Zhongjin: Middle East conflict causes global market volatility, A-share market mainly focuses on "defense and hedging" and "energy substitution" themes.

China International Capital Corporation released a research report stating that, from an industry perspective, since the outbreak of the conflict on February 28, the A-share market has mainly revolved around the two main themes of "defense and risk aversion" and "energy substitution." As of March 27, the utilities, coal, banking, and power equipment sectors have defied the trend and closed higher. Among them, utilities and banking are typical defensive sectors, while coal, power, batteries, energy storage, etc. are supported by the logic of energy substitution. Other sectors have experienced a general decline, especially sectors such as non-ferrous metals and national defense military industries that had previously accumulated large gains. It is worth noting that sectors directly related to the oil industry chain, such as petroleum and petrochemicals, and basic chemical industries, have experienced increased volatility due to short-term news-based speculation and concerns about medium to long-term demand, increasing the difficulty of allocation. China International Capital Corporation's main points are as follows: Market trends Since the outbreak of the conflict in the Middle East on February 28, there has been a significant differentiation in the trends of global asset classes. As of March 27, Brent crude oil prices have risen by 45.2%, the US dollar index has increased by 2.6%, the yield on US 10-year Treasury bonds has risen by 47 basis points to 4.44%, and COMEX gold has retraced significantly by 15.2%. In terms of equity markets, major global stock indices, especially in the Asia-Pacific region, have come under pressure, with the Korean composite index falling by 12.9%, the Nikkei 225 falling by 9.3%, the S&P 500 index and the Hang Seng index falling by 7.4% and 6.3% respectively, and the Shanghai Composite index showing relative resilience with a 6.0% pullback. Since the outbreak of the conflict nearly a month ago, the market trading logic has gradually shifted from the expectation of "short-term manageable conflict with quickly cleared risks" to a global focus on "rising inflation" and beginning to factor in risks of global growth weakening at the margin. The bank has reviewed the performance of assets after 14 major geopolitical conflicts in the past. The results show that in the initial stages of geopolitical shocks, the stock market often faces emotional shocks and rising risk premiums. This is manifested by increased volatility and capital reallocation, with capital tending to shift from equity assets to safe-haven assets. After the emotional shock subsides, the market focus gradually shifts to fundamentals and policy themes, with the substantial changes in the global industrial chain and macro environment due to geopolitical conflicts becoming the dominant logic. Concerns in these two areas have recently increased: 1) cost shocks and profit differentiation. China is a typical energy-importing country, and rising energy prices bring direct or indirect cost pressures to most domestic industries. If the impact continues to spread to global trade, it may also affect China's export demand. This concern, coupled with high oil prices, has been gaining increasing attention recently and impacting profit assessments in the capital markets, especially for non-financial sectors in the A-share market; 2) the linkage effect between macro inflation and interest rates. High oil prices push up inflation expectations, which in turn affect the pace and direction of the Fed's monetary policy, and an early end to the global liquidity easing cycle may suppress equity market performance.