Market Herald Weekly Call | Safe-haven Logic and Technology Opportunities Amid Middle East Turmoil

The market implications of escalating tensions in the Middle East go far beyond the simplistic view of 'oil prices rise, gold rises.' It forces a reevaluation of global risk premiums and inflation paths: short-term asset correlations increase, volatility rises, equity markets first 'slash Beta' then 'slash high valuations,' before gradually returning to fundamental discussions around interest rates and earnings. The key to understanding this type of shock lies in a geographic chokepoint — the Strait of Hormuz.

1. Why the Strait of Hormuz Determines the 'Magnitude' of the Shock

The recent US-Iran friction has escalated rapidly from negotiation progress to breakdown, followed by limited military strikes; Iran's military actions toward the Strait of Hormuz have strengthened deterrence, forcing markets to factor in 'transportation disruptions.' The Strait of Hormuz connects the Persian Gulf with the Gulf of Oman/Indian Ocean, with its narrowest point being about 21 miles (approximately 33–39 kilometers), and the main shipping lanes are extremely narrow (two lanes, each about 2 miles wide, with limited maneuverability). What it carries is not just 'regional' traffic but serves as a crucial valve for global energy trade:Crude oil / condensate LNG dependenceMore critically, even if the strait is blocked, the 'ceiling' for alternative routes is very low. Saudi Arabia’s 'East-West Pipeline' has a capacity of about 5 million barrels per day, while the Abu Dhabi pipeline in the UAE can handle approximately 1.8 million barrels per day, allowing for a combined stable diversion of only about 2.6 million barrels per day, which is just a small fraction of the strait's flow. Even if all reroutable pipelines are included, it still falls far short of offsetting a large-scale blockage of the strait. This implies that once a 'serious disruption' occurs, the market could easily shift from 'short-term sentiment' to pricing based on 'structural supply and trade realignment'.

Phase Two and Three Dynamics: Shock Period → Repricing Period → Rotation Period

Placing asset performance within a time dimension provides clearer logic:Phase One: Shock Period (already underway)Oil prices, oil shipping, and gold often experience sharp upward spikes, with the VIX rising; equity markets typically first see a decline in 'Beta,' followed by a pullback in high-valuation sectors. The most common mistake during this phase is chasing the most crowded trades.Phase Two: Repricing Period (1–12 weeks)The market shifts focus back to inflation, interest rates, and earnings: oil and gold prices are more likely to diverge. Empirical statistics often show a rhythm where 'oil is stronger over three months, and gold stronger over six months' – initially reflecting supply concerns, then, if oil prices retrace, gold is more likely to take over (provided real interest rates do not rise rapidly).Phase Three: Rotation Period (3–9 months)Capital flows from sectors directly benefiting from the conflict back into industries with higher earnings quality and greater valuation recovery potential; the beta of defense and oil/gas converges, with resources / high dividend stocks and some growth sectors regaining favor.

Three, three key monitoring variables: determining 'short-term disruptions' or 'structural crises'

Hormuz passage and war risk premiumsThe duration of blockades/disruptions and the actual affected shipment volumes are crucial in distinguishing between short-term shocks and structural oil crises; war risk premiums and shipping rerouting often serve as leading indicators.Oil price benchmarks and domestic political responses in the USIf Brent stays above $80–90 for an extended period, it is more likely to push up US inflation and political pressure, prompting stronger policy actions in diplomacy and energy tools; markets often view the combination of 'verbal intervention to suppress oil prices + Strategic Petroleum Reserve (SPR) releases' as one of the potential signals of a temporary peak in oil prices.VIX and US real interest ratesIf the VIX climbs back above 30–40 while the 10-year real interest rate rises rapidly, there is a need to be vigilant about systemic risks caused by excessively tightening financial conditions (this would escalate geopolitical events from 'sectoral shocks' to 'macroeconomic shocks').

Four, how core assets are priced: oil, shipping, gold, currency, military industry, and equities

4.1 Crude oil: the current situation resembles 'adding a risk premium' rather than pricing in a one-time shock

From a pricing structure perspective, the market typically considers around $60 per barrel as close to the 'fundamental benchmark,' and after tensions escalate, the futures rebounding to around $70 implies that a geopolitical premium of approximately $8–10 per barrel has already been factored in, though tail-risk scenarios remain not fully priced. Three scenarios can help understand the upper limit of oil prices:Limited strikes, partial blockades without substantial lockdowns / severe disruptions (a more realistic high-probability path) Extreme: Long-term full blockade (tail scenario)Intuitive conclusion: The risk for oil prices stems from 'forced inclusion of tail probabilities,' rather than today's supply-demand tables themselves.

