Eastmoney's Chen Guo: From "American Exceptionalism" to "Chinese Exceptionalism," still confident in the medium-term prospects of A-shares

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Source: Chen Guo Investment Strategy

Summary

In the near term, there is a trend toward escalation in the U.S.-Iran conflict, as well as the Iraq/Israel conflict. Oil prices’ middle level has moved upward, with increased risk of approaching new highs. Although the latest news suggests that the U.S., Iran, and Iraq/Israel may reach an agreement, in the short term, global financial markets may still face uncertainties. As we previously said about “controlling volatility,” risk assets still need to patiently position for medium-term opportunities on the basis of defensive protection. Structurally, we focus on three clues: low-volatility dividends that are relatively insensitive to oil prices, energy security, and strongly cyclical growth industries. Key industries to focus on include the new energy industry chain, innovative drugs, banks, coal, semiconductor equipment/PCB, optical communications/overseas computing power, tourism and scenic areas, etc.

With oil prices continuing to rise, it may further disrupt companies’ earnings and liquidity expectations

Recently, the Brent crude spot price has broken through $140 per barrel, nearly doubling versus before the U.S.-Iran-Iraq/Israel war, and exceeding the 2022 high point during the Russia-Ukraine conflict. In an environment where the new oil-price benchmark has moved higher and there remains upside risk in expectations, a new round of external market risk, risk of weakening external demand, and potential renewed disruption in liquidity transmission may reappear. Historically, at the early stage of rising oil prices, it drives PPI higher; in China, manufacturing benefits from cost advantages, improving profitability, or staying at high levels, and the earnings-driven equity market strengthens. When oil prices rise moderately alongside global economic growth, external demand improves, domestic exports rise, and corporate earnings rise as well; however, if oil prices become too high, it can easily trigger tighter overseas monetary policy, weakening external demand, and even a recession.

How do oil-price costs transmit across different industries? Which industries should we focus on at this stage?

Based on the 2020 input-output table, we calculate each sector’s “fully consumed oil” coefficient and influence coefficient to measure cost pressure. We obtain sensitivity coefficients and, together with industry concentration, measure each sector’s ability to pass through price increases. After mapping each sector to Shenwan’s Level 2/Level 3 industries, we divide them into five categories: 1) Direct beneficiaries: oil and gas extraction; 2) Substitute beneficiaries: coal mining, coal chemical industry, and new energy; 3) High consumption, strong pass-through (different oil-price benchmarks lead to different impacts): non-ferrous metals, refining and chemical processing, oil and chemical engineering (including petrochemical products), agricultural and chemical products, civil explosives products, road freight transport, etc.; 4) High consumption, low pass-through (the most harmed): piped natural gas, airline airports/shipping ports (excluding oil transport), warehousing logistics/courier delivery, textiles and apparel (textile manufacturing/garment and home textiles, etc.), rubber, glass/remodeling and building materials (such as ceramics, bricks and tiles, and refractory materials, etc.), and infrastructure; 5) Insensitive: electric power, banks, communication services, pharmaceuticals, essential consumption, services consumption, and cyclical tech, etc. At this stage, as oil prices reach above $100 per barrel and even higher at the benchmark level, the “high consumption, strong pass-through” logic weakens and may even turn into “being harmed.” In the short term, we focus on category 1) and 5) assets; in the medium term, we focus on category 2) assets. Among these, pharmaceuticals, AI computing power, tourism and scenic areas can receive increased attention.

From “the American exception” to “the Chinese exception”

From a medium-term perspective, if the ongoing overseas energy crisis continues to keep Europe and the U.S. stuck in stagflation, China’s stock market is likely to still show exceptional resilience. Referring to the 1970s, during persistent stagflation, the U.S. stock market remained sluggish, while Japan, supported by unique factors such as industrial transformation (rapid growth in automobiles/semiconductors, etc.), energy-saving technologies, and unions (breaking the wage—inflation spiral), came out on top. After experiencing volatility and pullbacks, Japanese stocks entered a long bull market and clearly outperformed U.S. stocks. In today’s energy crisis, China’s proactive energy transition can provide solutions for global energy security. Many industries also have globally competitive products with high cost performance. The domestic demand market still has ample room for maneuver, and policy still has significant space. Under a bottom-line mindset, even if we experience external turbulence, we remain confident in A-shares over the medium term.

【Risk Warning】Domestic-demand policy effects are lower than expected; tariffs imposed are far beyond expectations; geopolitical conflicts disrupt beyond expectations, etc.

1

With the oil-price benchmark rising again, it may further disrupt companies’ earnings and liquidity expectations

Recently, the Brent crude spot price has broken through $140 per barrel, nearly doubling versus before the U.S.-Iran-Iraq/Israel war, and exceeding the 2022 high point during the Russia-Ukraine conflict. On April 2, Trump’s televised remarks released a strong signal, explicitly stating that the U.S. “will carry out extremely violent strikes against Iran within the next 2 to 3 weeks.” Affected by this, crude oil prices quickly jumped. In particular, on April 2, the Brent crude spot price broke through $140 per barrel, exceeding the 2022 high point during the Russia-Ukraine conflict. Polymarket’s bets on the end date of the U.S.-Iran-Iraq/Israel war have also continued to be pushed back. As of April 5, about 83% of investors have bet that it will last at least until the end of April.

