Dongwu Strategy: The transmission path of this round of conflict to the A-shares may be similar to that of the Russia-Ukraine conflict

Key Points of the Report

Since 2015, historical review shows that geopolitical events generally cause short-term disturbances to major asset classes, which markets can fully absorb within a week, without becoming the dominant factor driving overall asset trends. However, the Russia-Ukraine conflict in 2022 broke this pattern. The unexpectedly prolonged war led to a mid-term rise in oil prices, creating a new transmission pathway: rising oil prices—imported inflation expectations—marginal tightening of Federal Reserve policies—deterioration of dollar liquidity—pressure on A-shares. The current conflict’s transmission path to A-shares bears some similarities to that of the Russia-Ukraine war.

By 2026, technological industry trends and liquidity conditions are somewhat similar to those in 2022.

In terms of industry trends, during the 2022 Russia-Ukraine conflict and the 2026 Middle East escalation, core tech growth sectors faced pressures from mismatched growth momentum and capital expenditure. In 2022, the new energy sector transitioned from rapid growth to steady maturity, with weakening prosperity. Currently, AI agent penetration is rapidly increasing, but deep application in downstream real economy remains unscaled, and the full commercial cycle is not yet established. Investors question whether the high ongoing costs in upstream hardware hardware can be profitable.

Regarding liquidity, 2022 and 2026 are both in transition phases of major liquidity shifts. In 2022, the Fed’s rate hike cycle began, shifting liquidity from ultra-loose to tightening, driven by excess liquidity from large-scale fiscal stimulus post-pandemic, compounded by energy and food supply shocks from the Ukraine conflict, accelerating inflation. In 2026, the environment is at the tail end of a loose cycle, with high absolute interest rates. Persistent fiscal deficits exert upward pressure on inflation, and geopolitical factors may further disturb inflation expectations or even pause rate cuts.

How did the market perform in 2022? What lessons does it offer?

In 2022, the A-share market evolved in three main phases, providing important insights for today:

• February to April: Multiple negative factors converged, causing sharp declines. External factors included escalating Ukraine conflict and Western sanctions, leading to liquidity concerns. Internally, some regions experienced pandemic-related stagnation. Growth stocks led the decline, with sectors like computing, electronics, power equipment, and military down about 30%.

• May to June: Pandemic easing and signals of stabilizing growth prompted a rebound. As some regions’ COVID-19 situations improved, and policy signals for stabilizing the economy were released, market risk appetite improved. Sector-wise, energy prices rose, reinforcing renewable energy themes. Power equipment and energy metals led gains, with some sectors up over 60%.

• July to October: Rising oil prices boosted overseas inflation expectations, causing growth stocks to decline again. US bond yields surged, and domestic economic outlook weakened, with real estate sales falling. Cyclical sectors like power and media underperformed, while some sectors like energy metals and photovoltaics saw profit-taking. As liquidity tightened in 2023 and renewable energy benefits waned, the industry adjusted further.

Given the similarities between 2022 and the current environment in industry trends and liquidity, the market lessons are:

• If current oil price movements similarly impact inflation as in 2022, rising oil prices could prompt a reassessment of growth stocks, pressuring them.

• The transmission from oil prices to inflation and rate hikes is gradual, not immediate. Coupled with complex factors within A-shares, market reactions may be phased, with some sub-sectors still offering excess returns due to structural logic, as seen in energy metals and photovoltaics in mid-2022.

Current market stage, core contradictions, and strategies

In the medium to long term, caution is needed regarding the potential for prolonged conflicts. The current situation exceeds expectations, with the Strait of Hormuz blockade, Iran’s internal split, and the Revolutionary Guard’s de facto independence. US officials suggest the conflict could last eight weeks or longer. This indicates the actual trajectory may surpass US and market expectations. It’s prudent to consider the possibility of a long, quagmire-like conflict similar to Ukraine, which could have significant market impacts, especially on oil prices. The current industry trend and liquidity environment are quite similar to 2022, so the risks of compounded disturbances and potential shocks are heightened. This is a worst-case scenario, not the baseline, but risk pre-emptive planning is essential.

Analogous to 2022, oil prices will become a key pricing contradiction. Previously, a weak dollar, easing rate hike expectations, and clear industry trends supported markets. If oil prices continue upward, they could break the weak dollar pattern and force policy tightening. A rising dollar would suppress growth stocks. Although Trump has publicly aimed to stabilize oil prices, and US midterm elections are approaching with low tolerance for inflation, the actual control over oil prices remains uncertain. Volatility in oil prices and geopolitical developments must be closely monitored.

In terms of strategy, three paths are recommended:

1. Neutral: Use tech and energy as hedges. If conflict remains contained and oil prices stabilize, focus on AI hardware “new infrastructure” and resource sectors.

2. Risk-off: Reduce tech exposure if long-term conflict disrupts the Strait of Hormuz and keeps oil prices high, breaking dollar weakness and adding pressure on growth stocks due to structural issues.

3. Aggressive: Maintain tech positions if oil prices spike sharply and expectations of US intervention lead to a correction, enabling a rebound in tech stocks.

Risk warnings: slower-than-expected economic recovery; policy implementation delays; geopolitical risks; overseas policy uncertainties.

Main Text

Review of Major Geopolitical Events Since 2015 Shows that geopolitical conflicts have a consistent impact on international oil prices and the A-share market: in the short term, conflicts trigger pulse-like spikes in oil prices and suppress risk appetite, causing short-term declines in stock indices; however, from a valuation perspective, most conflicts—especially in the Middle East—tend to resolve quickly with limited spillover, and do not cause lasting disruptions to oil supply patterns. Therefore, their impact on major assets is mainly short-term, often absorbed within a week, and do not dominate overall asset trends.

