Market trends this year have been highly volatile, with rapid rotation across various asset classes. The most significant unexpected factor driving this volatility is the ongoing evolution of the Middle East situation. The duration and intensity of the current conflict have far exceeded market expectations, not only altering the initial pricing logic at the start of the year—centered on interest rate cuts and demand improvements from global fiscal expansion—but also substantially increasing uncertainty in the macroeconomic outlook. Although the U.S. and Iran have achieved a temporary ceasefire and entered negotiations, core disagreements remain, leaving the future trajectory highly uncertain. Against this backdrop, what core themes should guide the allocation of major asset classes moving forward? And what key indicators should investors monitor to time their allocations effectively?
We believe the impact of the Middle East situation will gradually shift across short-, medium-, and long-term narratives. In the short term, supply-side disruptions caused by geopolitical conflicts exhibit strong persistence, making price increases a central theme. Focus should remain on downstream demand with sustained purchasing power, particularly the rigid demand driven by the AI industry cycle and strategic inventory replenishment motivated by geopolitical factors. In the medium term, global markets will grapple with the interplay between capacity relocation and recessionary trends. China is poised to benefit from shifting production and orders, but vigilance is required against potential recessionary pressures triggered by renewed oil price surges. In the long term, the weakening of U.S. credit will accelerate de-dollarization and asset reallocation. The long-term pricing logic for commodities remains intact, while Chinese assets and AI-related hard technology sectors offer compelling long-term allocation potential.
To observe transitions between these narratives, we recommend tracking the following key indicators: In the short term, closely monitor downstream inventory digestion and the resilience of end-demand to validate the sustainability of price increases and the efficiency of price transmission. In the medium term, follow the pace of global capacity relocation and manufacturing sentiment across major economies to identify the inflection point where supply restructuring gives way to demand slowdown. In the long term, observe cross-border capital flows and the progress of global asset reallocation to gauge the reshaping of asset pricing anchors and capital deployment trends under a weakening U.S. dollar cycle.
1. Short-Term Focus: Price Increases Remain Paramount The supply-side shock has led to price increases with notable stickiness, suggesting a recovery will not be swift. Although a temporary ceasefire has been reached between the U.S. and Iran, underlying geopolitical tensions persist, and statements from involved parties remain inconsistent, leaving the situation fluid. Even if the conflict fully subsides, restoring shipping through the Strait of Hormuz will take time, and rebuilding damaged energy production capacity could require months. Regional energy supply and logistics channels will continue to face disruptions, meaning short-term supply constraints will not be quickly resolved.
Consequently, rising prices remain one of the clearest near-term trends. As detailed in our previous report, price increases can be a double-edged sword for industries: while they may expand profit margins, they also test the cost-bearing capacity of downstream sectors. Therefore, the market's current focus is on identifying price increase chains where cost pressures can be efficiently passed through to end-consumers, targeting entities with clear "payment capability."
Amid declining or bottoming inventory cycles in major global economies, we identify two core areas with sustained purchasing power in end-demand: First, rigid demand driven by the global artificial intelligence industry cycle. Although concerns exist about potential cuts in AI-related capital expenditure, it is premature to assume significant reductions. Participants in the "AI race" have limited retreat options; halting progress risks obsolescence. Thus, high costs are not the primary concern—endurance and competitiveness take precedence.
Positive fundamental developments in the AI sector further support demand resilience. Rapid growth in Token consumption has reinforced market confidence in the long-term demand potential and profit durability of the AI industry.
Second, inventory replenishment demand from sovereign reserves, driven by geopolitical security concerns. Against a backdrop of profound geopolitical shifts, many nations are expanding and strengthening strategic reserves, which could underpin resource price trends this year. However, as U.S.-Iran tensions escalate, the primary objective of reserves has shifted from supporting "economic development" to ensuring "national security." Reserve priorities are tilting toward more urgent areas like food, energy, and defense—core sectors vital to national stability. This demand exhibits stronger resilience and greater upward price momentum.
