China Galaxy Securities: The global asset pricing logic is changing in the backdrop of high oil prices, high inflation, and high interest rates.

China Galaxy Securities released a research report stating that in the context of high oil prices, high inflation, and high interest rates, the global asset pricing logic is undergoing a change. The U.S. bond yield is more vulnerable to inflation and supply factors, with upward pressure on long-term interest rates, gold has allocation value in inflation and uncertainty environment, and the central uplift of oil prices has become an important constraint. The U.S. dollar is still supported by safe-haven and liquidity in the short term, but faces adjustment pressure in the medium term under fiscal pressure and reserve diversification background. The attractiveness of RMB assets will increase, China is far from the core conflict areas, there is still policy space, and strong industrial chains and supply capabilities give it an advantage in terms of "stability". A-shares are temporarily affected by external disturbances, but there are still structural opportunities in areas such as power equipment and high-end manufacturing; Hong Kong stocks are more affected by foreign capital flows, with high volatility, but are becoming more attractive to medium- and long-term funds in a context of low valuation. The main observations of China Galaxy Securities are as follows: This week marks the fourth week of the US-Iran conflict, with the rhythm shifting towards more frequent ongoing confrontation. Ali Larijani was killed in an air strike, energy facilities, ports, etc. were targeted, and signs of spillover from the conflict to the Caspian Sea and the Gulf have also emerged. There is differentiation between the U.S. and Iran in terms of targets, with Iran clearly rejecting a ceasefire, making it difficult for a quick resolution in the short term. After disruptions in the Strait of Hormuz, despite efforts to mitigate the impact through releasing reserves, the U.S. has released Iranian oil in transit, and the IEA is pushing for large-scale joint releases. However, in addition to supply itself, costs such as transportation, insurance, and inventories are rising, causing oil prices to operate at a higher central point and not quickly fall after rising. With high oil prices, the monetary policy space of the Federal Reserve is clearly narrowing. With high oil prices, the monetary policy space of the Federal Reserve is clearly narrowing. The interest rate remained unchanged at the March meeting, with the dot plot showing that most officials only support 0-1 rate cuts, while raising the 2026 inflation forecast to 2.7%. Powell also directly mentioned the impact of oil prices on inflation at the press conference, stating that there will be no rate cuts until inflation does not fall further. The statement included new expressions of uncertainty in the Middle East. Market expectations for no rate cuts for the whole year have significantly increased after the meeting, and both interest rates and the U.S. dollar have risen. With the expansion of U.S. bond supply and weakening demand, long-term interest rates face sustained upward pressure. As of March, U.S. federal debt had approached $40 trillion, the expansion rate having accelerated significantly in recent months, coupled with foreign military spending and long-term fiscal deficits, the demand for bonds is still rising. At current interest rate levels, interest expenses are growing rapidly, possibly exceeding $1 trillion in the 2026 fiscal year. Demand is also changing, with high inflation depressing real returns, major foreign holders such as Japan and China having phased divestments by the end of 2025. Meanwhile, some oil-producing countries in the Middle East and emerging markets are gradually diversifying their reserves, reducing dependence on a single asset. In this context, U.S. bonds are no longer able to stably attract global safe-haven funds as they used to, with interest rates more vulnerable to a combination of increased supply and inflation expectations, leading to upward pressure on long-term yields. Historically, wars do not directly determine the trajectory of U.S. bonds, with the key factors being inflation and monetary policy environment. Whether it be the Vietnam War, the Reagan era, or the subsequent war on terror, changes in the scale of U.S. bonds often coincide with macroeconomic cycles. During the Vietnam War, interest rates rose mainly due to out-of-control inflation and changes to the U.S. dollar system, rather than simply increased supply; during the Reagan era, despite significant fiscal expansion, after Volcker's interest rate hikes suppressed inflation, rates actually fell; during the war on terror, the impact of supply expansion on rates was significantly weakened due to quantitative easing. Compared to these periods, after 2022, bond issuance and interest rates have risen simultaneously in a high inflation and rate hike environment. The current environment is closer to the latter, with constraints existing simultaneously between supply, inflation, and interest rates. In the context of high oil prices, high inflation, and high interest rates, the global asset pricing logic is undergoing a change. U.S. bond yields are more vulnerable to inflation and supply influences, with upward pressure on long-term interest rates, gold has allocation value in inflation and uncertainty environment, and the central uplift of oil prices has become an important constraint. The U.S. dollar is still supported by safe-haven and liquidity in the short term, but faces adjustment pressure in the medium term under fiscal pressure and reserve diversification background. The attractiveness of RMB assets will increase, China is far from the core conflict areas, there is still policy space, and strong industrial chains and supply capabilities give it an advantage in terms of "stability". A-shares are temporarily affected by external disturbances, but there are still structural opportunities in areas such as power equipment and high-end manufacturing; Hong Kong stocks are more affected by foreign capital flows, with high volatility, but are becoming more attractive to medium- and long-term funds in a context of low valuation. Risk factors: Geopolitical disturbances; uncertainty in Trump's policies; foreign interest rate cuts falling short of expectations; domestic policy effects falling short of expectations.