Are various asset classes fully pricing in the Middle East situation? Gold, stocks and bonds differ

Since the outbreak of the US-Israel conflict, market trading logic has shown a dual structure to some extent. On one hand, “HALO trading” continues to attract attention. On the other hand, there is an arbitrage layer involving a betting reversal called “TACO” trading.

However, recently, the escalation of tensions in the Middle East has led to the Strait of Hormuz being blocked, impacting the global energy market. If the blockade persists, the effects of high oil prices will need to be factored in. The global economy, led by the US, may face stagflation risks, corporate earnings could decline, affecting valuations, and the Fed’s rate cut expectations have diminished. Liquidity tightening further impacts asset pricing.

From the transmission chain, various major assets such as copper, gold, and US Treasuries may have already priced in the “no rate cuts this year” expectation. Equity markets reacted relatively slowly, but volatility is increasing, and there is still room for a pullback. Compared to US stocks, Hong Kong’s Hang Seng Index and Hang Seng Tech Index had already fallen significantly before the Middle East tensions escalated, while major A-share blue-chip indices have shown some resilience.

Impact of the Escalating Conflict on Asset Pricing

The US-Israel conflict has been ongoing for nearly a month, with the situation continuing to escalate. On March 23, spot gold fell below $4,200 per ounce, erasing this year’s gains; global stock markets plunged sharply due to panic selling triggered by the escalation of Middle East tensions (US-Iran situation). Major markets such as the US, A-shares, and Japan were all affected.

Looking at different assets, the market no longer seems to expect the Fed to cut rates in the near term. However, expectations for different assets regarding the conflict and oil price paths vary, and some risks have been somewhat released.

CICC’s overseas strategy team led by Liu Gang believes that bond market expectations are the most pessimistic. After recent corrections, copper and gold have quickly moved toward tightening expectations. Conversely, equity market expectations are not fully priced in. If the situation worsens to extreme scenarios, there could still be a risk of a correction.

“Oil at $100 is a ‘watershed’ that will push inflation peaks from 2.8% to 3.5%, roughly matching the current federal funds rate (3.5%–3.75%), meaning the Fed will find it difficult to cut rates in the short term. However, after a brief rise, rates could fall again in the second half of the year, mainly delaying rate cuts,” Liu Gang’s team estimates. They believe the Fed can still cut rates in the second half unless oil prices remain above $100 through Q3 and Q4.

From the transmission chain perspective, various major assets like copper, gold, and US Treasuries may have already priced in the “no rate cuts this year” expectation. Equity markets react relatively slowly, earnings have not yet fully incorporated the impact of sustained high oil prices, but volatility is increasing.

Liu Gang’s team states that if the situation continues to escalate, US stocks could face a 10% correction. The Chinese market shows divergence: if US bond yields and the dollar stay high, there will inevitably be some impact on Hong Kong and A-shares. However, indices like Hang Seng Tech, which have already fallen sharply and are undervalued, along with blue-chip A-shares supported by policy funds and with incomplete capital account opening, are likely to be more resilient.

Long-term Investment in Hong Kong IPOs by Middle Eastern Funds

Sources indicate that current interest rates, exchange rates, and foreign capital flows have not shown significant abnormal fluctuations, and there are no signs of systemic capital shifts yet. Multiple research institutions monitoring the market suggest that Middle Eastern funds’ short-term risk-avoidance behavior in secondary markets is not obvious. Their movements are more reflected in strategic allocations in primary markets, such as cornerstone investments in Hong Kong IPOs.

Guotai Junan Securities’ strategy team led by Liu Chenming believes that this year, Middle Eastern funds have gradually extended from previous cornerstone investments in EV supply chain companies like CATL to sectors such as Minimax, Jingfeng Medical, and Dongpeng Beverage. This may indicate that they have accumulated a substantial return base in Hong Kong’s primary market, prompting a moderate expansion of their investment scope.

Even when investing in secondary markets, Middle Eastern sovereign funds tend to prioritize long-term returns, preferring Chinese assets aligned with domestic strategic industries with growth potential. Private wealth funds, with strong family attributes, are more inclined toward diversification, risk hedging, and value-added strategies.

According to Huatai Securities, based on different Middle Eastern investor preferences, these funds may flow into strategic sectors such as renewable energy, digital economy (AI, digital infrastructure), high-end manufacturing, and low-risk dividend stocks. They may also consider real estate, infrastructure, and other alternative assets to meet their needs for investment security, compliance, and long-term returns. Private wealth tends to be more conservative, focusing on asset preservation and steady appreciation. Hong Kong’s high-dividend stocks are a significant asset class suitable for increasing Middle Eastern private wealth allocations.

Currently, there is no clear sign of Middle Eastern risk-averse capital entering Hong Kong markets, but Hong Kong’s large and mature asset and wealth management industry provides a solid foundation for attracting foreign investment. Future growth in Middle Eastern demand could further boost local private banking, insurance, and wealth management services.

Proofread: Yang Lilin