What is your view on the recent correction in the A-shares market? It’s a release of pressure rather than a trend reversal.

Ask AI · Have the current market pessimistic expectations been fully priced in?

Chief Economist and Director of Research at Yuekai Securities: Luo Zhiheng

Chief Financial Analyst: Yuan Ye (15810120201)

Introduction

On March 23, 2026, during Asia-Pacific trading hours, Japanese and Korean stock markets plummeted, while A-shares came under pressure simultaneously. Gold prices broke through multiple levels, with London gold futures briefly falling to $4,098.25 per ounce. After a sharp decline at the open, Japanese and Korean markets continued to fall, with the Nikkei 225 down 3.48% and Korea’s KOSPI down 6.49%. Major Chinese indices also declined significantly: the Shanghai Composite fell below 3,900 points to 3,813.28, a 3.63% drop for the day; the ChiNext Index dropped 3.49% to 3,235.22, essentially erasing all gains for the year.

The escalation of the US-Iran conflict has exceeded expectations, causing intense fluctuations in global asset prices including gold, silver, crude oil, and equities. Market sentiment has been volatile amid the war developments. Concerns about high oil prices potentially triggering global inflation and monetary tightening have led to rapid capital outflows from stocks and other rate-sensitive risk assets. Meanwhile, gold, crowded with long positions and viewed as a risk asset, has also been sold off. We believe that the recent continuous correction in the A-share market is mainly driven by overseas sentiment and profit-taking in some sectors, rather than the end of a bull market. Historical experience shows that bull markets in China have never ended due to geopolitical issues but are usually caused by domestic policy shifts.

In the long term, the current market adjustment is more about the release of accumulated pressure rather than a trend reversal. We remain confident in A-shares. In times of frequent geopolitical events, China’s strong economic, military, and diplomatic capabilities provide security. Internally, a stable institutional environment and a complete industrial system are the foundation and confidence for long-term optimism in A-shares. We suggest focusing on two main themes: first, sectors with improving supply-demand dynamics, strong inflation expectations, and profit recovery potential, such as non-ferrous metals, power equipment, basic chemicals, oil and petrochemicals, and coal; second, domestically controlled and self-reliant sectors like domestic computing power, AI, new energy, energy storage, commercial aerospace, and defense industries, which may see repeated activity throughout the year.

Contents

1. Asia-Pacific stock adjustments and major indices decline: what are the reasons?
2. The current market pricing may have already incorporated significant pessimism
3. How to view and allocate in the future A-shares?

Main Text

1. Asia-Pacific stock adjustments and major indices decline: what are the reasons?

The core reason for the decline in Asia-Pacific markets and gold prices is the escalation of the US-Iran conflict, which has shifted macro expectations and triggered concerns about stagflation and a small liquidity crisis. The conflict has entered its fourth week, with intensifying tensions. Trump issued threats to Iran, demanding the opening of the Strait of Hormuz within 48 hours or else destruction of power plants. Iran responded that if the US attacks its power infrastructure, it will impose comprehensive blockades on the Strait of Hormuz and retaliate against Israeli energy and communication facilities. From “Strait of Hormuz blockade” to “mutual infrastructure strikes,” the global energy shock continues to escalate. Markets worry that high oil prices could trigger worldwide inflation and monetary tightening, leading to capital fleeing rate-sensitive assets like stocks. Gold, with crowded long positions and viewed as a risk asset, has also been sold off (see “Why did gold plunge? Is the ‘hedge logic’ invalid?”).

The ongoing correction in A-shares mainly stems from three overlapping factors:

First, macro-level concerns about overseas stagflation and liquidity tightening. If Middle East tensions push oil prices higher, global stagflation could impact A-shares: inflation from geopolitical conflicts may squeeze corporate profits and raise living costs, dampening consumption and economic fundamentals. Meanwhile, overseas central banks turning hawkish and tightening monetary policy will suppress valuations across global markets, including A-shares.

Second, capital-level factors: profit-taking and institutional rebalancing exert internal pressure. Sectors like non-ferrous metals have seen large gains, and the quarter-end rebalancing by mutual funds and insurance funds has increased cash-out flows, amplifying market volatility.

Third, technical and sentiment factors: key support levels breaking trigger panic selling. The Shanghai Composite broke below 3,900 points, a key psychological level, activating stop-losses among some trading and quant funds, leading to forced selling, further accelerating short-term declines, and pushing risk aversion to extremes.

2. The current market pricing may have already incorporated significant pessimism

Whether for speculation or investment, it’s essential to see through appearances to the core and base expectations on the present to anticipate the future. The key is to adopt “second-order thinking”: not just what the market is trading now, but how much of the main trend has already been priced in and how much room for expectations remains. When markets focus on earnings, consider how much of those earnings are already reflected in prices. When markets panic, discern how much of the panic is based on facts versus others’ fears.

In the current sentiment environment, clarifying these two questions can help us identify the more probable directions amid uncertainty and prepare in advance:

1. Regarding the conflict itself, could it evolve into another prolonged “Russia-Ukraine war”?

The US faces three major constraints: economic, political, and diplomatic. Its strategic will is weakened, and internal divisions prevent it from initiating a bottomless, long-term Middle East war. Economically, high inflation and rising oil prices could hinder the Fed’s rate cuts, conflicting with its efforts to ease fiscal and debt pressures through low interest rates. Rising living costs may also impact voter support (see “How will oil prices reshape the US economy and politics?”).

