Sudden Change in Middle East Situation! How Should Investors Respond? Latest Fund Manager Analysis

Recently, geopolitical risks in the Middle East have continued to escalate, leading to increased volatility in global markets!

In terms of crude oil, the past week saw the largest weekly gain on record for U.S. crude prices, with WTI crude up over 36% and Brent crude up over 28%. Besides crude oil, major asset classes such as stocks, bonds, and gold have also experienced intense fluctuations, presenting unprecedented challenges for asset allocation.

How to anchor certainty amid uncertainty and balance portfolio returns and risks? Which asset classes offer better value in the current environment? To explore these questions, China Fund News interviewed Li Wenliang, General Manager of the FOF Investment Department at Southern Fund and fund manager; Zeng Hui, Head of Multi-Asset Allocation at Guotai Fund; Liu Xiao, Fund Manager of Multi-Asset Allocation at China Merchants Securities Global Fund; and He Zhe, Chief Investment Officer of Retirement FOF and FOF Fund Manager at HSBC Jintrust Fund.

These FOF managers discussed valuation of stocks and bonds, style rotation, gold and oil trends, and FOF allocation strategies, providing in-depth analysis of the current market’s core drivers and dissecting investment opportunities and defensive strategies amid market turbulence.

Southern Fund’s Li Wenliang: Under the impact of geopolitical conflicts on global stock markets, it is advisable to reduce equity positions and adopt a defensive structural adjustment.

Guotai Fund’s Zeng Hui: This year, the stock market may shift focus toward earnings growth. Structural opportunities will continue, but style differences from last year are likely.

China Merchants Securities Global Fund’s Liu Xiao: With rising valuations, slow improvement in fundamentals, and sustained loose liquidity, overall medium- to short-term equities are neutral. Volatility may increase, but long-term value remains evident.

HSBC Jintrust Fund’s He Zhe: From a medium- to long-term perspective, short-term external sentiment shocks will not alter the long-term trend. We remain optimistic about the medium- to long-term strategic opportunities in the A-share market.

Still optimistic about the long-term value of equity asset allocation

China Fund News: With the arrival of “black swan” events and increased volatility in global stock markets, domestic A-shares and Hong Kong stocks fluctuate repeatedly, while the bond market remains stable. How do you view the investment value of stocks and bonds now? Which asset class offers better value?

Li Wenliang: Reviewing the impact of the last four Middle East conflicts on A-shares, A-shares faced pressure one month after conflicts erupted, but over 3–6 months, the probability of gains gradually recovered, reaching a 70% success rate over 12 months. Given the current low risk premium in A-shares and relatively low bond yields, I remain bullish on A-shares in the medium term.

Zeng Hui: Our multi-asset analysis uses an overbought–oversold extreme framework: On the bond side, yields have risen rapidly due to various factors, with the 30-year government bond yield rising over 50 basis points, indicating obvious overbought conditions. Therefore, short-term yields may slowly decline, leading to a short-term rebound in long-term bond prices, but medium- to long-term yields are likely to rise due to economic recovery expectations and potential high oil prices.

In the stock market, 2022 was a year of significant valuation expansion, with some sectors showing clear signs of overbought conditions. This year, the focus may shift toward earnings growth, with continued structural opportunities, but style differences from last year are expected.

He Zhe: In the short term, geopolitical risks impact risk assets, boosting global risk aversion, with funds migrating to defensive sectors. Growth sectors face pressure, while assets like gold and oil prices rise. The A-share market may see increased volatility influenced by sentiment and fundamentals. However, from a medium- to long-term perspective, external short-term sentiment shocks will not change the long-term trend. We remain optimistic about the medium- to long-term strategic opportunities in the A-share market.

On one hand, domestic policies on supply and demand are strengthening, with profits and ROE gradually stabilizing and improving. The domestic tech industry continues to make breakthroughs, and combined with loose overseas liquidity, A-shares are expected to continue improving supported by both fundamentals and valuation.