2. Medium-Term Perspective: Capacity Relocation Versus Recession Trading From a medium-term viewpoint, global markets are embroiled in a complex interplay between "capacity relocation" and "recession trading." Geopolitical risks, supply chain restructuring, and aggregate demand cycles are converging, suggesting macroeconomic pricing logic will no longer follow a single narrative but may evolve progressively from inflation to stagnation, and potentially to recession.
Prolonged Middle East tensions are causing ripple effects in price increases, creating broad-based cost pressures from production to demand: Supply chain issues are particularly acute. Rising oil prices and potential closure of the Strait of Hormuz could lead to production halts reminiscent of the pandemic era. Short-term uncertainty in trade routes and exacerbated cross-border logistics disruptions threaten global supply chain stability, potentially triggering production interruptions and delivery delays that constrain global supply capacity.
From a price transmission mechanism perspective, similar to the oil price surge following the Russia-Ukraine conflict in 2022, cost increases in the energy and chemical sectors—core foundations of manufacturing—will gradually permeate various industries over time. This process will squeeze corporate profits, elevate household living costs, and ultimately transmit pressures from production to end-demand. Without robust policy countermeasures, the probability of the global economy shifting from high inflation to growth stagnation, or even recession, will rise significantly.
Currently, the impact of the Middle East situation remains in its initial phase—characterized by rising inflation and supply disruptions—without yet systematically transmitting to global demand. The rebound in manufacturing PMIs in the U.S. and other major economies in March indicates precautionary inventory building by firms preparing for supply chain uncertainties, suggesting short-term demand retains some resilience. This provides a brief buffer for the global economy.
During this "supply shock"-driven window, global capital's safe-haven needs and capacity relocation demands often align. In terms of asset allocation, this favors economies with robust supply chain resilience, stable energy security, and well-developed industrial ecosystems. Such economies will not only serve as "safe havens" for excess global liquidity but also become primary recipients of global orders and industrial resources, gaining strategic initiative in the restructuring of global market dynamics.
Chinese assets stand out as particularly attractive in this context. China's comprehensive and self-sufficient industrial system, efficient supply chain infrastructure, reliable energy security, and continuously improving business environment position it as a highly competitive beneficiary in the global reallocation of industry and capital.
Reflecting on 2021–2022, China's strong export performance demonstrated the core value of supply chain resilience and industrial advantages. During pandemic-induced global supply chain disruptions, China's effective management of epidemic control and economic recovery enabled a swift rebound in industrial chains, significantly increasing its global export share and supporting phased high growth in exports, thereby stabilizing global trade and supply.
In the current cycle, as capacity relocation and supply chain restructuring again become central themes, China's scaled, low-cost, and high-efficiency manufacturing advantages in midstream sectors like new energy, high-end equipment, and electronics will continue to attract global capacity and consolidate its position as a core hub in global industrial chains.
However, vigilance is warranted: any cost increases and imported price shocks will inevitably transmit to demand. Unlike the previous inflation cycle, which featured robust global demand supported by massive U.S. fiscal stimulus, the current macroeconomic environment has fundamentally shifted. Developed economies face constrained room for interest rate cuts, tighter fiscal space, and debt limitations, leading to overall weak aggregate demand due to ongoing credit contraction. This means market logic cannot simply replicate the post-2021 inflation or recovery trading patterns.
If oil prices remain elevated, further suppressing global consumption and investment demand and pushing manufacturing cycles into decline, major economies may struggle to remain insulated. As global manufacturing sentiment weakens, the capacity relocation narrative driven by supply restructuring will gradually yield to recessionary pressures from slowing demand. In this scenario, asset allocation should prioritize defensiveness and certainty, shifting toward sectors with profit resilience, stable cash flows, and reasonable valuations, while avoiding highly cyclical assets sensitive to demand fluctuations.
