Zhang Yidong: The most severe phase of the global market shock has passed; now is the time to position on the left side for gold and Hang Seng technology stocks

The impact of geopolitical events in the Middle East has directly affected global capital markets this week. However, after a series of declines and rebounds in regional markets, the next direction of movement is particularly worth paying attention to. Recently, Zhang Yidong, the newly appointed Executive Committee member, Chief Economist, and Head of the Equity Research Department at Haitong International, shared his latest views at an event. Known for his ability to judge the overall situation, he provided his independent perspective. Key quotes: After this round of geopolitical shocks, the pricing logic of global capital markets has further changed, shifting from efficient pricing to safety pricing. We believe that a true ceasefire in the Middle East has not yet arrived. We must not only listen to what is said but also observe actions, and even what is not said may be more important than what is spoken. Regarding the conflict in the Middle East, the phase that has had the greatest impact on global capital markets and has severely killed valuations has already passed. China's "hardcore assets" will rise. Hardcore assets mainly manifest as those with safety, manufacturing hard power, or technological hard power. At the current price level, should we buy oil or gold? It must be gold. At over $4,000 an ounce, gold presents an opportunity both tactically and strategically. The structural long bull market for China's hardcore assets in the future will be driven by domestic funds, similar to the real estate bull market of the past 20 years. The next year or two is likely to be a year of reversal for the risk premium in the U.S. capital markets, as cracks have appeared in the AI bubble in U.S. stocks. Even if we consider the Hang Seng Technology Index as a consumer stock, it is worth buying at this stage. It is also worthwhile to treat it as a convertible bond. Do not cut losses at this time while sowing seeds with a heart of compassion. Adopted first-person perspective, with some content omitted. Global Market Shifts to "Safety Pricing" The Iran war has caused significant disturbances in global capital markets. Against this backdrop, we wrote an in-depth report focusing on China's hardcore assets. In early April (2025), we wrote a report stating that the international order might be entering a turbulent reconstruction period. About a year has passed, and the conclusions we see further validate its correctness. Whether it is the Russia-Ukraine situation or the recent situation in Iran, we can observe that the entire international order has entered a turbulent period dominated by the jungle law of the strong preying on the weak and the resurgence of hegemonism. The reconstruction of the international order has become even more profound in the face of this Iran war. We focus on macro strategies and are not specialized in geopolitics. What we want to share with everyone is how the frequent occurrence of geopolitical conflicts and the reconstruction of the international order affect our allocation of major asset classes and asset pricing. In short, it is a shift from "efficient pricing" to "safety pricing." In the past 30 years of globalization, everyone tried to minimize costs, allowing supply chains and industrial chains to be globally distributed according to their resource endowments, ultimately maximizing the benefits of globalization, especially for multinational companies. However, you can now see that the decoupling and disconnection led by the U.S. has become increasingly evident since 2018, and this year has seen various unreasonable and rule-breaking actions, with hegemonism replacing rules, and the resurgence of power politics and Cold War thinking What is reflected behind geopolitical issues is the reconstruction of the international order, which will affect the capital markets through three main lines: the first line is geopolitics. The second line is the reconstruction of the international financial order. The third line is the new stage of the international economy represented by decoupling and supply chain disruptions. In this context, the security of resource and energy supply has become an important premise for pricing. We used to take air for granted, but only when we are deprived of it do we realize its value; for the past 30 years, we have been accustomed to efficiency pricing, but now that chaos has arrived, we have entered a modern version of the Warring States period, where security pricing is the primary consideration in our asset pricing. This is my first point: The pricing logic of the global capital market has changed from efficiency pricing to security pricing. What is the core variable of the Middle East situation? The second point is our attempt to understand geopolitical conflicts. The recent focus is on the situation in Iran and its potential impact on the next phase of the global capital market. An important topic these days is the United States continuously trying to cool down the situation, with Powell also using words to stabilize the market. U.S. leaders have tweeted, sometimes saying they are negotiating well with Iran, and at other times claiming they are seeking Congressional approval for an additional $200 billion in military spending, even suggesting sending ground troops to attack Iran's Khark Island. This flip-flopping indicates that what they want to do is "promote peace through pressure." However, we believe that a true ceasefire has not yet arrived. Therefore, we must not only listen to their words but also observe their actions, and even what they do not say may be more important than what they do say. Now, Trump is saying things to soothe the capital market, trying to influence it with rhetoric similar to that during the 2018 U.S.