Yang Delong: Middle East conflict causes market fluctuations; maintain moderate positions, look more, move less

Ask AI · How does the Middle East conflict affect the direction of the Federal Reserve’s monetary policy?

Recently, the market has been significantly impacted by the escalating conflict in the Middle East, with global stock markets experiencing substantial declines. The Strait of Hormuz, a vital artery for global oil transportation, has been blocked for some time, causing international oil prices to soar, reaching as high as $120 per barrel. Compared to the pre-war price of $73 per barrel, this represents an increase of nearly 50%. The rise in oil prices could have a substantial impact on the global economy, and global prices may also rise, leading many investors to worry about whether the global economy will fall into stagflation. During periods of stagflation, stock market performance often declines. The increase in oil prices has raised inflation expectations and has led to repeated delays in the Federal Reserve’s interest rate cuts, with some even predicting that the Fed may not lower interest rates again this year, or may even raise them further. Of course, we cannot yet confirm the Federal Reserve’s decisions for this year, as there is still significant disagreement regarding the direction of this war.

The instigator of this war is undoubtedly U.S. President Trump, who also faces considerable anti-war pressure domestically. By the end of this year, Trump will face midterm elections, and he aims to find a respectable reason to end the war so he can declare, “We have won.” If the war does not last long and the Strait of Hormuz can resume navigation within the next two to three weeks, the high oil prices will be sustained for a shorter period, resulting in a relatively smaller impact on the global economy, and the stock market is expected to rebound accordingly. However, if the war takes a negative turn, for example, if Trump cannot extricate himself for various reasons and has to drag the war into a protracted conflict, the impact on global oil prices and the prices of assets like gold will be more lasting.

Recently, not only has the stock market plummeted, but gold, a traditional safe-haven asset, has also seen a significant decline. Fundamentally, on one hand, international gold prices have risen sharply over the past few years, accumulating substantial profit-taking, prompting some funds to seize the opportunity to sell off in large amounts. On the other hand, some institutions facing liquidity crises may choose to sell gold to alleviate financial pressure. Therefore, international gold prices have experienced significant fluctuations recently. Of course, from a long-term perspective, the logic behind rising international gold prices has not changed. The U.S. government is heavily in debt, the dollar continues to be printed, and de-dollarization is a long-term trend; these factors all support the strong long-term outlook for international gold prices. Therefore, investors are advised to allocate gold from a medium to long-term perspective to hedge against risks, avoid short-term operations, and prevent chasing highs and selling lows, which could result in being “sliced like leeks.”

From the perspective of asset allocation, the current adjustment in the capital markets is inevitable. During the weekend of the Middle East conflict, I pointed out that the escalation of the conflict has increased market uncertainty, and investors can significantly reduce their positions to mitigate risks, waiting for the end of the war to find an opportunity to enter the market. From the current situation, this strategy remains effective. In the face of many uncertainties that we cannot grasp, we can only respond by lowering equity positions and increasing the allocation ratio of cash and cash equivalents. Once the war situation becomes clearer and approaches its end, we can look to accumulate some quality stocks or quality funds that have been oversold to seize the opportunity for the next round of market rebound. I believe that although this Middle East conflict has significantly impacted the market’s short-term trends, it will not change the long-term pattern of a slow bull market in the A-share market.

Currently, concerns about the bubble in U.S. AI tech stocks are escalating. Many people worry that the technology stocks in the U.S. have risen for over a decade and are now showing clear signs of bubbling, questioning if they will experience a sharp decline due to AI applications not meeting expectations. If the risk of a bubble burst in U.S. AI tech stocks arises, it could impact the performance of A-share tech stocks, as many A-share tech stocks have supply chains in the U.S., such as the Nvidia supply chain, Tesla supply chain, and Google supply chain (referred to as Da chain, T chain, and Gu chain, respectively); companies in these supply chains could face significant short-term impacts. However, we believe that the widespread application of AI is a key feature of the Fourth Industrial Revolution. Since the end of 2022, generative AI has become the most important industrial transformation globally, likely bringing about a lot of new productivity. Recently, Nvidia’s founder Jensen Huang unveiled the latest Nvidia products at a press conference, showcasing the rapid development of AI, and he even believes that by 2027, it could generate trillions of dollars in output. Therefore, the overall trend of U.S. tech stocks is still expected to be characterized by increased volatility, but it may not quickly lead to a bubble burst.

This Middle East conflict has also led to significant adjustments in U.S. stocks, but this adjustment has not yet evolved into the same level of impact as a bubble burst in tech stocks, thus the impact on the A-share market is relatively limited. Of course, both the A-share and U.S. tech stocks currently belong to elastic sectors, and the Middle East conflict has lowered investor risk appetite and increased risk-averse sentiment, which is why tech stocks have seen sharp declines and even panic selling under profit-taking pressure, which is understandable. We need to analyze the long-term development patterns of these tech stocks from the perspective of the Fourth Industrial Revolution.

Recently, driven by the upcoming listing of Yushu Robotics, the humanoid robot sector, particularly the listed companies supporting Yushu Robotics, has seen a significant rise, rebounding against the trend. Coupled with the fact that the robotics sector has already undergone a long period of adjustment, there is indeed an opportunity for a rebound from oversold conditions; the listing of Yushu Robotics is expected to bring a wave of momentum for humanoid robots. Additionally, Tesla robots may soon release the new Optimus V3 robot, with Musk stating that V3 will see significant improvements and changes in performance compared to V1 and V2, which could also ignite investor enthusiasm for the humanoid robot sector.

Recently, the non-ferrous metals sector has experienced severe adjustments. Due to changes in the international situation, panic has emerged in the market, triggering fund sell-offs in the previously high-performing non-ferrous metals sector, which still remains in a state of adjustment in the short term. However, from a medium to long-term perspective, overall demand for non-ferrous metals is increasing, and the U.S. stockpiling of copper and other non-ferrous metals may also bring long-term opportunities. Therefore, the long-term allocation logic for non-ferrous metals has not fundamentally changed. In the AI era, the demand for non-ferrous metals is actually increasing, especially for metals such as copper related to AI data center construction, which has high demand. Many industrial metals have also seen significant price increases over the past two years. In the future, as demand rebounds, non-ferrous metal stocks still have the opportunity to stabilize and recover, but short-term market sentiment is relatively pessimistic, leading to subdued performance in non-ferrous metals; this is a short-term phenomenon and does not undermine its long-term allocation logic. Previously, I suggested that technology and resources would be the two major investment themes for this year, and from the current perspective, this strategy remains effective. (The views are for reference only, and investment should be approached with caution. Image source: Internet)