Since the outbreak of the US-Israel-Iran conflict, market trading logic has exhibited a dual structure to some extent. On one hand, "HALO trades" continue to attract attention. On the other hand, there exists a "TACO" trade at the arbitrage level, which bets on a reversal. However, with the recent escalation of Middle East tensions and the blockade of the Strait of Hormuz impacting global energy markets, a prolonged duration would necessitate factoring in the effects of high oil prices. The global economy, particularly the US, could face stagflation risks. Corporate earnings may decline, affecting valuations, while expectations for Federal Reserve rate cuts have diminished. Tightening liquidity further impacts asset pricing.
From the transmission chain perspective, major asset classes such as copper, gold, and US Treasuries may have already priced in expectations of "no rate cuts within the year." Equity markets have reacted with relative lag, but volatility is increasing, suggesting room for further correction. Compared to US stocks, the Hong Kong Hang Seng Index and Hang Seng Tech Index had already experienced significant declines prior to the escalation of Middle East tensions. Mainland China's A-share blue-chip indices have also demonstrated a degree of resilience.
The escalation of the conflict is impacting asset pricing. The US-Israel-Iran conflict has been ongoing for nearly a month, with the situation continuously intensifying. On March 23, spot gold fell below $4,200 per ounce, erasing its gains for the year. Global stock markets experienced significant declines triggered by panic selling due to the escalating Middle East conflict (US-Iran situation), impacting major markets including US stocks, A-shares, and Japanese equities.
Judging from the performance of different assets, the market appears to no longer anticipate near-term Fed rate cuts. However, different assets have incorporated varying expectations regarding the conflict's trajectory and oil price path, with risks in some individual assets having been partially released.
The overseas strategy team at CICC, led by Liu Gang, believes that bond markets have priced in the most pessimistic expectations. Furthermore, following recent corrections, copper and gold have also rapidly adjusted towards tighter monetary policy expectations. Conversely, equity markets have not fully priced in these expectations. If the situation evolves towards a more extreme scenario, there remains a risk of further correction.
An oil price of $100 per barrel is seen as a critical "watershed." It could push the peak inflation rate from 2.8% to 3.5%, aligning it with the current federal funds rate range (3.5%-3.75%). This would imply significant near-term difficulty for the Fed to implement rate cuts, although inflation might subside again in the second half of the year, suggesting a scenario more likely to delay rather than cancel rate cuts entirely.
Based on analysis by Liu Gang's team, the Fed could still potentially cut rates in the second half of the year, unless oil prices remain persistently above $100 per barrel extending into the third and fourth quarters. Through the transmission chain, major assets like copper, gold, and US Treasuries might have already factored in "no rate cuts this year." Equity market reactions are lagging, and corporate earnings have not yet incorporated the impact of sustained high oil prices, although market volatility is increasing.
Liu Gang's team indicated that if the situation continues to escalate, US stocks could face a correction potential of around 10%. The Chinese market shows divergence. If US Treasury yields and the US dollar remain elevated, it will inevitably exert some pressure on Hong Kong and A-shares. However, indices like the Hang Seng Tech Index may show relative resilience due to already low valuations following previous significant declines. A-shares, particularly large-cap blue chips, might also demonstrate more resilience, supported by capital account controls that are not fully open and potential policy-driven funding support.
Regarding Middle East capital taking long-term positions in Hong Kong IPOs, current interest rate and exchange rate trends, along with foreign capital flows, have not shown significant abnormal fluctuations, suggesting no clear signs of systemic capital flight at present. Monitoring by several research institutions indicates that short-term避险 (risk-off) behavior by Middle Eastern funds in secondary markets is not pronounced. Their movements are more reflective of strategic long-term capital allocation in primary markets, specifically participating as cornerstone investors in Hong Kong IPOs.
The strategy team at GF Securities, led by Liu Chenming, believes that since the beginning of the year, Middle Eastern capital, which previously participated in cornerstone investments for IPOs like those in the electric vehicle产业链 (e.g., CATL), has gradually extended its reach to areas such as Minimax,精锋医疗 (assumed: Jingfeng Medical), and东鹏饮料 (assumed: Dongpeng Beverages). This may reflect that these funds have accumulated considerable returns from the Hong Kong primary market, driving them to appropriately expand their investment boundaries.
Even when investing in secondary markets, Middle Eastern sovereign wealth funds tend to favor long-term returns. When selecting Chinese assets, they prefer industries that align with their domestic strategic interests and possess growth potential. Private wealth funds exhibit strong family office characteristics, with a pronounced desire for diversified allocation and避险增值 (risk-off and value appreciation).
According to Huatai Securities statistics, depending on the preferences of different Middle Eastern investors, capital inflows might target strategic sectors such as new energy (renewable energy), the digital economy (AI, digital infrastructure), high-end manufacturing, as well as lower-risk stocks like those with high dividends. Simultaneously, these sovereign funds will also allocate to alternative areas like real estate and infrastructure to meet their demands for investment safety, compliance, and long-term returns. Overall, private wealth exhibits a more conservative style, pursuing capital preservation and steady appreciation. Hong Kong stocks with high dividend yields constitute a significant portion and represent an important asset class suitable for increased allocation by Middle Eastern private wealth.
Currently, while significant inflows of Middle Eastern避险 capital into the Hong Kong market are not yet evident, Hong Kong possesses a vast and mature asset and wealth management market, providing a solid foundation for absorbing foreign capital. Future demand growth from the Middle East region could still stimulate local Hong Kong businesses in private banking, insurance, and wealth management.