-China tariff war, but the marginal benefits of such statements are diminishing. People have become accustomed to these verbal expressions and feel they are deceptive. In contrast, compromises that are put into action are what truly benefit investments in the capital market. So when is it possible to see a substantial cooling or ceasefire in the Middle East situation? We think several aspects should be considered. The first aspect is the pressure within the United States. The second aspect is the situation within Iran. The third observation direction is the influence and restraint of Israel on the United States and its leaders. However, the political and economic situation within the United States may be the core variable for cooling the situation. The game here determines that it may take until early April to truly find a ceasefire, TACO. What cannot be obtained on the battlefield cannot be obtained at the negotiating table, and ultimately there will be a compromise. The earliest sign of a ceasefire may be the withdrawal of aircraft carriers or the emergence of relevant ceasefire agreements, at which point it would be suitable for investors to increase their risk appetite and invest more optimistically. But we must also pay attention to low-probability events, such as ground troops becoming increasingly entrenched in hotspot areas during the Vietnam War. The most impactful and severe phase of market shock has passed Regarding the Middle East conflict, the conclusion is that the phase that had the greatest impact on the global capital market and severely killed valuations has passed. A true ceasefire may be formed as early as April, which would be TACO. However, we must remain cautious about low-probability events below 50%. If the U.S. deploys large-scale ground troops and the crisis extends for six months or even a year, it would lead to a global crisis mode. Under this logic, China remains a relative safe haven. ** At that time, although it would also be affected by imported inflation, China was relatively less affected compared to Europe, Japan, South Korea, and even the United States. At the same time, considering the importance of the U.S. midterm elections, time is the enemy of the country's leaders, so we believe the probability of a compromise ceasefire is greater. However, do not take last year's trade war as a template for this year; for Iran, it is a matter of life and death. In this asymmetric war, even if the U.S. wins tactically, it may still lose strategically. “Hardcore Assets” Will Rise The third issue is to deduce the global pricing of major asset classes from the situation in Iran. We believe that China's “hardcore assets” will rise. Hardcore assets mainly manifest as security, manufacturing hard power, and technological hard power, which is our “SMART strategy”. Conversely, resources, energy, and gold have always existed as hard powers, but under the current framework, their strategic attributes will be systematically enhanced. The first point is energy. For the past four years, energy has been hovering at low levels, with capital expenditure on crude oil extremely low, nearly zero growth. However, this war has made everyone realize the importance of strategic petroleum reserves. Although the U.S. is currently releasing reserves through allies to suppress oil prices, as the war continues, Japan, South Korea, and Europe will definitely increase their strategic petroleum reserve replenishment. The Strait of Hormuz accounts for 20% of global oil trade volume, and a substantial disruption will lead to a significant increase in global energy prices over the next two years. This highlights the wisdom of the domestic energy strategy. As early as 2018, we clearly stated that we must hold the energy bowl in our own hands. Due to the presence of coal, China's energy self-sufficiency rate reaches 85%, while Japan is only 16%, South Korea less than 20%, and Europe is also highly dependent. If the chaos in the Middle East persists, China's energy security capability in the manufacturing sector will be overwhelmingly superior to the aforementioned economies. After this war, Europe and Japan will definitely increase their investment in clean alternative energies such as nuclear power, hydrogen energy, and wind energy. The construction of new power systems and the overseas expansion of China's new energy will usher in a trend opportunity; this is not only a cost issue but also a matter of life and death for the manufacturing system. Therefore, the strategic value of energy (including crude oil, coal, coal chemical, and clean alternative energy) will be systematically enhanced. Even by 2030, the proportion of fossil energy in our country will still be as high as 74%, and the strategic attributes of traditional energy are difficult to replace. At the same time, energy technologies such as controllable nuclear fusion and energy storage will also undergo systematic re-evaluation. Opportunity Period for Gold Layout The second point is gold. At the current price