Huatai Securities A-Share Strategy: Waiting for the Right-Side Signal Amidst Geopolitical Fluctuations

Huatai Securities’ A-share strategy says that last week, with the Middle East situation fluctuating repeatedly and the market continuing to trade in a range, and with capital seeking safety ahead of the Qingming holiday, the tracked A-share sentiment index is still in the “panic” range. Structurally, electricity, new energy, and coal—benefiting from geopolitics and high oil prices—have seen funds realize profits due to relatively high crowding, while communication and innovative drugs with low correlation have performed remarkably; earnings in the reporting season that exceeded expectations have also become a new trading catalyst. The odds of a long-side setup on the left may gradually rise, but before the geopolitical situation becomes clear, it is not advisable to make a one-sided bet. It is recommended to continue waiting for right-side signals. In addition, even with the stronger-than-expected Nonfarm Payrolls data, investors still need to be wary of the risk chain of oil prices rising → inflation moving higher → liquidity tightening. In terms of allocation, it is recommended to control position sizes and leave room, and in the short term maintain some defensive and low-correlation asset allocation, such as dividends, AI computing power, innovative drugs, etc. In the medium term, allocate on dips around the two main themes: the power sector chain and valuation/cyclical momentum.

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Huatai | A-share Strategy: Wait for Right-Side Signals as the Geopolitical Situation Keeps Fluctuating

Last week, the Middle East situation fluctuated repeatedly and the market continued to trade sideways; in addition, with funds seeking safety ahead of the Qingming holiday, the A-share sentiment index we track is still in the “panic” range. Structurally, electricity, new energy, and coal—benefiting from geopolitics and high oil prices—have seen funds realize profits due to relatively high crowding, while communication and innovative drugs with low correlation have performed remarkably. Earnings during the reporting season that exceeded expectations have also become a new trading catalyst. The odds of a long-side setup on the left may be gradually increasing at present, but before the geopolitical situation becomes clear, it is not advisable to make a one-sided bet. It is recommended to continue waiting for right-side signals. In addition, even under stronger-than-expected Nonfarm Payrolls data, investors still need to watch out for the risk chain of rising oil prices → higher inflation → tightening liquidity. In terms of allocation, it is recommended to control position sizes and leave room; in the short term, maintain some defensive and low-correlation asset allocation, such as dividends, some oversold AI computing power, innovative drugs, etc. In the medium term, allocate on dips around two main themes: the power sector chain and valuation/cyclical momentum.

Key viewpoints

Point one: With repeated fluctuations in geopolitical expectations, visibility remains limited

The Middle East situation is still the main contradiction in the current global asset pricing. On the evening of March 31, according to a report by CCTV News, both the U.S. and Iran signaled their willingness to end the war, and the market saw the start of TACO trading. But immediately afterward, on April 2, Trump delivered remarks saying that over the next two to three weeks the U.S. would carry out extremely severe strikes on Iran, causing risk appetite to fall again. Vacation incremental information is mixed: 1) signs that military conflict may further escalate; 2) the number of voyages through the Strait of Hormuz has risen somewhat, but it remains far below the level before the outbreak of the conflict; 3) according to CCTV International News, Trump will delay the “last ultimatum” by one day to April 7, and Iran has also said it is reviewing the latest ceasefire proposal from the mediator. In terms of asset performance, on April 6, Brent crude opened higher and then fell back; U.S. stock index futures opened lower and then turned red; after Japan and South Korea’s stock markets opened higher, they traded in a range throughout the day and closed higher; risk appetite recovered slightly. Overall, there is still a risk of escalation in the conflict, but the possibility of reaching an agreement has not been ruled out, and the geopolitical situation remains unclear.

Point two: The stagflation trade may be transitioning from Phase 1 to Phase 2

Even if the U.S.-Israel-Iran conflict gradually eases afterward, it is still necessary to pay attention to the medium- and long-term impacts under high oil prices and supply shocks: First, inflation expectations rise, and global liquidity faces tightening pressure. The U.S. March Nonfarm Payrolls data released last Friday exceeded expectations; market expectations for rate cuts were revised again. Currently, market pricing for the Fed implies no rate cuts this year and even one rate hike. The probability of the BOJ raising rates in April has also risen to 70%. Goldman Sachs’ Financial Conditions Index has risen sharply (the higher it is, the tighter it is). Second, price increases suppress demand, and growth expectations may be downgraded. Bloomberg’s consensus prediction of recession risk has risen to 30%. Currently, the stagflation trade may be in the stage of transitioning from trading “inflation” to trading “stagnation.” In our April 5 note “The Three Stages of the Stagflation Trade—Comparing Similarities and Differences from the 1970s and 2022,” we mentioned that liquidity pressure is gradually being released, but it has not fully priced in a downturn in growth; the domestic assets to watch revolve around the expectation gap in rebalancing domestic and external demand.

Point three: In the earnings season, focus on directions where improving fundamentals show staying power

Since March, the cyclical-conditions indicators we track have declined somewhat, but the actual annual report performance is higher than the average drawdown of individual stocks in the A-share universe that is significantly smaller than the average implied drop based on Wind’s consensus forecast at the end of February. In the earnings season, fresh trading leads have emerged around earnings that exceed expectations. Our meso-level cyclical model shows that in March, the industry-wide cyclical index continued to rebound, corroborating the rebound in the PMI that also exceeded expectations, indicating that endogenous momentum has some resilience. At the industry level, signs that improving fundamentals may have staying power include: 1) “price hikes spread”: petrochemicals, coal, parts of chemical products, building materials for consumption, and minor metals’ cyclicality rebound that appears sustained; 2) “AI narrows the circle”: upward momentum in optical communications, gaming, and others; 3) the domestic–external demand scissors gap narrows: cyclicality rebounds in dairy, white goods, etc.; 4) some capital goods and independent cyclical categories: marine equipment, construction machinery, and improvements in pharma cyclicality.

Maintain defensive and low-correlation allocation in the short term; in the medium term, position around the power sector chain and valuation/cyclical momentum

At the macro level, until external uncertainty is resolved, the market remains in a period of range trading. In terms of style, value in the short term may still be relatively favored, but the risk–reward profile of growth versus value has already improved somewhat; once risk appetite stabilizes and recovers, growth may gradually regain its lead. At the industry level, in the short term it is advisable to control position sizes and leave room, and continue to maintain defensive and low-correlation allocations, such as dividends, some oversold AI computing power, innovative drugs, etc. In the medium term, allocate on dips around two main themes: the power sector chain (lithium battery materials, power equipment, power utilities, etc.) and valuation/cyclical momentum.

Risk alert: external risks beyond expectations; liquidity less than expected; domestic fundamentals less than expected.

（Source: People’s Financial News）