On the other hand, China’s economy is resilient, with substantial excess savings. As the capital market becomes more active, a positive feedback loop of resident capital inflows and gradual stock market growth may form, further attracting foreign investment and solidifying a long-term upward trend.

Liu Xiao: After a year and a half of gains, valuations in the equity market have significantly increased. With rising valuations, slow fundamental improvement, and sustained loose liquidity, overall medium- to short-term equities are neutral. Volatility may increase, but long-term value remains clear. As household savings accumulate and the credit cycle slowly recovers from the bottom, consumption and confidence are expected to gradually rebound, ultimately restoring corporate profits. I remain optimistic about long-term equity allocation.

With risk-free rates at low levels and bond yields also low, the overall environment is subdued. Currently, a diversified asset mix (stocks + bonds + gold, etc.) can better hedge against individual asset volatility and achieve steady long-term returns.

Style rotation remains to be observed

Focus on liquidity expectations and domestic demand policies

China Fund News: With A-shares and Hong Kong stocks fluctuating, will there be a style shift in the equity market? Which sectors or opportunities are structurally favorable?

Zeng Hui: The profound impact of the Iran conflict as a major historical event has been underestimated. Oil prices may break through $100, which could impact the global economy’s fundamentals and influence global capital market liquidity via the petrodollar. Coupled with the U.S. stock market already at a super-cycle overbought high, global stock volatility is likely to increase.

Market style may shift from valuation expansion last year to earnings growth this year. Hard assets, especially energy-related sectors driven by major geopolitical conflicts—such as crude oil, coal, chemicals, and agricultural products—are likely to be the main themes. Additionally, scarce assets like new materials (rare earths, lithium batteries) and industries with clear comparative advantages, such as power grid equipment, are worth关注。

Liu Xiao: Regarding future style in the equity market, I favor gradually increasing allocations to value and quality funds. This is based on two considerations: first, many value assets have declined recently, and if their long-term value remains unchanged, their odds of success increase; second, as macroeconomic recovery progresses and CPI stabilizes, the success rate of value assets correlated with the broader market is rising. We plan to position ourselves on the left side of the cycle, gradually increasing allocations to these assets.

Li Wenliang: Whether style shifts depends on whether liquidity expectations face contraction risks and whether domestic demand policies significantly boost large-cap value stocks. Keep an eye on the dollar and oil prices. If oil rises above $95 per barrel, it indicates that inflation expectations are constraining global easing, potentially triggering liquidity risks and pressuring growth styles.

In the short term, even without geopolitical conflicts, the calendar effect suggests that large-cap value, low-dividend, free cash flow strategies will outperform, while growth may weaken. Structurally, rising oil prices will squeeze profits in shipping and chemicals, and inflation expectations may dampen risk appetite, putting pressure on broad growth sectors. From a risk hedging perspective, strategies with low volatility and high dividends can reduce equity exposure fluctuations.

Gold investment’s high cost-performance half a year ago

Back to normal valuation levels

China Fund News: Commodities face intense volatility. Gold prices have experienced a rollercoaster, and market opinions on gold investment are divided. In the current environment, has the cost-performance of gold investment declined?

He Zhe: The recent gold price increase is entirely due to the Iran conflict. The $5,400 per ounce level likely reflects market expectations that the conflict will persist for a long time. If tensions ease, gold prices may decline; even if the conflict intensifies, it will probably cause risk assets and gold to resonate together. Therefore, at current prices, gold’s cost-performance is relatively low, which is a key reason for our cautious stance on gold.

Liu Xiao: The logic behind gold pricing has changed since Q4 last year, leading to increased volatility. However, gold’s long-term allocation value remains, and we have allocated some in our portfolios to serve as a hedge against extreme risks.

Zeng Hui: From a medium- and short-term perspective, gold’s price currently shows no obvious signs of overbought conditions or bubble risks. In the context of expanding global geopolitical conflicts and high risks in U.S. stocks, extending the time horizon provides some explanation.