However, the 2022 Russia-Ukraine conflict broke this pattern. Initially, markets expected a quick Russian victory, but the conflict evolved into a prolonged war, leading to a mid-term rise in oil prices and a new transmission path: rising oil prices—imported inflation expectations—marginal tightening of Fed policies—deterioration of dollar liquidity—pressure on A-shares. The current escalation in the Middle East again exceeded initial expectations, with markets underestimating the persistence of conflict. Consequently, the transmission pathway to A-shares resembles that of the 2022 Ukraine war.

1. The technological industry trend and liquidity environment in 2026 are somewhat similar to 2022

In industry trends, during the 2022 Russia-Ukraine conflict and the 2026 Middle East escalation, core tech growth sectors faced pressures from mismatched growth momentum and capital expenditure.

In 2022, the new energy sector saw a decline from rapid growth to steady maturity, with penetration rates of new energy vehicles surpassing critical thresholds, ending explosive growth; solar industry capacity continued to expand, but demand slowed globally, and high capital expenditure worsened supply-demand balance, weakening profitability expectations. Overall, the industry transitioned from high-speed growth to steady maturity, with weakening prosperity.

In 2026, AI faces similar issues. While AI agent penetration accelerates, downstream applications are not yet scaled, and the full commercial cycle remains incomplete. Upstream hardware maintains high capital expenditure, raising doubts about sustained profitability.

Liquidity-wise, 2022 and 2026 are both in transition phases of major liquidity shifts.

In 2022, the Fed’s rate hike cycle began, shifting liquidity from ultra-loose to tightening. The federal funds rate rose from near 0%, with 10-year US Treasury yields climbing from 1.6% to over 4%. This was driven by excess liquidity from large fiscal stimulus post-pandemic, compounded by energy and food supply shocks from the Ukraine conflict, accelerating inflation.

In 2026, the environment is at the tail end of a loose cycle, with 10-year yields around 4%. Market expectations for rate cuts fluctuate between no change and 100 basis points of easing. Persistent fiscal deficits and geopolitical tensions continue to exert upward pressure on inflation, possibly pausing rate cuts.

2. How did the market perform in 2022? What lessons can be learned?

In 2022, the A-share market evolved in three phases:

• February to April: Multiple negative shocks led to sharp declines. External factors included escalating Ukraine conflict and Western sanctions, causing liquidity concerns; internally, some regions experienced pandemic-related stagnation. Growth stocks led the decline, with sectors like computing, electronics, power equipment, and military down about 30%.

• May to June: Pandemic easing and stabilization signals prompted a rebound. As some regions’ COVID-19 situations improved and policies aimed at stabilizing growth were introduced, risk appetite recovered. Sector-wise, energy prices rose, reinforcing renewable energy themes. Power equipment and energy metals led gains, with some sectors up over 60%.

• July to October: Rising oil prices boosted inflation expectations abroad, causing growth stocks to decline again. US bond yields surged, and domestic real estate outlook weakened. Cyclical sectors like power and media underperformed, while some sectors like energy metals and photovoltaics saw profit-taking. As liquidity tightened in 2023 and renewable energy benefits waned, the industry further adjusted.

Given the similarities between 2022 and today’s environment, the market lessons are:

• If current oil price movements similarly impact inflation as in 2022, rising oil prices could trigger a reassessment of growth stocks, leading to pressure.

• The transmission from oil prices to inflation and rate hikes is gradual. Coupled with complex internal factors, market reactions may be phased, with some sectors still offering excess returns due to structural logic, as seen in energy metals and photovoltaics in mid-2022.

3. Current market stage, core contradictions, and strategies

In the medium to long term, caution is warranted regarding prolonged conflicts. The current situation exceeds expectations—repeated Strait of Hormuz blockades, Iran’s internal split, and the Revolutionary Guard’s de facto independence. US officials suggest the conflict could last eight weeks or longer, indicating the actual trajectory may surpass US and market expectations. It’s prudent to consider the possibility of a long, quagmire-like conflict similar to Ukraine, which could significantly impact markets, especially oil prices. The current industry trend and liquidity environment are quite similar to 2022, so the risks of compounded shocks and potential disturbances are heightened. This is a worst-case scenario, not the baseline, but risk management must be proactive.

Similar to 2022, oil prices will become a key pricing contradiction. Previously, a weak dollar, easing expectations, and clear industry trends supported markets. If oil prices continue upward, they could break the dollar weakness pattern and force policy tightening. A rising dollar would suppress growth stocks. Although Trump has publicly aimed to stabilize oil prices, and US midterm elections are near with low tolerance for inflation, actual control over oil prices remains uncertain. Oil price volatility and geopolitical developments require close monitoring.

In terms of strategy, three paths are suggested:

1. Neutral: Use tech and energy as hedges. If conflict remains contained and oil prices stabilize, focus on AI hardware “new infrastructure” and resource sectors.

2. Risk-off: Reduce tech exposure if long-term conflict disrupts the Strait of Hormuz and keeps oil prices high, breaking dollar weakness and adding pressure on growth stocks due to structural issues.

3. Aggressive: Maintain tech positions if oil prices spike sharply and expectations of US intervention lead to a correction, enabling a tech rebound.

4. Risk warnings

• Slower-than-expected economic recovery

• Policy implementation delays

• Geopolitical risks

• Overseas policy uncertainties

(From Dongwu Securities)