In an environment where the oil-price benchmark has moved higher and there is risk of moving toward new highs, a new round of external market risks, risks of falling external demand, and potential renewed disruption in liquidity transmission may occur again. Historically, in the early stages of oil-price rises, it drives PPI higher; China’s manufacturing benefits from cost advantages, improving profitability or keeping it at relatively high levels, strengthening an earnings-driven equity market. Moderate oil-price increases alongside global economic growth lead to improving external demand and rising domestic exports, and corporate earnings rise; however, if oil prices are too high, it can trigger tighter overseas monetary policy, falling external demand, and even recession.

Recently, the U.S. stock market and stock markets in Korea and Japan have seen a phase of rebounds, especially in Korea and Japan, where the single-day rebound on April 1 exceeded 5%. On the other hand, the data released by S&P Global on Friday shows that the U.S. Services Purchasing Managers’ Index (PMI) fell from 51.7 in February to 49.8 in March, marking the first time since January 2023 that it has fallen into the contraction range, far below the earlier initial reading of 51.1; concerns about stagflation have intensified. Faced with the possibility of “oil prices rising—inflation rising— the Federal Reserve pausing rate cuts and possibly even raising rates,” U.S. Treasury yields have also clearly moved upward recently. We believe that under the current scenario where the U.S.-Iran-Iraq/Israel war is escalating, the oil-price benchmark is rising, and there is a risk of moving toward new highs, the pricing by the U.S. and Korea/Japan stock markets for earnings downgrades and valuation contraction still seems insufficient. The probability of adjusting again after a short-term rebound has risen significantly, and a new round of external market risks may also transmit to the domestic market.

Domestic PMI rebounded significantly in March, but the impact of “inflation” is also starting to show: the increase in the purchase price in March was far higher than the increase in the ex-factory price. If external demand falls back only in phases afterward, but oil prices remain at a high level, it may drag on companies’ earnings performance.

In sum, as we previously said about “controlling volatility,” risk assets still need to patiently position for medium-term opportunities while paying attention to defensive protection in the short term.

2

How do oil-price costs transmit across industries? Which industries should we focus on in the current environment?

Based on the 2020 input-output table, we calculate each department’s fully consumed oil coefficient and influence coefficient to measure cost pressure, obtain sensitivity coefficients, and—together with each industry’s concentration—measure each department’s ability to pass through price increases. After mapping each department to Shenwan Level 2/Level 3 industries, we categorize them into five groups:

1) Direct beneficiaries: oil and gas extraction. It is itself an energy supply sector, and at the same time its fully consumed oil coefficient is low. It has a high sensitivity coefficient and a high industry concentration, with strong pricing power and strong downstream pass-through capability.

2) Substitute beneficiaries: coal mining, coal chemical industry (distributed across departments such as coke II/chemical raw materials, etc.), and new energy (distributed across sectors such as batteries and passenger vehicles, etc.). These sectors have relatively low dependence on oil; rising oil prices will not significantly increase costs, but will improve the relative competitiveness or the oil-price benchmark of their products. At the same time, they have relatively strong rigid demand and pass-through ability, thereby achieving improved profitability in a high oil-price environment.

3) High consumption, strong pass-through (different oil-price benchmarks, different impacts): non-ferrous metals, refining, oil and chemical engineering (including plastics, synthetic resins, paint and inks, chemical fibers, etc.), agricultural and chemical products (sensitivity coefficient is low because downstream demand is single but rigid), civil explosives products, road freight transport, etc. With high dependence on oil, their fully consumed oil coefficients are generally greater than 9%, and their sensitivity coefficients are greater than 1. With relatively strong downstream pass-through degree, when oil prices rise moderately (e.g., below $80 per barrel), cost transmission is effective. But when oil prices exceed $80 per barrel— and even exceed $100 per barrel—the pass-through capability weakens significantly and may even turn into “being harmed.”

4) High consumption, low pass-through (the most harmed): piped natural gas; airports for aviation/ shipping ports (excluding oil transport)/ warehousing logistics/ courier delivery; textiles and apparel (textile manufacturing/garment and home textiles, etc.); rubber; glass/remodeling and building materials (such as ceramics, bricks and tiles, refractory materials, etc.); and infrastructure (such as municipal infrastructure engineering and basic construction, etc.). Their fully consumed oil coefficients are generally greater than 9%, and their sensitivity coefficients are less than 1 or they have policy price caps (such as piped natural gas). Their pass-through capability is low; rising oil prices will directly squeeze companies’ gross margins. This is the sector that is harmed the most in a high oil-price environment.

