Eastmoney Strategy Chen Guo Team: Short-term still has uncertainties, be patient and wait for a good opportunity

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Source: Chen Guo Investment Strategy

Summary

In the recent period, with the Iran–Israel–U.S. conflict showing an upward trend toward escalation, the oil price mid-point has moved up and carries a risk of moving to new highs. Even though the latest news suggests that the Iran–U.S. sides might be able to reach an agreement, the global financial markets in the near term may still face uncertainties. As we previously said about “controlling volatility,” risk assets in the short term still need to lay out mid-term opportunities patiently on the basis of defensive protection. Structurally, we focus on three clues: low-volatility dividend strategies that are relatively insensitive to oil prices, energy security, and industries with strong growth momentum. Key industries to focus on include: the new energy industry chain, innovative drugs, banks, coal, semiconductor equipment/PCBs, optical communications/overseas computing power, and tourism and scenic spots, etc.

As oil prices keep rising, they may further disrupt companies’ earnings and liquidity expectations

Recently, Brent crude spot prices broke through $140 per barrel, nearly doubling compared with the pre-Iran–Israel–U.S. war level, and exceeding the 2022 peak during the Russia–Ukraine conflict. In an environment where the new oil-price mid-point is set higher and there is still an upside risk to expectations, a new round of external market risk, the risk of a decline in external demand, and the possibility that liquidity transmission may reappear. Historically, in the early stage of rising oil prices, PPI is pushed upward; China’s manufacturing benefits from cost advantages and profit improvement may be at relatively high levels, with profitability driving strength in equity markets. When oil prices rise moderately alongside global economic growth, external demand improves, domestic exports increase, and corporate earnings rise. However, when oil prices become too high, it can easily lead to overseas monetary policy tightening, a fall in external demand, and even a recession.

How does oil-price cost transmit across industries? Which industries should we focus on at this stage?

Based on the 2020 input-output table, we calculate the full petroleum consumption coefficients and influence coefficients of each department to measure cost pressure. We obtain sensitivity coefficients, supplemented by industry concentration to measure each department’s ability to pass through pricing. After mapping each department to the Shenwan 2nd/3rd level industries, we divide them into five categories: 1) Direct beneficiaries: oil and gas extraction; 2) Substitution beneficiaries: coal mining, coal chemical industry, and new energy; 3) High consumption, strong pricing-pass-through (different oil-price mid-points lead to different impacts): non-ferrous metals, refining and chemical processing, oil and petrochemical engineering, agricultural chemical products, civil explosives and military explosives products, highway freight transport, etc.; 4) High consumption, low pricing-pass-through (the most affected): gas, aviation airports/port terminals (excluding oil shipping)/storage logistics/express delivery, textiles and apparel, rubber, glass/renovation construction materials, infrastructure; 5) Insensitive: electric power, banks, communications services, pharmaceuticals, mandatory consumption, services consumption, and booming technology, etc. At this stage, as oil prices reach and move above $100 per barrel—even into a higher mid-point—logics of high consumption and strong pass-through weaken and may even turn into impairment. In the short term, focus on categories 1) and 5) assets; in the medium term, focus on category 2) assets. Among them, pharmaceuticals, AI computing power, and tourism and scenic spots can receive increased attention.

From “the U.S. exception theory” to “the China exception theory”

From a medium-term perspective, if the overseas energy crisis continues to cause the U.S. and Europe economies to remain stuck in stagflation, China’s stock market is likely to still have exceptional resilience. Referring to the 1970s, amid persistent stagflation, the U.S. stock market remained in prolonged weakness, while Japan outperformed by leveraging unique factors such as industrial transformation (rapid growth of automobiles/semiconductors, etc.), energy-saving technologies, and labor unions (breaking the wage–inflation spiral). After experiencing volatility and a rebound, Japanese equities emerged from a long bear phase and entered a long bull market, significantly outperforming the U.S. market. In the current energy crisis,