3. Long-Term Outlook: Global Asset Reallocation Cycle In the long term, the Middle East situation underscores deeper variables reshaping global asset pricing anchors and the appeal of U.S. dollar credit. Regardless of the conflict's outcome, the perceived decline in U.S. strategic control and credibility is likely to accelerate global capital's reassessment of U.S. "safe asset" status, prompting even traditionally steadfast supporters like Middle Eastern sovereign funds to diversify their allocations.
Thus, the camp advocating "de-dollarization" and diversified allocation is expanding unprecedentedly. From China seeking self-sufficiency post-trade tensions, to Russia's pre-pandemic decoupling, Europe's reservations over resource disputes like Greenland, to Middle Eastern oil producers eager to diversify risks—the reliance of major global economies on a single dollar system is loosening. Although this process will be volatile, the "weak dollar" narrative is gaining consensus, with its foundations steadily strengthening.
Based on this narrative, we identify several long-term allocation themes: First, against geopolitical fragmentation and declining dollar credibility, commodity attributes are undergoing qualitative changes. On one hand, faced with high debt in developed economies and marginal erosion of dollar credit, gold and a basket of non-renewable commodities serve as optimal hedges against fiat currency depreciation—transcending inflation trading to reflect distrust in credit currency systems. On the other hand, Middle East conflicts exacerbate supply uncertainties, transforming traditional energy resources like oil, gas, and minerals from mere industrial inputs into strategic national security assets. Geopolitical risk premiums stemming from supply chain fragility will be permanently priced in.
Second, asset reallocation based on sovereign credit. As capital flows out of overvalued dollar assets in search of undervalued and politically neutral options, the risk premiums of economies with sound fiscal discipline, complete industrial chains, and deep domestic demand (like China) will be reassessed.
In this context, Chinese assets, including A-shares and Hong Kong stocks, may see systematically enhanced strategic positioning. As noted in our previous report, Hong Kong's role as a bridge between Eastern and Western capital could elevate its global financing strategic importance amid dollar溢出, positioning it as a core beneficiary in global asset rebalancing.
Furthermore, if global recession trading forces the AI industry narrative to shift from "valuation-driven" to "profit- and cost-driven," China's manufacturing sector could potentially capture the entire AI industry chain. With soaring capital expenditure by Silicon Valley giants and diminishing marginal returns from model iterations, the cost-effectiveness of computing power supply is showing signs of deterioration. Should high-interest rates constrain financing and recession expectations dampen demand, capital expenditure growth will inevitably slow, creating a strategic window for China to leverage its "late-mover cost advantage" and comprehensive supply chain for a "curve overtaking" in AI.
Ultimately, AI represents a deep integration of electricity, hardware, and algorithms, destined to gravitate toward manufacturing. When industry competition shifts from "arms race"-style parameter stacking to cost control and implementation efficiency in "commercial closed loops," China's profound manufacturing foundation will form a formidable moat second only to technological breakthroughs. This positions China to achieve vertical integration across the AI industry chain, establishing itself as a core global supplier of AI infrastructure and end applications.
Under this paradigm, "Token出海," leveraging cost-effective computing services and model deployment, could emerge as a high-certainty, cash-flow-positive business model in the AI sector. This not only extends China's manufacturing advantages into the digital economy but also reinforces the global strategic position of hard tech and internet leaders in A-shares and Hong Kong stocks.
4. Short-, Medium-, and Long-Term "Anchors" of Middle East Impact In summary, we believe the transmission of Middle East tensions will progressively shift across short-, medium-, and long-term narratives. The pace and intensity can be tracked through three key indicators: Short-term: Monitor the pace of downstream inventory digestion and end-demand resilience to assess the sustainability of price increases and price transmission efficiency. Medium-term: Track the rhythm of global capacity relocation and changes in manufacturing sentiment across major economies to identify the tipping point where supply restructuring logic transitions to demand slowdown logic. Long-term: Closely observe cross-border capital flows and global asset reallocation progress to gauge the profound changes in asset pricing anchors and capital deployment directions under a weak dollar cycle.