Politically, as the midterm elections approach, prolonged Middle East conflicts could pressure Trump’s support. The MAGA camp supporting Trump is increasingly divided; many allies believe that entanglement in Middle East conflicts violates “America First” promises and harms the national treasury and domestic workers. Under multiple pressures, Trump’s room for maneuver on Middle East issues diminishes.

Diplomatically, Trump issued a 30-day sanctions waiver allowing countries to buy Russian oil stranded at sea, undermining Europe’s sanctions efforts. Meanwhile, European allies have largely refused to participate in escorting the Strait of Hormuz, deepening rifts. Europe’s pursuit of “strategic autonomy” and centrifugal tendencies may lead the US to reconsider the scale and duration of US-Iran conflict.

Iran’s core strategy is to retaliate strongly and blockade the Strait of Hormuz, creating economic “pain” to pressure the US into concessions. If the conflict drags on, it could backfire: affecting relations with oil-consuming countries like Europe, Japan, and South Korea; cutting off revenue sources and impacting Iran’s economy, which already suffers from long-term inflation and unemployment; and internal ethnic tensions with Kurdish and Baloch groups, risking civil unrest if the economy remains depressed.

Therefore, we believe a prolonged war is unlikely; rather, escalation and threats are aimed at achieving negotiation opportunities. On March 23, Trump unilaterally expressed “strong interest in reaching an agreement with Iran” and announced a five-day pause on military strikes. While this may be a psychological tactic, Iran denied the statement, but it suggests a willingness to avoid further escalation.

2. How will the US-Iran conflict impact China? Could it cause severe shocks?

Economically, the current conflict mainly has indirect effects on China. China is not a direct participant nor in the conflict core regions. The impact mainly transmits through energy prices, global supply chains, and transportation routes, with overall limited lasting effects.

Market-wise, China’s past bull markets show they have never ended due to geopolitical issues but are usually caused by domestic policy shifts. As of early 2026, A-shares remain in a bull phase, with market risk appetite resilient. Regulatory signals continue to promote stability, and liquidity remains relatively ample, providing a supportive environment. Therefore, a deep correction does not mean the end of the bull market.

In summary, the current deep correction has largely priced in pessimistic expectations. When sentiment is squeezed to the extreme, the subsequent rebound potential becomes noteworthy. CME data shows the market no longer expects Fed rate cuts in the first half of 2026; instead, about a 10% chance of rate hikes exists. Commodities like gold and copper continue to decline, with technical indicators showing significant oversold signals. As of 3:00 pm on March 23, the RSI (14-day) for Shanghai gold and copper was below 30, indicating oversold conditions. These metrics suggest the market has already priced in considerable pessimism.

3. How to view and allocate in the future A-shares?

4. In the short term, it’s prudent to control positions, reduce trading frequency, and be prepared for market volatility.

Given ongoing US-Iran tensions, investors should be cautious of high volatility risks. Short-term strategies include: first, reducing positions appropriately; second, maintaining balanced allocations to avoid over-concentration in any single sector.

2. In the long term, the current market adjustment is more about pressure release than trend reversal. We remain long-term optimistic about A-shares.

In an era of frequent geopolitical events, China’s strong economic, military, and diplomatic capabilities provide security. Internally, a stable institutional environment and a complete industrial system underpin confidence. We recommend focusing on two main themes:

First, sectors with improving supply-demand dynamics, strong inflation expectations, and profit recovery potential, such as non-ferrous metals, power equipment, basic chemicals, oil and petrochemicals, and coal (see “Reassessing US-Iran conflict: where is it heading? How does it impact the global economy and asset prices?”).

Non-ferrous metals and power sectors supply raw materials and energy for AI development, with strong demand support. Oil and petrochemicals benefit directly from geopolitical conflicts and rising prices. Coal, as a fundamental raw material alongside oil, faces valuation reassessment under the logic of chemical substitution.

Notably, non-ferrous metals have experienced significant corrections mainly because they have certain financial attributes and valuations declined with gold’s plunge. However, their fundamentals remain intact: supply constraints persist for copper and aluminum; demand from new energy and AI remains strong. Overall, gold’s strategic value and the importance of rare earths remain solid, and industrial metals like copper and aluminum are expected to rebound.

Second, domestically controlled and self-reliant sectors such as domestic computing power, AI, new energy, energy storage, commercial aerospace, and defense industries may see repeated activity within the year. Policy signals further reinforce the underlying logic of a bull market. The government’s work report emphasizes accelerating high-level technological self-reliance and seizing opportunities from new technological revolutions and industrial transformations, enhancing independent innovation capabilities for high-quality development. Additionally, reforms in the capital market, such as the reform of the ChiNext and re-financing systems, support “focusing on excellence and technology,” providing further momentum for the bull market.

Risk warning: Geopolitical developments and oil prices exceeding expectations, global monetary policy tightening beyond forecasts, Fed’s independence weaker than expected, and global financial market volatility surpassing expectations.

Analyst: Luo Zhiheng, License No.: S0300520110001, Email: luozhiheng@ykzq.com

Analyst: Yuan Ye, License No.: S0300523070001, Email: yuanye_zb@ykzq.com