4.2 Oil shipping (VLCC): The most 'direct' ton-mile leverage in geopolitical shocks, but scenarios need to be differentiated

The pricing mechanism for oil shipping leans more towards 'engineering' rather than sentiment: Rising route risks → Increased war risk premiums → More complex rerouting / waiting / STS (ship-to-ship transfers) → Higher ton-miles + Reduced effective capacity → Elevated freight rate benchmarks. In terms of data, freight rate indicators such as BDTI often lead and are more persistent. The recent spike in freight rates itself reflects the market pricing in a high-risk environment: TCE for VLCC routes like Middle East to China surged to over $100,000/day or even higher; one-year time charter prices also rose significantly, indicating that the market is not just trading 'events' but also 'the persistence of high freight rates.' However, it is not all one-way positives for oil shipping; the key lies in the state of Hormuz.Higher probability: Partial blockades +常态化 high risks + Trade restructuring Extreme tail: Full, sustained blockadeAt the industry level, some large participants accelerated their expansion of VLCC-controlled fleets before and after the conflict (via second-hand vessel acquisitions + time charters to lock in capacity), essentially betting on the structural opportunity of 'scarce compliant capacity + rising freight rate benchmarks'—this also indirectly confirms that the certainty in oil shipping comes from supply constraints and route restructuring, not solely reliant on oil price direction.

4.3 Gold: A typical 'two-phase' asset — short-term spikes, medium-term dependent on real interest rates and capital flows

Gold tends to strengthen around the outbreak of conflicts, but sustained rallies usually require deeper mechanisms: 1) Supply disruptions pushing up inflation trends; 2) Actual capital outflows from US dollar-denominated credit assets (corresponding to declining real interest rates or rising risk premiums for dollar assets). Historical experience provides reference for timing: Various statistics show that in the first three months following a geopolitical shock, crude oil’s average gains significantly exceed those of gold, but over six months, gold is more likely to outperform (with crude oil pullbacks being more common). Thus, gold serves better as a mid-term hedge against 'macro uncertainty,' rather than merely chasing gains on event days.

4.4 Bitcoin: More akin to a highly volatile risk asset, with unstable safe-haven attributes

In this round of escalating tensions, crypto assets experienced rapid retracements during heightened situations: For instance, on February 28 during the escalation window, the market saw a temporary evaporation of total market cap, declines in major coins, and widespread liquidations, contrasting with the strength shown by gold. This behavior aligns more closely with characteristics of 'high-beta risk assets.' A more rational positioning would be: Gold as the anchor for geopolitical risk aversion; Bitcoin as a highly volatile, institutional / de-dollarization narrative-driven tool-like asset; Altcoins as high-risk satellite positions.

4.5 Military Industry and Strategic Metals: Driven by Orders and Bottlenecks, Focus on Structural Opportunities Brought by the 'Combat Paradigm'

Escalation of conflicts typically raises the risk premium for military industries and certain strategic resources. More noteworthy is tracking directions related to modern combat methods: air defense and missile interception, anti-drone measures, radar and satellite remote sensing, ammunition replenishment, and upstream critical materials. On the resource side, the logic of 'war metals' often prevails: for instance, the demand for tungsten in land warfare supply chains, the need for specific rare earth elements in aerospace and electronics, and enhanced export controls boosting bargaining expectations.

4.6 Equity and Technology: Short-term Pressure, Medium-term Return to Profitability; Volatility Amplified in High Valuation Environments

Empirical statistics show that after major geopolitical events, stock index drawdowns typically range between 5%-15%, depending on the sample and criteria used, but recovery cycles often occur within approximately 1-2 months (around 47 trading days). In other words, heightened volatility on the event day is common, but medium-term trends do not necessarily turn significantly negative, ultimately reverting to profitability and interest rates. However, the current peculiarity lies in high valuations combined with tail risks of reflation, making long-duration growth sectors (including AI-related chains) more prone to 'volatility digesting valuations.' Structurally, the AI industry trend has not changed due to geopolitical shocks, but it is better suited to screen opportunities through the lens of 'infrastructure bottlenecks and supply constraints' rather than merely chasing sentiment.

