The stock market plunge is not a sign of stagflation pricing! HSBC in-depth analysis: the market is currently pricing in recession risk, but there are structural imbalances and overselling.

Since the US and Israel launched strikes on Iran, global stock markets have fallen by 5%. Analysts at HSBC believe that, from a macroeconomic perspective, this decline is "basically reasonable." However, the bank pointed out in a research report that there are "significant structural misalignments beneath the surface of the market," with many stock markets being oversold relative to fundamentals. HSBC's model shows that recent market rotations "more reflect the market pricing in recession risks rather than stagflation risks." Currently, the probability of an economic recession has risen to 35%, a significant increase from 10% two weeks ago. Alastair Pinder, Head of Global Emerging Markets and Global Equity Strategy at HSBC Global Investment Research, stated that the implied probability of stagflation in the market has remained unchanged at around 8%. The bank's data shows that this shift correlates closely with the performance of cyclical sectors being 9% behind defensive sectors since mid-February. Pinder added that the substantial closure of the Strait of Hormuz, causing the "largest physical supply disruption in oil market history," has become a major pain point for the stock market. According to sensitivity analysis of stock market returns to oil price shocks, if the supply bottleneck continues to push up oil prices, European markets such as Germany, the Netherlands, Belgium, and France may underperform, while markets with high energy weights like Norway, Saudi Arabia, the UK, Canada, and Brazil may show greater resilience. HSBC's research also found that some emerging markets have been "wrongly killed" in this round of volatility: South Korea, South Africa, and Indonesia have been oversold by 5-10%. Strategists point out that these markets are showing increasingly attractive valuations, especially given their limited exposure to rising oil prices. The research team also mentioned that about 10% of the 23% decline in the UAE market cannot be explained by fundamentals - although this gap may reflect the geopolitical risk premium implied in the current market. For investors seeking to adjust their holdings, HSBC recommends focusing on the materials, industrial, and financial sectors, believing that these areas have advantages in the current environment. The bank advises investors to "prioritize positioning in cyclical sectors that remain resilient in a stagflation environment" and recommends specific sectors such as metals and mining, industrial, and banking based on their stagflation defense rating.