Style: When external shocks last longer, dividend assets dominate, and the impact at the end of a bear market amplifies relative gains. Also, dividend assets are still risk assets, with poor absolute returns; ② Industry: Sectors with independent industry cycles are most resilient.

During the rebound after bottoming: ① Sector selection: Policy and industry supply/demand are key; ② Sector performance: Contrary to market intuition, during rebounds, tech growth sectors do not always benefit from risk appetite recovery, and sectors like communications, computing, electronics, defense, and power equipment show higher proportions of negative returns and lower high-yield (over 10% or 20%) stocks.

We believe this phenomenon relates to the sectors that outperformed before the shock, such as consumer and blue-chip stocks from 2019-2021, which had stronger growth recognition.

From a medium-term perspective, technology remains a priority, following the “redistribution” logic driven by AI reshaping global wealth and controlling distribution channels; meanwhile, sectors with potential for expectation reversal, such as those with strong growth at the production end and narrowing investment drag, are worth exploring. As prices moderate, service consumption is expected to accelerate recovery, including high-end commercial real estate, outdoor sports, tourism, hotels, and catering.

(1) Pre-shock sectors and unchanged industry logic: AI computing power (computing, storage, semiconductors, robotics), liquid cooling, power equipment, platform applications (AI4S).

(2) Potential reversal sectors: Asset-liability stabilization-driven consumption and service recovery (high-end commercial real estate, outdoor sports, tourism, hotels, catering).

03

Investment Strategy—Mainly response, layout for recovery, focus on prosperity and policy opportunities

Compared to Russia-Ukraine, the current Iran situation shows more resilience in Chinese stocks. Short-term market turbulence caused by conflict escalation is expected to recover later. Sector and stock distribution shows that deep declines are lower than during historical extreme shocks, indicating controlled declines and structural differentiation.

From the impact perspective, the current geopolitical risk mainly causes indirect disturbances to China. Iran’s situation features non-localized, non-participating characteristics, mainly transmitted through energy prices, supply chains, and transportation. China’s energy dependence is relatively manageable, limiting the persistence of external shocks.

From the market environment: The shock occurs during a bull market phase, with the index center still capable of moving higher, and risk appetite remains resilient. Meanwhile, regulators continue to signal stability, and liquidity remains relatively ample, providing effective support.

Sector allocation suggestions:

Before the next key signal (crude oil volatility convergence):

(1) Defensive: Dividend base holdings to smooth volatility. Consider high-dividend ΔG stocks: coal, non-bank financials, media, petrochemicals, transportation.

(2) Offensive: Focus on rising industry demand (upstream AI computing power and power grid equipment), energy security (coal, photovoltaics, hydropower, energy storage).

During index recovery (after crude oil volatility convergence):

(1) Sectors with pre-shock logic unchanged: AI computing power (computing, storage, semiconductors, robotics), liquid cooling, power equipment, platform applications (AI4S).

(2) Sectors with potential expectation reversal: Asset-liability stabilization-driven consumption and service recovery (high-end commercial real estate, outdoor sports, tourism, hotels, catering).

04

Risk Warnings

• Macroeconomic policy surprises;

• Geopolitical risks exceeding expectations;

• Past data does not predict future performance.

(Source: Kaiyuan Securities)