Joaquin Strategy: A-Shares Maintain Short-term Oscillation Trend, Short-term Recommendation for Balanced Allocation

Investment Highlights

Reviewing history, high oil prices have a greater impact on overseas inflation, while the stock market is more driven by liquidity and fundamentals. (1) High oil prices significantly push up overseas inflation, especially during economic upswings. First, high oil prices have a larger effect on US inflation, more so during economic recovery; secondly, they may lead to imported inflation in China, reflected in rising PPI. Second, liquidity tightening is more determined by economic and inflation trends: first, whether the Fed raises interest rates depends on a comprehensive assessment of economic and inflation levels; second, whether China tightens liquidity mainly considers if the economy is overheating. Third, economic downturns are not necessarily caused by high oil prices: first, US economic slowdown is due to weakening fundamentals or liquidity tightening; second, domestic economic decline is more due to external demand weakening, etc. (2) High oil prices negatively affect the stock market, but fundamentals and liquidity are more influential. First, US stocks are mainly affected by fundamentals and liquidity: for example, in 2008, high oil prices and inflation led to declines primarily due to the subprime crisis, with the Fed still in easing mode; in 2022, rising oil prices further increased inflation expectations, prompting rate hikes and causing US stocks to fall. Second, A-shares are mainly influenced by external environment and liquidity: in 2008, declines were driven by overseas subprime crisis and liquidity tightening since 2007; in 2022, declines were mainly due to Russia-Ukraine conflict, Shanghai疫情, and Fed rate hikes, while domestic liquidity remained relatively loose.

Currently, A-shares remain resilient supported by policies, fundamentals, and liquidity, maintaining a short-term oscillation trend. (1) The current round of oil price increases may have a weaker impact on inflation than in 2007 and 2022. First, US energy component’s weight in CPI has significantly decreased from about 10% in 2012 to 6-7%. Second, US economy and employment are slowing: PMI continues to weaken; non-farm payrolls and labor participation rate growth are declining, indicating ongoing slowdown; lastly, current oil price rise is mainly due to US-Iran tensions, and once conflicts end or Strait of Hormuz reopens, prices may fall quickly, limiting inflation impact if high prices don’t last long. Third, China’s imported inflation may be limited: CPI and PPI remain low; weak domestic demand reduces the pass-through effect of oil prices on CPI and PPI. (2) The current oil price rise may negatively impact US stocks but less so than in 2008 and 2022: inflation may be pushed up but less than in 2007 and 2022, reducing the likelihood of rate hikes; the negative impact on US fundamentals is limited. (3) A-shares may remain relatively resilient in the short term supported by policies, fundamentals, and liquidity: first, policies remain proactive; second, economic recovery and profits are ongoing: with peak season and cost advantages, investment, consumption, and exports may rebound; PPI rising could further boost corporate profits; third, domestic liquidity may stay accommodative: overseas liquidity expectations have eased; domestic inflation pressure is low, and the central bank may continue to inject funds, though short-term foreign inflows may slow, long-term institutional funds could persist.

Industry Allocation: Short-term balanced allocation of high-quality tech, some cyclical sectors, and undervalued dividend industries. (1) In the short term, petrochemical and high-quality tech sectors may outperform: reviewing history, during rapid oil price increases or high levels (above $120/barrel), energy-related industries like petrochemicals and coal tend to outperform. For example, during 2003/3/20-2004/10/26, coal; 2007/3/24-2008/6/27, coal; 2022/2/4-2022/6/14, coal, petrochemicals, and non-ferrous metals performed well. Also, during such periods, industries with upward trends like new energy vehicles (2022), consumer upgrades (2011/2/15-2012/3/8) also outperformed. Tech growth sectors were generally suppressed during rapid oil price hikes, but segments with good performance or upward industry trends, such as power equipment (2007/3/24-2008/6/27) and media (2011/2/15-2012/3/8), showed relative strength. (2) Currently, sectors like petrochemicals, power, new energy, and hardware may perform better: oil prices boost profits in oil extraction and services; renewable energy sectors benefit from higher oil prices and energy transition; rising AI demand supports hardware and related industries with improving earnings.

(2) Short-term balanced allocation: Focus on industries with policy and industry trend support, such as new energy (AI power, energy storage), communications (AI hardware), electronics (semiconductors, AI hardware), non-ferrous metals, chemicals, military (commercial aerospace), and pharmaceuticals. For example, upcoming expos and conferences in these sectors will promote industry development and investment opportunities.

Risk Warnings: Past experience may not predict future performance; policy surprises; economic recovery may fall short of expectations.

Main Content

1. How do high oil prices affect the economy and stock markets?

(A) Reviewing history, high oil prices mainly influence stock markets through liquidity transmission

Reviewing history, high oil prices have a greater impact on overseas inflation, while A-shares are more driven by liquidity and fundamentals. Looking back at the extreme oil price hikes in 2007-2008 and 2020-2022, the performance of domestic and international economies and stock markets shows:

(1) High oil prices significantly push up overseas inflation, especially during economic upswings.