5) Insensitive: electric power, banks, communication services, pharmaceuticals (medical services/chemical pharmaceuticals, etc.), essential consumption (such as liquor/food processing/beverage dairy, etc.), services consumption (such as hotels and restaurants/tourism and scenic areas, etc.), and cyclical tech (such as components/communication equipment, etc.). Their fully consumed oil coefficients are generally low, the cost-side impact from rising oil prices is weak, demand has rigid characteristics, weak cyclicality, or an independent industry cycle logic, and profitability stability is strong. In a high oil-price environment, they show significant anti-inflation and defensive attributes.

You can further intuitively feel the changes in pass-through ability of category 3) and 4) assets by looking at gross-margin changes across different oil-price benchmark intervals for industries with high oil dependence. We select three extremely high oil-price intervals. From near to far, they are: 22Q1—the quarterly average of Brent crude oil futures prices (same below) rising 22.9% from $79.7 per barrel to $97.9 per barrel; 11Q1—rising 20.8% from $87.4 per barrel to $105.7 per barrel; 08Q2—rising 27.5% from $96.3 per barrel to $122.8 per barrel. In most industries, gross margins are harmed. We also select three moderate oil-price rise intervals. From near to far, they are: 21Q1—rising 35.5% from $45.3 per barrel to $61.3 per barrel; 16Q2—rising 33.6% from $35.2 per barrel to $47.0 per barrel; 09Q2—rising 30.7% from $45.8 per barrel to $59.9 per barrel. In most industries, costs can be transmitted normally.

Specifically, non-ferrous metal ore mining and processing/ refining/ plastics/ paint inks/ chemical fibers/ road freight transport, etc., represent most category 3) assets. During periods of moderate oil-price rises, they show good pass-through capability and smooth cost transmission. However, when the oil-price benchmark is above $100 per barrel, they show weakened or even ineffective pass-through capability, and gross margins decline clearly.

At this stage, as oil prices reach above $100 per barrel and even higher at the benchmark level, the “high consumption, strong pass-through” logic weakens and may even turn into being harmed. In the short term, we focus on category 1) and 5) assets; in the medium term, we focus on category 2) assets. Among these, in category 5) assets, besides stable sectors with clear anti-inflation capability such as electric power/water utilities and banks, we can further increase attention to pharmaceuticals (earnings forecasts clearly upgraded), AI computing power within cyclical tech (communication equipment such as optical modules and optical communications with clearly upgraded earnings forecasts, and PCB/semiconductors with clearly obvious price increases), and tourism and scenic areas/hotels within discretionary consumption (spring break and Qingming Festival overlap, with clearly rising tourism heat, which brings strong expectations for Labor Day and the summer vacation).

3

From “the American exception” to “the Chinese exception”

From a medium-term perspective, if the ongoing overseas energy crisis continues to keep the European and U.S. economies in persistent stagflation, China’s stock market is likely to still have exceptional resilience. Looking back to the 1970s, during persistent stagflation, the U.S. stock market remained sluggish. Japan, however, won out thanks to unique factors such as industrial transformation (rapid growth in automobiles/semiconductors, etc.), energy-saving technologies, and unions (breaking the wage—inflation spiral). After experiencing volatility and pullbacks, Japanese stocks emerged from a long bear market and went into a long bull run, clearly outperforming the U.S. stock market. In the current energy crisis, China’s proactive energy transition can provide solutions for global energy security. Many industries also have globally competitive products with strong cost-effectiveness, and the domestic demand market still has ample room to maneuver. Policies still have significant space, and under a bottom-line mindset, even if we experience external turbulence, we remain confident in A-shares over the medium term.

Risk analysis

1) Domestic-demand policy effects are below expectations: If subsequent domestic data on real estate sales, investment, and new construction fails to recover for a long time, credit remains weak, infrastructure starts are below expectations, inflation stays persistently low and sluggish, consumption does not show a clear rebound, and corporate earnings growth keeps falling—then the eventual falsification of an economic recovery would put pressure on the overall market outlook, and overly optimistic pricing expectations would face correction.

2) Tariffs imposed far exceed expectations: If the U.S. continues to impose tariffs on China at levels further beyond market expectations, while also using various sanctions measures and threat tools to prevent Chinese products from entering the U.S. through channels such as re-exports/trading through third countries; in addition, if further financial friction occurs later, such as forcing the delisting of Chinese concept stocks, it could bring major negative shocks to China’s exports, economic growth, and financial markets—affecting A-share fundamentals and investors’ risk appetite. 3) Geopolitical conflict disruptions exceed expectations: If the U.S.-Iran-Iraq/Israel conflict continues to escalate and triggers comprehensive turmoil in the Middle East, the Strait of Hormuz will remain obstructed for a long time, international oil prices surge sharply and remain at high levels, and meanwhile global energy and supply-chain disruptions intensify and risk-aversion sentiment spreads rapidly, it may bring significant pressure to domestic inflation, companies’ costs, and the external demand environment—hitting A-share earnings fundamentals and market risk appetite.

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