CICC: Iran's situation in April is likely to remain volatile, and it is recommended to respond on three levels.

Zhitoong Finance APP learned that, according to a research report released by CICC, in the short term—especially the April situation—there is a high likelihood it will keep fluctuating and repeating; in the medium term, the final loss of control is still not the baseline scenario. Without considering the Iran situation, the second quarter is already a relatively weak phase of China’s credit cycle. It is recommended to respond in three tiers: 1) If your position is light, you can take a left-side layout; assets that have already fully reflected pessimistic expectations, such as Hengke, gold, innovative drugs, and others. 2) If your position is heavy, you can modestly reduce exposure, or hedge volatility with low-volatility dividend-style assets. 3) For beneficiaries such as energy storage and coal, they can be held, but because consensus is converging and trading is crowded, it is also not advisable to chase gains excessively.

CICC’s main views are as follows:

1. EPFR basis (as of Wednesday): active foreign capital outflows from Hong Kong stocks were $90 million (vs. outflows of $330 million last week). Outflows from A-shares were $110 million (vs. outflows of $90 million last week).

Passive foreign capital outflows from Hong Kong stocks were $670 million (vs. inflows of $370 million last week), and outflows from A-shares were $970 million (vs. inflows of $820 million last week).

By source, there were more fund outflows focused on China and Asia excluding Japan.

2. Southbound: still volatile. On Monday and Wednesday there were outflows, while on Tuesday and Thursday there were inflows. Total inflows were HK$5.37 billion (vs. HK$25.1 billion inflows last week). Average daily inflows were HK$1.34 billion (vs. HK$5.03 billion inflows last week). The largest inflows were into Tencent (00700) and Xiaomi (01810). Among the outflows were CNOOC, Hengke, and Alibaba (09988).

The Iran situation has entered its 6th week. After an initial rapid release of sentiment, the market in the past one or two weeks appears to have entered a relatively “stable period,” but this calm can be easily broken. First, there are less than two days left until April 7 from the time Trump previously delayed the restart of attacks. Second, as time keeps passing, if the market realizes that the impact will gradually change from the earlier “paper” concerns at the sentiment and trading level to an “actual” shock to production activities, then the pricing will also need to be reset.

For example, since the outbreak of the conflict, earnings expectations in the U.S. stock market and the A-share market have actually been revised upward by 4% and 1.5%, respectively. The downward revisions to earnings in Hong Kong stocks are mostly related to structural drag from their own industries, not because of high oil prices. This shows that the pricing of earnings relative to the oil-price shock has not yet fully manifested, which is one of the reasons why the equity market’s pricing of pessimistic scenarios is generally insufficient.

Looking ahead, April is a key turning point. In addition to whether the situation itself escalates, it is also important to focus on Southeast Asia. Based on normal vessel speeds, in early April oil tankers across East Asia will enter a state of “actual supply interruption.” Pay attention to whether production activities in Southeast Asia—identified as a “weak link”—are affected. If that proves to be the case, the market may quickly shift toward recession-trade positioning.

The U.S. March nonfarm payrolls released last Friday once again significantly exceeded expectations, but upon closer inspection of the internal structure, this data does not look as strong on the surface either: 1) The main “rebound” is the result of the fade-out of strike and weather-related factors. 2) Employment in the financial and information services sectors continues to decline, reflecting the negative effects of AI on employment substitution. 3) Wage growth has fallen both month-over-month and year-over-year. Therefore, for the Federal Reserve’s decision-making, the oil-price trend remains the main contradiction, and the marginal impact of this nonfarm data is limited. As long as the conflict does not persist into the second half of the year—leading to the oil-price center of gravity staying above $100—the Federal Reserve can still cut rates.