Gui Haoming: The resilience of A-shares stems from "safety premium"

Questioning AI · Why Has the Middle East Conflict Not Significantly Impacted the A-Share Market?

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■ Gui Haoming

After the Middle East ignited into war, the global economy was greatly affected. Especially as the Strait of Hormuz, one of the major international energy passages, experienced shipping disruptions, directly impacting oil and gas supplies in Eurasia, leading to concerns about inflation and economic recession.

Against this backdrop, stock markets in various countries generally declined, with some of the most important U.S. stock indices falling over 10% in a month, entering a technical bear market. East Asian markets like Japan and South Korea also kept falling, with daily drops often exceeding 5%, shaking investor confidence and causing widespread panic. As part of the global stock market, China’s A-shares naturally were not immune, with the current major indices retreating somewhat from late February levels.

However, since late March, the trend of A-shares has begun to strengthen. Especially in the last few trading days of the month, despite significant declines in overseas markets, A-shares often only opened slightly lower and then gradually stabilized and rebounded, even closing with positive lines at the end of the day. Even on some days when they declined in tandem with foreign markets, the decline was much smaller.

Historically, compared to neighboring markets, A-shares have often been “following declines without leading gains,” but now they are showing an unusual pattern of “following gains without falling,” even emerging as an independent market like a single red flower in a sea of green, which is rare in history and thus worth pondering.

In my view, this is a manifestation of the “safety premium” of A-shares. For the stock market to operate smoothly, a good market environment is needed. This environment not only includes loose monetary policy and proactive fiscal policy but also stable social order and a secure international environment.

Since its inception, A-shares have long been in a peaceful and stable environment, which has led many to see this as a matter of course, with no sense of a safety premium being necessary. But now, with the outbreak of war in the Middle East, people have to reconsider this issue.

Simply put, some countries in the Middle East are bombarding missiles and drones overhead every day, and people’s lives and property are under great threat, making it impossible to have stable expectations for the future.

Under such circumstances, the stock market naturally loses its foundation for stable operation. People need assets with good liquidity for risk hedging. As a result, not only stocks but also gold, as a traditional safe-haven asset, will attract capital.

Of course, the current conflict in the Middle East is still limited to specific regions and has not spread on a large scale. However, because multiple key infrastructure and industrial bases in several countries have been damaged, coupled with logistics disruptions, the impact has extended beyond the Middle East. Many Southeast Asian countries, which rely heavily on Middle Eastern resources for production, now face heightened risks in energy and raw materials due to the conflict. Clearly, the lack of an international security environment makes economic development prospects highly uncertain, and stock markets will naturally decline.

Looking at China, although it is also affected by rising crude oil prices and faces challenges in production and social consumption across various industries, China, as a country with a huge market, has been committed to opening up to the outside world while also striving to build a more efficient domestic cycle, reducing dependence on international markets.

Meanwhile, with years of efforts to diversify oil and gas import channels and develop new energy sources, the share of Middle Eastern oil and gas in domestic energy consumption has significantly decreased. These factors effectively safeguard domestic energy security and ensure the normal operation of social production and people’s livelihoods.

Moreover, in some areas, issues with foreign supply chains have even increased demand for Chinese products. In summary, because China is one of the main economies with relatively stable global security conditions, this environment—less affected by Middle Eastern conflicts—provides more favorable conditions for economic operation compared to other countries. This is reflected in the stock market as a safety premium. Currently, the A-shares are performing better than those in some other countries and regions, and the fundamental reason lies here.

While enjoying this safety premium, investors should also pay attention to two points: First, cherish this premium, as it creates conditions for stable market operation during this special period, but it does not support excessive speculation. Overall market risk appetite remains low, so caution is still necessary.

Second, the future development of the Middle East situation is unpredictable. If the conflict escalates further, although we have a safety premium, the actual impact will increase, and stock market performance may only be relatively better, with the possibility of declines still existing.

Editor | Wang Wei

Chief Editor | Chen Yuhe

Review | Hou Gege | Third Review | Zhang Jing