In the short term, gold and silver have respectively gained over 50% and more than four times in the past six months, marking one of the best periods in history. The recent surge indicates some short-term overextension, requiring patience for a correction. Gold’s cost-performance has returned to normal from a super-high level half a year ago, but after a pause, it may again see a significant improvement.

Short-term bullish sentiment on oil prices has reached extremes

China Fund News: The recent U.S.-Israel strikes on Iran have triggered a surge in international oil prices, with discussions of an “oil crisis.” How will oil prices evolve?

Li Wenliang: Looking back, oil prices spiked quickly at the start of conflicts but mostly retreated during the war. Currently, the spread between crude futures is higher than during the Russia-Ukraine conflict, indicating that short-term bullish sentiment has reached an extreme. Further upside is likely to be limited, with oil prices expected to fluctuate at high levels of $80–$90 per barrel.

He Zhe: If future conflicts become prolonged, even if intensity decreases, international oil prices may struggle to fall back to the relatively low levels at the end of 2025. As geopolitical uncertainties increase, major countries might start increasing their oil reserves to mitigate supply chain risks, which could temporarily disrupt supply-demand balance and push prices higher.

Therefore, the logic of global stagflation or commodity price increases may persist through 2026. The difference is that if global stagflation occurs, most sectors may be adversely affected; if commodity prices simply rise and push PPI higher, the market may remain healthier.

Zeng Hui: Historically, commodities can be broadly divided into precious metals (industrial metals) and oil, chemicals, and agricultural products, each driven by liquidity and fundamentals, respectively. They lead in different phases—recession, depression, recovery, and boom—showing cyclical patterns. The Iran conflict, as a major historic event, may shift the commodity market from being dominated by precious metals to a market jointly led by precious metals and oil. Thus, the recent rise in oil prices may not be a short-term phenomenon.

Build defensive core funds to reduce volatility

Focus on low-dividend, energy, and chemical commodities

China Fund News: With global stock markets highly volatile, how should FOF products allocate across major assets to reduce portfolio volatility? Which assets are preferred going forward?

He Zhe: In practice, we treat this as a risk event and aim to reduce portfolio volatility. We tend to lower the proportion of Hong Kong stocks and foreign markets, maintain caution on sectors with weak valuation support like robotics and AI applications, and increase focus on resource-related sectors such as chemicals.

From a performance benchmark perspective, I believe caution is warranted on gold assets. We might prefer sectors like industrial metals, energy, or agricultural products. The short-term surge in gold prices reflects excessive geopolitical risk premiums, as seen from inflows into 10-year U.S. Treasuries. Meanwhile, copper prices, affected by short-term logic, may also be under pressure, making energy and agricultural commodities relatively more attractive. If gold prices fall significantly, long-term allocation remains justified.

Liu Xiao: In equities, after a year and a half of gains, valuations are notably elevated. Fundamentals are slowly improving, but it takes time for fundamentals to catch up with valuations. Currently, I am neutral on equities in the short term and more optimistic in the long term; convertible bonds are somewhat more expensive than equities; and with low risk-free rates, bond yields are also low. Gold volatility may increase this year. Given a neutral stance across asset classes, I prefer to enhance returns around the benchmark, optimizing volatility to improve investor experience and reduce losses from frequent trading. The goal is to achieve better overall returns.

Li Wenliang: Under the impact of geopolitical conflicts on global stock markets, it is advisable to control equity positions and adopt a defensive structural adjustment. This could include tilting toward low-dividend, low-volatility styles, or a small allocation to sectors like petrochemicals that may benefit from Middle East conflicts, or using energy commodities ETFs to hedge risks.

Zeng Hui: Over the past decade, the rise of quant strategies and ETFs has significantly increased stock market volatility compared to ten years ago. Using commodities like gold and silver, as well as overseas assets, for multi-asset allocation is a trend. Going forward, we prefer to focus on structural opportunities in A-shares, diversify overseas holdings, and patiently wait for low points. For commodities, patience and readiness to switch between major cycles are essential. These are mostly implemented through various ETFs.