CICC: Has the market "dropped to the right level"?

The Iran conflict has entered its fifth week, and the evolution path is more complex and prolonged than the market initially expected. Last week, the market briefly traded on the "TACO" narrative and easing expectations, leading to a pullback in oil prices, but on Friday, the conflict escalated again. This indicates that there is still a considerable distance to true easing, and the road to easing may not be smooth. Against this backdrop, the performance of different assets has shown significant divergence. U.S. Treasuries and gold have limited volatility, even experiencing slight rebounds, while equity markets such as U.S. stocks have begun to "catch up" on declines. This aligns with our findings in last week's report "Has the Market Fully Priced in the Risks of Iran?" that bonds and gold have incorporated more pessimistic expectations, while equity assets have not fully priced in the pessimistic scenarios. At this point, the most pressing question for investors is: Has the market "dropped enough"? To answer this question, first, we need to see if the situation escalates; second, even if the situation remains unclear, we can observe whether asset pricing has been sufficient; furthermore, the pricing differences among different assets and industries can lead to significantly different "cost-performance ratios," which are important references for investors to respond to the evolving situation and make allocation choices. This is also a key focus of our discussion in this article. In summary, bonds, gold, and copper are relatively pessimistic; the equity market's pricing for pessimistic scenarios is generally insufficient (except for some markets like Hengke that have already seen significant declines). U.S. stock market: There may still be a 8-10% correction space under pessimistic scenarios. Chinese market: The pricing of A-shares and Hong Kong stocks for pessimistic scenarios is also not fully sufficient. On one hand, the suppression of valuations by U.S. Treasury yields and dollar fluctuations has not been fully reflected, especially for the more liquidity-sensitive Hong Kong stocks and A-share growth styles and small-cap stocks; on the other hand, if disruptions caused by the closure of the Strait of Hormuz further impact production activities in Southeast Asia, rising recession expectations will also transmit through demand logic along the sequence of "external demand - cycle - technology": under declining global demand, the space for domestic pricing advantages will narrow, and the export chain may face pressure first, such as in chemicals and construction machinery; subsequently, pressure will further diffuse to cyclical products like copper and aluminum through demand and supply; finally, technology sector valuations will be influenced by interest rates and risk preferences. The current adjustments in some export chains and pro-cyclical sectors have already reflected the beginning of this transmission path, but the pessimistic scenarios at the index level have not been fully accounted for