V. Applying the Framework to an 'Actionable' Portfolio Approach (Principle-based Expression)

In phases of heightened uncertainty, institutional practices commonly divide positions into three categories instead of betting on a single direction:Defense + Beta Hedging Reversal + Mispricing Recovery Dynamic Risk Control

—————Below is the Guest Sharing——————

Macroeconomic and Industrial Outlook - Global Investment Systems and Trends

Shift in Investment Systems: Senior institutional investment experts note that the current world is multipolar, presenting...Decoupling and disruptionTrends that last 5 to 10 years. In the past, under a unipolar global system, investment only required analyzing business models; under a multipolar system, the relationship between nations and enterprises becomes uncertain, challenging the moats of business models, requiring investment with a global perspective.

Supply chain restructuring: The US strategic pullback, involving the return of manufacturing and resource gathering, is leading to a global supply chain overhaul. Increased fiscal spending by developed countries is boosting manufacturing capacity, driving up resource prices, expanding infrastructure investments, and spurring demand-side growth. Rising geopolitical friction impacts supply chain security and capital flows, potentially pushing funds into stable markets like Japan, South Korea, and China.

Technological disruption opportunities: New technologies, represented by AI, bring disruptive impacts, such as layoffs in fintech companies and salary cuts at consulting firms. AI programming increases industrial efficiency, offering significant growth potential. Currently, there is no bubble in the AI industry, and mainstream chip companies are valued reasonably.

Analysis of investment opportunities in various countries

US investment situation: The US invests in emerging fields, especially AI, through issuing government bonds,which could increase the share of GDP by 40% to 50%. AI development can offset inflationary pressures, and the US is ramping up AI investment to regain global leadership. The return of US manufacturing will rely on Japan and South Korea, whose economic fundamentals have improved, with strong manufacturing capabilities ready to meet US demand.

Japan and South Korea investment opportunities: Japan and South Korea's nominal GDP continues to recover, with large manufacturing orders. Japan has exited deflation, and South Korea's birth rate is rebounding. Global liquidity expansion and US fiscal and monetary easing are driving valuation increases, but attention should be paid to the US core CPI indicator,as a rise could lead to interest rate hikes, reversing investment opportunities。

Emerging Market Investment Value: Emerging markets, including Japan, South Korea, and China, play a significant role in asset allocation. Despite being affected by valuation, narratives, and inflation, niche companies have growth potential, attracting global capital inflows amidst volatility, which could enhance their valuations.

AI Industry Demand and Investment Opportunities

AI Penetration and Demand: A February survey indicated that AI adoption has reached a 20% penetration rate, growing from 0 to 20% over the past three years, with expectations to reach 30%-40% by year-end. AI demand is steadily rising, driving ongoing requirements for computing power and infrastructure, particularly amid a shortage of high-end computing capacity.

Areas of Investment Focus: Competition among large models is concentrated in Q2, presenting investment opportunities in related models. Attention should be given to upstream and downstream areas of PCBs, such as drill bits and ladders, where Japanese companies benefit from capital inflows and spillover demand.The optical communication sector holds investment value, particularly in upstream optical chips and CPO core technologies. Non-linear growth in storage demand, coupled with reliance on extreme ultraviolet lithography machines for high-end storage, points to capacity shortages, offering room for valuation increases in related companies.

Interactive Q&A Session

PCB Industry-Related Questions: On-site participants asked about the sustainability of the positive outlook for upstream AI industries like PCBs. The expert responded that, fundamentally, the use of next-generation chips will increase demand for PCBs, but capacity expansion takes 1-3 years, ensuring demand remains solid until 2025. Stock prices tend to reflect market demand in advance; some companies already reflect expectations for 2027. It is recommended to rotate trades and enter positions on dips.

Questions on Japan's Economic Policies: Participants inquired about the impact of Japanese policies on supply and demand. The expert explained that Japan’s prime minister is pushing aggressive economic policies, with both monetary and fiscal policies being relatively bold. Mandatory wage hikes are being enforced, corporate governance is expected to improve, and cash returns will increase. However, there are risks associated with Japanese bonds, requiring attention to JGB yields and fiscal space. Currently, these policies remain sustainable within this year’s framework.

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