Global Asset Repricing Under Geopolitical Conflicts: China's Assets Demonstrate Resilience

Ask AI · How Will the Strait of Hormuz Fees Bill Reshape the Global Energy Landscape?

From the sharp swings in energy prices to the ripple effects across stock and bond markets, from the emergence of liquidity shocks to pressure on sectors such as technology, the tremors originating from the Strait of Hormuz are stirring up stormy waves across global capital markets.

In the view of industry insiders, the long-termization of the conflict and the resulting rise in inflation expectations, along with global central banks’ expectations of tightening monetary policy, create risks for a systematic reassessment of global assets. However, amid the severe turbulence in global financial markets, Chinese assets have demonstrated notable resilience thanks to their unique advantages.

“Energy” Becomes the Most Critical Variable

On March 30 local time, Iran’s Parliamentary National Security Committee approved a bill to levy fees on vessels transiting the Strait of Hormuz.

“Whether the bill can actually go forward remains to be seen. But if the bill is ultimately implemented, it will significantly raise geopolitical risk in the Middle East, and the global energy and shipping pattern will be changed, with far-reaching impact.” Dong Xiucheng, a professor at University of International Business and Economics, said.

The Strait of Hormuz—this “artery” that carries one-fifth of the world’s oil shipments—since about a month after the outbreak of the U.S.-Iran conflict, has had a direct bearing on global energy supply and price stability. Since the conflict began, international oil prices have risen markedly. On March 30, New York crude oil futures closed at $102.88 per barrel, the first time since July 2022 that they have moved above the $100 threshold. As of March, the cumulative increase has reached as much as 53%. On March 31, London Brent crude oil futures briefly broke above $118 per barrel during intraday trading.

This trend may continue. Recently, major international investment banks, including Goldman Sachs and UBS, have raised their forecasts for future oil prices. Industry insiders also generally believe that the length of time for which high oil prices persist could be longer than expected.

“Whether high oil prices last for as long as expected will mainly depend on the progress of the Strait of Hormuz’s restoration of navigation and the ‘OPEC+’ production-increase strategy.” Dong Xiucheng said. Unlike several past oil crises in history, in this case the conflict is not a simple supply embargo or production cut stemming from a “can’t buy” or “can’t afford” scenario; rather, a comprehensive shock has been formed by the disruption of shipping through the Strait of Hormuz, with broader impact and slower repair.

Miao Yanliang, chief strategy analyst at the research department of China International Capital Corporation, believes that because actual production cuts by oil-producing countries in the Middle East have already taken shape and changed the previous oversupply situation, the oil price mid-point is likely to be noticeably higher than before the conflict.

In fact, the impact of this geopolitics-driven energy supply shock has already gone well beyond the energy sector itself.

Shi Lei, head of asset allocation at Hangzhou Suijiu Private Fund Management Co., Ltd., said that changes in energy prices affect all kinds of areas such as chemical products, agricultural products, and electricity supply. The energy supply shock is gradually evolving into a systemic supply shock covering the entire production, distribution, and consumption chain.

“First, cost shocks and profit divergence. Higher energy prices bring direct or indirect upward cost pressure to most net energy-importing countries. The impact is especially more direct for sectors such as aviation and petrochemical and chemical industries, and it may damage real demand. Second, the macro linkages between inflation and interest rates. A sharp rise in oil prices could further aggravate the risk of stagflation in the United States, change the Federal Reserve’s original pace of rate cuts, and the environment of dollar liquidity easing will directly change.” Miao Yanliang said.

Global assets are undergoing a round of significant liquidity shocks. “One of the themes in global financial markets this year is falling liquidity, which had already shown signs as early as January and February. This geopolitical event has further accelerated the tightening trend.” Shi Lei said.

Data from Wind show that, as of March 30, since March began, the Dow Jones Industrial Index, the Nasdaq Composite Index, and the S&P 500 Index have cumulatively fallen by 7.68%, 8.27%, and 7.78%, respectively. In the Asia-Pacific market, the Nikkei 225 Index and the Korea Composite Index have each fallen by 11.83% and 15.48%, respectively. COMEX gold has dropped from a peak of $5,472.3 per ounce to as low as $4,128.9 per ounce. Driven by rising inflation expectations and a flight-to-safety sentiment, the U.S. dollar index has remained strong, rising to its highest level since last May.

“Risk-aversion sentiment is transmitting into financial markets. Shrinking trading volumes and no one taking selling pressure indicate that a ‘cash is king’ tendency is being reinforced in step among both institutions and retail investors.” Deng Zhijian, a senior investment strategy officer at DBS (China), said. On one side, holders of cash are waiting and not entering the market. On the other, position holders are reluctant to sell and have difficulty liquidating. This creates an anxious state of “high cash holdings plus low willingness to trade.”

Yao Yuan, a senior investment strategy officer for Asia at Credit Agricole Asset Management’s investment research institute, said that the market logic is to sell all risk assets other than energy—cash is king. “Although gold can theoretically hedge against stagflation, because it surged too quickly in the early period, trading has become crowded. When risk-aversion sentiment suddenly spikes, gold becomes a ‘cash machine,’ so prices also show volatility.” Yao Yuan said.

The market changes by the minute, but the anchor remains unchanged. As Thomas Muschla, a Wellington Investment Management geopolitical strategist, pointed out in a report released recently—“In this conflict, energy has already, and will continue to be, the most critical variable at the global macro level.”