level, should one buy crude oil or gold? It must be gold. At the beginning of the year, when it was $5,600 per ounce, I poured cold water on it, believing that the buying sentiment was irrational; but now, at over $4,000 per ounce, it is an opportunity period both tactically and strategically. The logic of the gold bull market is not about looking at the dollar or real interest rates, but rather the certainty premium of the reconstruction of the international financial order. Especially as the foundation of the “petrodollar” system has been violently shaken or even collapsed Recently, U.S. Treasury auctions have cooled, and yields are at high levels. In 1974, the U.S. and Saudi Arabia reached an agreement where the U.S. provided security protection, and Saudi Arabia settled oil transactions in U.S. dollars and purchased U.S. Treasury bonds. However, the U.S. can no longer protect the oil-producing countries in the Middle East, shaking the foundation of petrodollars. Amidst the crisis, there are opportunities. The Gulf War in 1990 strengthened the petrodollar, but this time it has shaken it. Recently, oil prices have risen, the dollar has strengthened, and gold has fallen. On one hand, this is due to profit-taking pressure from earlier in the year; on the other hand, it is a result of the inertia of petrodollar thinking. However, the essence of gold's long-term strength is a hedge against global sovereign credit risk. Gold is inherently a currency. Currently, the total market value of gold globally is about tens of trillions of U.S. dollars, while G20 sovereign debt far exceeds 100 trillion. Unless an extreme low-probability event of a global liquidity crisis occurs (which may lead to short-term panic), now is a good time to allocate gold. The lower the pressure, the greater the elasticity; the shaken petrodollar is the new momentum for gold's upward movement. Increase Allocation to Strategic Resources The third aspect is strategic resources, such as bulk commodities like copper and aluminum, as well as minor metals like rare earths, tungsten, molybdenum, and tin. In the era of globalization, everyone pursues maximum efficiency, but in the era of decoupling and supply chain disruption, it is essential to strengthen the development and reserves of strategic minerals. Both China and the U.S. are enhancing (development and reserves). With the development of the AI chain, the demand for resources is rigid, and the strategic attributes are elevated. The fourth aspect is military technology. Last year, global military spending reached $2.7 trillion, an increase of 9.4%, the largest increase since the Cold War. Military spending as a percentage of GDP in the U.S., Europe, Japan, and South Korea ranges from 2% to 3.5%, while China is currently only at 1.24%. The future focus of military industry will be on AI, drones, and intelligent technologies. Optimistic About Chinese Assets Strategically Finally, let's discuss how to view Chinese assets in this context. One should be strategically optimistic while maintaining tactical rationality. Strategic optimism arises because China is the most stable source of global growth in the great era of world order reconstruction. The Chinese stock market has overturned the three major mountains of "China's economy is like Japan's," "China's technology is a failure," and "China's private economy is retreating," establishing three new supporting bases for a long-term bull market. The first base is that the Chinese economy is bottoming out and recovering; the most difficult phase of switching from old to new driving forces has passed. An important indicator is that real estate has transitioned from an L-shaped decline to a horizontal bottoming phase. The rental yield in 100 Chinese cities has reached 2.4%, surpassing the 1.8% risk-free return rate. When rental yields exceed risk-free returns, it indicates that real estate has entered a bottoming phase. The optimization of the supply side brought about by anti-involution and new growth points will quietly enhance vitality like spring rain nourishing the earth. The second base is a new development path centered on technological self-reliance and strength. This is not about borrowing ideas but is driven by technological innovation. The third base is the path of financial development with Chinese characteristics. Long-term funds (social security, pensions, bank wealth management, etc.) will continue to allocate. The structural long bull market of China's hard assets in the future will be driven by domestic funds, similar to the real estate bull market of the past 20 years. Tactically, one should avoid chasing highs and adopt contrarian thinking. Before a true ceasefire TACO arrives, keep half sober and half intoxicated. When the market is pessimistic and volatile, dare to buy the highest quality Chinese assets; maintain composure during overseas rebounds and avoid blindly chasing highs. Once the withdrawal of U.S. troops is confirmed and a ceasefire agreement is signed, risk appetite will increase, and technology growth assets will have an advantage From a long-term perspective, safe pricing is a core consideration, and there is great potential in gold, military industry, strategic resources, and the energy technology industry chain. Gold and Technological Growth I believe that if there is a real ceasefire, gold and technology (especially China's high-tech hard technology, military technology, and AI-related hardcore technology) should