Guangfa Strategy: Latest Market Outlook After the US-Iran Situation and the Two Sessions

1. How Does the Iran Issue Affect Stock Market Performance?

Before this round of Iran-related issues, global non-U.S. assets generally maintained a bullish trend, with multiple stock indices hitting record highs, showing a “Davis Double Play”: liquidity in non-U.S. markets benefited from the declining attractiveness of dollar assets, and leading indicators of OECD economies, AI industries, and resource-rich economies improved on expectations of fundamental recovery.

Since last year, we have seen capital inflows into European markets (easing of Russia-Ukraine tensions, Renaissance), Chinese Hong Kong stocks (Deepseek explosion), Vietnam (manufacturing PMI hitting new highs), South Korea (semiconductor and memory industry advantages), and Brazil (energy resources).

In other words, after the decline in the attractiveness of dollar assets, markets with positive economic or industrial changes attracted additional foreign investment. From this perspective, Chinese stocks in 2026 also have marginal changes and conditions for Davis Double Play.

After the Iran issue, concerns about inflation and stagflation disrupted the above logic, leading to a short-term surge in oil prices and risk-off in the stock market.

In the short term, “geopolitics has no experts,” the situation is unpredictable and has a certain degree of randomness.

It is recommended to respond with allocation strategies in the short term. The “April Decision” focuses on fundamentals and earnings reports. We suggest allocating to sectors with high certainty in Q1 reports to cope with short-term market uncertainties.

Key sectors to select include those with improved operating data in January-February or with annual report forecasts, which can both attack and defend:

(1) AI industry chain (price-related), such as storage, MLCC, electronic fabrics, optical fibers

(2) AI industry chain (volume-related), such as optical modules, optical chips, semiconductors, byte industry chain, electricity consumption sectors

(3) High-end manufacturing: lithium mines, lithium battery materials

(4) Global demand: copper, aluminum are trending; export-oriented companies to the US may see a turnaround in the second half of the year

(5) Domestic special supply and demand: building materials (countering internal competition / urban renewal)

From a medium-term perspective, the visibility and predictability of the situation are increasing.

Firstly, currently, U.S. stock valuations are only “one step away” from the peak of the tech bubble; long-term U.S. Treasury yields remain resilient, and both U.S. stocks and bonds are highly sensitive to global inflation expectations.

Secondly, if the U.S. faces difficulty in cutting interest rates, it will further impact the fundamentals, as the median of U.S. bond yields affects financing costs for the AI industry, consumer credit loans, and mortgage rates, thereby suppressing overall demand.

Thirdly, referencing the period before and after the 1990s tech bubble burst, the Kosovo War triggered oil price hikes, Fed rate hikes, tech stock valuation compression, and U.S. stock declines, with far-reaching effects.

Fourthly, in December 2025, Trump stated that the core issue of the 2026 midterm elections would be “prices,” with the Republican Party focusing on “living costs.” The ongoing war situation is unlikely to be tolerated before the U.S. midterm elections.

From the most probable scenario, the logic of the 2026 global non-U.S. asset bull market is unlikely to be overturned by geopolitical tensions. We remain optimistic about Chinese stocks and expect the Davis Double Play to continue alongside non-U.S. markets.

Therefore, once short-term geopolitical uncontrollable factors subside, the market may present the best bottom-fishing opportunity of the year.

2. How Will the Two Sessions Affect Future PPI Judgments and Market Styles?

Past experience shows that broad fiscal policy as a percentage of GDP needs to increase by at least 5% to be considered stimulative. Looking back at 2025, broad fiscal as a share of GDP only increased by 1%, providing only a bottoming effect on PPI.

The 2026 deficit target of 4.0% corresponds to a broad fiscal growth of less than 1%, leading to a slight upward shift in the PPI median, but with limited elasticity.

Thus, the broad fiscal and PPI month-on-month situation in 2025-2026 is similar to 2012-2014—beta factors are relatively weaker than in previous cycles, while alpha factors are more prominent.

Based on this context, in our earlier PPI research framework report, we drew the following core conclusions:

(1) Cyclical sectors: Currently, PPI has just turned positive month-on-month; cyclical sectors still hold an advantage, but we need to observe the peak point of PPI month-on-month.

(2) Growth sectors: Entering a high-volatility phase, but considering current industry progress, the market trend is not over.

(3) Financial sectors: Expectation should be moderately lowered.

(4) Consumer sectors: Dynamic response, follow-up data tracking.

Risk Warning: Geopolitical risks, overseas inflation risks, and low expectations for domestic steady-growth policies.

(Source: GF Securities)