一是 high oil prices raise inflation: first, they have a larger effect on US inflation, especially during recovery, e.g., CPI YoY in July 2008 reached 5.6%, and in June 2022 reached 9.1%. The difference is that in 2008, the US was already in a subprime crisis with weakening real estate; in 2022, the economy was recovering from the pandemic. Second, high oil prices may lead to imported inflation in China, reflected in rising PPI, e.g., China’s CPI YoY in Feb 2008 was 8.7%, and in Nov 2021 was 2.3%; PPI YoY in July 2008 was 10.0%, remaining high at 8-14% in late 2021.

二是 Liquidity tightening depends on economic and inflation trends: first, Fed rate hikes depend on economic and inflation conditions; in 2007, despite high inflation, the Fed cut rates to address subprime risks; in 2022, the Fed raised rates amid rising inflation and economic growth. Second, China’s liquidity tightening depends on overheating: in 2007-2008, the PBOC raised reserve ratios and interest rates multiple times; in 2022, the central bank cut reserve requirements and rates due to economic pressure.

三是 Economic downturns are not necessarily caused by high oil prices: first, US slowdown was due to weak fundamentals or liquidity tightening (e.g., 2008 recession caused by subprime crisis); second, China’s slowdown was mainly due to external demand decline, e.g., exports falling in 2008 and 2022.

(2) High oil prices negatively impact stocks, but fundamentals and liquidity are more influential. US stocks are mainly affected by fundamentals and liquidity: in 2008, the decline was driven by the subprime crisis despite high oil prices; in 2022, rising oil prices increased inflation expectations, leading to rate hikes and stock declines. A-shares are influenced by external environment and liquidity: in 2008, declines were due to overseas crisis and liquidity tightening; in 2022, affected by Russia-Ukraine conflict, Shanghai疫情, and Fed rate hikes, with domestic liquidity remaining relatively loose.

(B) Currently, A-shares show resilience, maintaining a short-term oscillation

A-shares are supported by policies, fundamentals, and liquidity, showing resilience and a short-term oscillation trend. (1) The current oil price rise may have a weaker inflation impact than in 2007 and 2022: US energy’s CPI weight has decreased from about 10% in 2012 to 6-7%; US economy and employment are slowing: PMI weakens; wages and participation rate decline, indicating slowdown; current oil prices are mainly due to US-Iran tensions, and once resolved, prices may fall quickly, limiting inflation impact. (2) China’s imported inflation may be limited: CPI and PPI remain low; weak domestic demand reduces the pass-through effect. (3) The impact on US stocks may be less severe: inflation may rise but less than in 2007/2022, reducing rate hike expectations; US fundamentals are already weakening, but tech profits and growth may continue if liquidity remains supportive.

(3) A-shares may remain resilient short-term supported by policies and fundamentals: policies remain proactive; economic and profit recovery continues with rising manufacturing, infrastructure, real estate, retail, and export data; PPI rising could further boost profits; domestic liquidity may stay accommodative, with overseas liquidity expectations easing but long-term institutional inflows continuing.

2. Industry Allocation: Balanced short-term allocation of high-quality tech, cyclical sectors, and undervalued dividend industries

(A) Short-term outperformance expected in petrochemicals and high-quality tech

Historical review shows during rapid oil price hikes or high levels (above $120/barrel), energy-related industries like petrochemicals and coal outperform. For example, during 2003/3/20-2004/10/26, coal; 2007/3/24-2008/6/27, coal; 2022/2/4-2022/6/14, coal and petrochemicals performed well. Industries with upward trends like new energy vehicles (2022) and consumer upgrades (2011/2/15-2012/3/8) also outperformed. Tech growth sectors were suppressed during oil surges, but segments with good fundamentals or upward trends, such as power equipment (2007/3/24-2008/6/27) and media (2011/2/15-2012/3/8), showed relative strength. Currently, sectors like petrochemicals, power, new energy, and hardware may benefit from rising oil prices and industry trends.

(B) Short-term balanced allocation:

Focus on industries with policy and industry trend support, such as new energy (AI power, energy storage), communications (AI hardware), electronics (semiconductors, AI hardware), non-ferrous metals, chemicals, military (commercial aerospace), and pharmaceuticals. Upcoming expos and conferences will promote industry development and investment.

3. Risk Warnings

• Past experience may not predict future outcomes: historical analysis has limitations; market conditions, industry trends, and global environment change over time, affecting investment results. Past performance is for reference only.

• Policy surprises: macroeconomic policies influenced by external shocks, international relations, or unforeseen events may deviate from expectations, impacting investment decisions.

• Economic recovery may fall short: external disruptions, trade disputes, natural disasters, or other unpredictable factors could cause economic fluctuations, affecting investment outlooks.

(Source: Huajin Securities)