rise simultaneously. These two are not in conflict. The recent adjustment is due to liquidity shocks; once the shock is alleviated, both will rise together, albeit with slightly different logic. If gold rises, it is because the earlier TACO occurs, the clearer it becomes that the United States is no longer mysterious and invincible, and the logic of petrodollars begins to waver. In this broader context, Trump is extricating himself from the Middle East, and the next step will definitely be to pressure the Federal Reserve to ease monetary policy and lower interest rates to alleviate domestic dissatisfaction. If he subsequently calls for interest rate cuts, it will be positive for both gold and growth stocks. The decline in the risk-free rate is beneficial for the rebound of technology growth stocks. The real seesaw effect is actually in crude oil and the energy chain, which will be suppressed in the short term. Recently, overseas investors have been holding dollars in one hand and energy in the other to hedge risks, which has negatively impacted gold and technology growth. If a ceasefire occurs, the seesaw effect will reverse. The next one or two years are likely to be a year of reversal in the risk premium of the U.S. capital market. The rigid bubble in U.S. AI has shown cracks; the market is no longer just listening to PPTs telling stories but is looking at cash flow. The U.S. private credit market (approximately $3-4 trillion in size) has been continuously impacted by the war. Therefore, even if U.S. growth stocks rebound, it is a return to the fundamentals of profitability, driven by whether they can bring sustainable business models and clear cash flow returns. If the capacity to bear is relatively strong and there is no short-term performance pressure, I suggest that everyone position themselves on the left side with gold and truly capable excellent technology companies. Hong Kong Stocks Are Worth Buying Even as Consumer Stocks I am very optimistic about Hong Kong stocks. Like A-shares, I believe that after this war, Chinese assets will achieve more attractive allocation value. The correlation between the Chinese stock market (whether A-shares or Hong Kong stocks) and U.S. stocks is significantly weakening. Historically, during the period from 2018 to 2020 when MSCI included A-shares, the correlation was at its highest, reaching 60%-80%; but now the correlation is almost zero, and even the Hang Seng High Dividend Index is negatively correlated with the S&P. This is due to domestic capital making long-term pricing. Unfortunately, the Hang Seng Technology Index is still dominated by foreign capital and has a high correlation with Nasdaq, with pricing power not yet in the hands of domestic capital. However, because of this, as long-term Chinese capital dominates the capital market, our correlation with the U.S. has decreased. In a turbulent and torn world, global asset management companies seeking wealth preservation find "non-correlation" to be a very attractive quality. After this war, we are expected to welcome a wave of substantial foreign capital allocation. Recently, representatives of Middle Eastern listed companies have been very willing to communicate with mainland China, indicating that the attractiveness of Chinese assets is growing stronger. The recent fluctuations and adjustments in A-shares and Hong Kong stocks can be described as the city gate catching fire, affecting the fish in the moat. But I believe this is like gathering momentum; crouching down can actually allow for a higher jump. Whether A-shares or Hong Kong stocks, there is hope for new highs in the second half of the year For the Hang Seng TECH Index, one can downplay its "tech" attribute, as it has not yet reflected the latest patterns of China's economic transformation and technological development in a timely manner. Currently, it represents more of the "old tech." However, even if we consider the Hang Seng TECH Index as a consumer stock, it is worth buying at this stage. The recovery of the Chinese economy has solidified the fundamentals, and the negative factors from previous years, such as anti-involution, have been fully priced in. Now, it is also worth buying as a convertible bond. Shed tears of compassion while sowing seeds; do not cut losses at this time. Unless a low-probability event of a global financial crisis occurs at the end of the year, it is definitely worth this price in the long run. To truly find opportunities in Hong Kong and A-shares, one should focus on excellent assets in certain niche areas outside of these large indices, using our "SMART strategy" to seek out China's hardcore assets: The first line is S (Security), which includes energy, strategic resources, and gold. The second line is M and A (Manufacturing/Advantage), which refers to China's most competitive manufacturing companies going overseas. After competing domestically, they go abroad to deliver a dimensionality reduction strike, such as in construction machinery, power equipment, and automotive parts. The third line is R and T (R&D/Technology), which includes strategic emerging industries that align with national strategic directions, such as semiconductors, new energy, innovative pharmaceuticals, and aerospace, as well as future industries and small giant enterprises like quantum computing, controllable nuclear fusion, and embodied intelligence. Risk Warning and Disclaimer The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk