Industrial: A shares may trend towards "me-first" in the future, it is suggested to focus on oil price linkage and independent sector prosperity.

Industrial released a research report, stating that as the situation on the battlefield evolves, two major changes are occurring in the core contradictions of market pricing. The first is the transition of the trading core from "intensity escalation" to "repeated negotiations", and the second is the beginning of pricing the impact of high oil prices on the economy and policy orientation. After confirming these two major changes, as the market gradually dulls its negative response and the certainty advantages of domestic policies become prominent, A-shares are expected to increasingly trend towards "taking charge". Considering that high oil prices will continue to be the core variable in the global asset pricing narrative in the foreseeable future, the report recommends positioning oneself along two strategies: first, in the price hike chain, look for sectors where prices can be linked to oil prices and are likely to benefit from an upward trend in oil prices; second, in sectors with independent prosperity, look for sectors with minimal impact from rising oil prices. The main observations by Industrial are as follows: 1. After confirming the two major changes, A-shares are expected to increasingly trend towards "taking charge" The report summarizes four stages of the impact of oil price hikes driven by supply shocks on asset prices: 1) Panic trading: dominated by risk aversion, defensive assets have the advantage; 2) Reversal trading: as the intensity of conflicts decreases, structurally, there is a rebound in liquidity-sensitive sectors and the emergence of two major characteristics: "excessive rebound" and "taking charge" (prosperity advantage & policy bias); 3) Stagflation expectation trading: if oil prices remain high, the market will gradually shift towards stagflation expectations trading, favoring inflation-resistant assets; 4) Real trading: after the long-term trend of oil prices and policy responses become clear, the market returns to reality, trading based on fundamentals and policy. Looking at this week, the market has transitioned from the earlier stage of "panic trading" to the stage of "reversal trading" where the intensity of conflicts has relieved. However, as Iran's tough stance leads to a stalemate, triggering stagflation expectations trading to dominate once again. In the beginning of the week, Trump's "let's see" attitude triggered market expectations of reduced conflict intensity, possibly even nearing its end, leading to a drop in oil prices, while growth-oriented equity assets such as US and Chinese tech stocks and South Korean stock indices rebounded. However, as Iran continues to maintain its hardline stance against confrontation and blocking of the strait, the market realizes that the conflict may endure for a longer period of time. Consequently, as oil prices rise again, stagflation expectations trading seems to regain dominance. The shift in market trading direction stems from the escalation in geopolitical tensions, leading to the market beginning to price in high oil prices lasting for a longer period. This, in turn, will escalate inflationary pressures, tighten policy expectations, and impact various asset prices based on underlying logic. Industrial states that the core variable that will determine whether oil prices have a long-term impact on asset prices is whether high oil prices are maintained in the long term and eventually economic and policy orientations. While sharp fluctuations in oil prices may have a significant impact on short-term risk appetite, their long-term impact on the economy, policy, and asset prices is limited. However, if oil prices remain high in the long run and thereby influence the economy, inflation levels, and monetary policy orientation, it will fundamentally alter the operational logic of asset prices, resulting in lasting and profound effects. Currently, with tensions escalating and sustained high oil prices, the effects on the economy and inflation, as well as the transmission to policy orientation and asset prices, will indeed require continued tracking and attention in the foreseeable future. Nevertheless, as tensions persist and drive oil prices higher once more, it may trigger a second, larger "TACO" (Trump's erratic decision-making style), which could become a potential "expectation gap" in the future. For Trump, high oil prices and an uncertain battle scene present a liability, with rising military costs and mounting fiscal pressures necessitating urgent control over oil prices. The window for a regime change has passed, and the cost-benefit ratio of escalating the conflict has diminished. If oil prices climb again to reach a threshold that Trump cannot accept, or if they provoke a second round of larger "TACO", the direction of asset pricing will once again reverse. Currently, with some signals indicating a peak in conflict intensity, the core of market trading is transitioning from "escalating intensity" to "repeated negotiations", indicating that A-shares may increasingly trend towards "taking charge". With the US having achieved political objectives like "regime change" and military objectives like "targeted strikes", there is no longer any political interests or military motives to expand the conflict. As oil prices continue to rise, Trump may find it easier to make a "TACO" that Iran can accept, leading to the core of trading shifting from the previous "escalating intensity" to "repeated negotiations". Drawing from the experience of the Russia-Ukraine conflict in 2022, once the market conclusively priced in the escalating intensity of the first round of conflicts, as the market began to dull reception to downside risks and oil prices rose again, A-shares rebounded despite internal setbacks like epidemic lockdowns. Structurally, aside from sectors in the price hike chain like coal and Shenzhen Agricultural Power Group, property chains and travel chains benefiting from stable growth policies are also at the forefront, as the market starts to "take charge" and search for clues. Furthermore, as the market begins to assess the impact of high oil prices on the economy and policy orientation, the certainty of domestic policies will also become a core support for A-shares to take charge in the future. China's current commodity prices are still at a low level, with policy rates at historically low levels, allowing for tolerance towards input-driven inflation caused by rising oil prices, indicating significant policy response space. It is highly probable that policies will continue to focus on "stable growth" and maintain reasonably ample liquidity. The certainty of policies and the ample liquidity environment will become a core support for A-shares in maintaining resilience amidst this round of external shocks. In conclusion, as the situation on the battlefield evolves, two major changes are occurring in the core contradictions of market pricing. The trading core is transitioning from "escalating intensity" to "repeated negotiations" and beginning to price in the impact of high oil prices on the economy and policy orientation. After confirming these two major changes, as the market gradually dulls its negative response and the certainty advantages of domestic policies become prominent, A-shares are expected to increasingly trend towards "taking charge". 2. The Two Key Strategies for "Taking Charge" in March-April Looking at the calendar effects, the two main strategies structurally driving the market in March-April are price hikes and performance. On one hand, as post-holiday season enters the peak season for production and the economic activity peak known as "golden March and silver April", domestic price hike signals become more abundant, leading the price hike chain to exhibit strong excess returns in March-April. With the external geopolitical factors catalyzing the current situation, the logic of price hikes is further strengthened, consolidating market consensus on trading high. On the other hand, starting in March, as new economic data is revealed and the fundamentals become clearer following the quarterly financial reports, the correlation between stock prices and performance will gradually rise, reaching its peak in the latter half of April, making prosperity the core of market trading. 3. Two Strategies for "Taking Charge" under the backdrop of high oil prices Considering that high oil prices will continue to be the core variable affecting global asset prices in the foreseeable future, the report recommends positioning oneself along two strategies: first, in the price hike chain, look for sectors where prices can be linked to oil prices and are expected to benefit from an upward trend in oil prices; second, in sectors with independent prosperity, look for sectors with minimal impact from rising oil prices on their fundamentals. First, sectors where prices or profits are expected to be linked to the rise in oil prices will be an important clue in the "price hike chain" in the foreseeable future. Analyzing the correlation between industry absolute/relative returns and oil prices since 2010, the industries with higher positive correlation mainly include: non-ferrous metals, coal, oil and petrochemical industries, chemicals, steel, machinery, new energy, agriculture, and so on. Among these, there are three main logics for sectors benefiting from rising oil prices: Direct profit thickening: rising oil prices directly thicken profits for upstream energy-related industries such as crude oil extraction, oilfield equipment, and oil transportation, providing profit elasticity; Energy substitution: under high oil prices, the economic viability of other energy sources like coal, gas, coal chemical industry, and new energy becomes apparent, benefiting from the increasing demand for energy substitution; Cost-driven hikes: the rise in oil prices pushes up production costs for fertilizers, pesticides, and subsequently through the Shenzhen Agricultural Power Group, prices for farming. Second, look for sectors with independent prosperity and minimal impact on fundamentals from rising oil prices. Sectors with industrial trends and policy support such as AI and advanced manufacturing remain the classic fields, which after a cluster of pricing in external geopolitical risks in the short term, are likely to become relatively benefiting fields in the current geopolitical risk environment due to their minimal impact from oil price rises. By filtering out sectors showing upward revisions in earnings forecasts since the beginning of the year, the main focus lies on: AI: hardware (consumer electronics, components, computer equipment, communication equipment, electronic chemicals), software (gaming, digital media, IT services). Advanced manufacturing: new energy (batteries, motors, photovoltaic equipment, wind power equipment), military industry (navigation equipment, aerospace equipment), mechanical equipment (rail transit equipment, special equipment, engineering machinery), home appliance parts, commercial vehicles, medical services. Among these specialized directions, industries with relatively low increases in stock prices since the beginning of the year mainly include: North American computing power chain (communication equipment, components), downstream AI (gaming, digital media, computers), new energy (motors, batteries), military industry (aerospace equipment), mechanical equipment (engineering machinery, special equipment), pharmaceuticals, and more. From the perspective of benefiting from the rise in oil prices, new energy sectors, which combine their own prosperity logic with the logic of energy substitution, are expected to be strong areas in terms of certainty; looking at the area seeking further catalysts, the upcoming NVIDIA GTC conference is expected to provide a concentrated catalyst for the North American computing power chain (CPO, PCB, liquid cooling, power systems), warranting increased attention in the near term.