Global Assets Face a Systematic Reassessment

In the view of industry insiders, the long-termization of the conflict and the resulting rise in inflation expectations, along with tightening monetary policy expectations from global central banks, mean global assets are at risk of a systematic reassessment.

“The long-termization of the conflict will export ‘stagflation-type’ institutional costs to the world. For asset pricing, this means that valuation models from the past two decades—based on the supremacy of low interest rates, globalization, and efficiency—are being systematically reassessed.” Tian Lihui, dean of the Financial Development Research Institute at Nankai University, said.

During last week’s “Super Central Bank Week,” major central banks around the world such as the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan held frequent monetary policy meetings. Judging from the signals released by these meetings, the world’s major central banks have temporarily paused the easing process previously expected by the market, in order to address potential stagflation risks.

In the view of Guan Tao, global chief economist at BOC Securities, global central banks are stuck in a dilemma between “steady growth” and “controlling inflation.” “From the perspective of financial asset pricing, at this stage, global asset prices are mainly pricing in inflation shocks, while overlooking the shock to economic growth from high energy costs. In the later phase, if the market shifts to a recession trade, the value of bonds as a safe-haven allocation will stand out, equity assets will face pressure to mark down earnings, and commodity prices will face downward pressure due to weakening demand.” Guan Tao said.

It is worth noting that among multiple asset categories, this energy supply shock has had a relatively large impact on technology stocks with high capital expenditures. “If rate hikes lead to tighter liquidity and market risk appetite drops sharply, technology companies will face challenges at the financing level, causing capital expenditures to fall short of expectations and affecting technical iteration.” Yao Yuan said.

In Miao Yanliang’s view, the impact of an energy supply shock on technology stocks with high capital expenditures mainly includes a risk-premium shock, and at the real-economy level it also affects financing costs and supply chains to a certain extent. However, he said that for AI industry chains that have good medium- to long-term demand prospects, the current disruption is likely more skewed toward the short term. Although AI does have some bubble risk, overall it still remains relatively healthy, and it also offers good investment value in the medium to long term.

Cao Liulong, chief strategy analyst at Western Securities, told reporters that investing in the technology sector is an inevitable trend, but after technology stocks have experienced sustained large rallies, relying solely on “concept narratives” may not be enough to move investors. Investors’ requirements for improvements in the fundamentals of technology companies and their ability to bring in “real cash” will rise.

Chinese Assets’ Resilience Is Gradually Emerging

It is worth noting that amid global financial market turmoil since March, Chinese assets have shown clearly stronger resilience.

Wind data shows that as of March 30, the Shanghai Composite Index and the Shenzhen Component Index had each declined cumulatively by 5.76% and 5.30% since March, respectively—significantly smaller declines than U.S. stocks and markets in Japan and South Korea over the same period. In the foreign exchange market, the renminbi has appreciated by more than 1% against the U.S. dollar year to date, significantly stronger than other non-U.S. currencies.

Industry insiders generally believe that against the backdrop of increased uncertainty caused by geopolitical conflicts, the certainty inherent in China’s economy and China’s assets will show obvious advantages.

Meng Lei, a China equity strategy analyst at UBS Securities, said that from a macro perspective, China’s dependence on oil and natural gas is lower than in major global economies. Considering the incremental macro policy support, the sparks of technological innovation, and the continuing reforms in capital markets and market-cap management, A-share valuations are expected to be repaired in the medium term.

Tian Xuan, a professor of Boya part-time appointment at Peking University, said that Chinese assets, including A-shares, will display unique advantages through relatively independent supply-chain resilience, a domestic demand market that continues to expand, and the advancement of technological innovation under policy leadership. “Especially, China has substantial policy room in macroeconomic terms. Its monetary policy is more flexible than in other major economies. Fiscal policy has been continuously stepped up to support technological innovation and industrial upgrading, providing A-shares’ technology sector with valuation support that is more certain and with long-term growth space.” he said.

Miao Yanliang believes that in the long run, it will be important to pay attention to the impact of this geopolitical conflict on international order and the overall landscape. The conflict’s long-termization means a decline in America’s credibility and erosion of its national power; the status of U.S. Treasury bonds as a core safe asset may be shaken, and the logic that the safety of dollar assets declines may be further strengthened. Global capital flows will show a clear “fragmentation” and “diversification” trend. “Fragmentation” will drive funds to return to the home market, reflecting a strong domestic preference. “Diversification” will prompt funds that were previously highly concentrated in dollar assets to look for new allocation directions, and non-U.S. assets such as Chinese assets and gold may relatively benefit.

Latest research from Huatai Securities shows that among allocation-type foreign capital tracked by EPFR, from March 18 to March 25, allocation-type foreign capital recorded net inflows of more than 5 billion yuan. Among them, active allocation-type foreign capital recorded net outflows of 630 million yuan, while passive allocation-type foreign capital recorded net inflows of 5.66 billion yuan.

“The core advantage of Chinese assets in today’s global chaos lies in providing a ‘mismatch space’ across macro cycles and a ‘certainty anchor’ at the institutional level.” Tian Lihui told reporters that when Western major economies are deeply trapped in the dilemma between fighting inflation and recession, China has an independent monetary policy cycle and more comfortable room for fiscal policy to step up its efforts. This helps keep Chinese assets from being subjected to extreme pressure from the global high-interest-rate environment. (Reporters Zhang Mo, Wu Lihua, Wang Lu)

Source: Economic Information Daily