Open-source strategy: The conflict "second derivative" has emerged. The opportunity for left-side layout is now visible!

Executive Summary

● Next signal—volatility convergence

In our 3.2 report, 《The biggest expectation gap in the U.S.-Iran conflict—Iran’s conflict duration and the Strait of Hormuz》, we clearly state that the market may be overly optimistic about a rapid resolution to the U.S.-Iran conflict: “Conflict duration and the Strait of Hormuz may be the most apparent expectation gap in the current U.S.-Iran conflict.”

Whether it’s the expectation gap in conflict duration or in the Strait of Hormuz, the most direct impact is on crude oil prices. And because crude oil prices and their supply dynamics further propagate through a long chain of effects across global factors, crude oil prices have become the core observation point for current global asset price trends.

● How to judge the right-side signal? Best observation indicators for positioning under conflict: OVX and VIX

Amid market turmoil triggered by geopolitical conflict, stepping out of a single “event-driven” logic and shifting to a quantitative volatility framework and cross-asset indicators is the core of how institutional investors respond.

To effectively observe volatility, we introduce two volatility indicators: OVX (the crude oil ETF volatility index) and VIX (the fear index). When OVX rises rapidly while VIX responds with a relative lag, it indicates that risk is still concentrated on the energy side and has not fully transmitted to global macro credit risk or earnings expectations. Once the two begin to resonate upward in sync, it often implies that geopolitical risk has already triggered a liquidity crisis or heightened global recession expectations. Current risk is still concentrated in energy supply risk and has not fully transmitted to global macro credit risk or earnings expectations. Compared with historical VIX readings, the current reading is lower than the VIX value during the April 2025 U.S.-China trade conflict.

● Changes in the conflict’s “second derivative”: Opportunities on the left side are already here, but the right-side confirmation has not yet arrived

(1) The latest development is that, beyond both sides of the conflict beginning to release signals about “making room to leave an exit,” countries outside the conflict have also taken more proactive actions:
　　① The current statements and engagement between both sides of the conflict are closer to the “political game” stage of “fighting to push for talks”;
　　② The Strait of Hormuz has also shown marginal changes in traffic flows;
　　③ In recent times, the international community has placed even more emphasis on diplomatic pressure, as well as economic and political coordination, to help restore navigation through the Strait of Hormuz.

(2) This means that the “second derivative” of how the war unfolds has begun to change. Of course, this is still not right-side confirmation. But from a positioning perspective, the left-side signals have already appeared, so investors can be modestly more proactive than before. Still, we need to emphasize: the left-side signals are an important timing point for a relative return battle, but right-side signals are the best entry time for absolute returns. In the short term, the tech categories that were most heavily damaged earlier often benefit the most; in the long term, what truly deserves attention is still ΔG growth. If crude oil prices and related volatility continue to decline afterward, market risk appetite may further recover, and growth is likely to remain one of the directions with the highest recovery elasticity.

● Investment thesis—The timing for left-side positioning is here; seize opportunities with ΔG tech + high dividends

For the upcoming actions, we believe: The conflict hasn’t ended, but the worst pricing phase may be in the past; the left side can start to attempt an offensive positioning, but it should not be overly aggressive, while tech growth remains the most important direction to focus on.

Asset allocation approach:

(1) Growth is still the strongest main theme this cycle, but the investment approach must change: ΔG + profit redistribution. Key areas to focus on: power capital (power equipment, energy metals), compute capital (storage, semiconductors, robotics, liquid cooling), platform applications (Hong Kong-listed internet), innovative drugs;

(2) We emphasize that high dividends in 2026 are better than in 2025, and we focus on high dividends that have considered ΔG: coal, insurance, media, petrochemicals, and transportation and logistics;

(3) “Options” among real estate-related assets after potential bottoming in property prices: optional consumption and the recovery of service consumption driven by stabilization in balance sheets (high-end commercial properties, outdoor sports, tourism, hotels, food and beverage, etc.).

● Risk warning: Macroeconomic policy changes beyond expectations; risk of worsening geopolitics; risk of changes in industrial policy.

Report Main Body

01

Next signal—volatility convergence

In our 3.2 report, 《The biggest expectation gap in the U.S.-Iran conflict—Iran’s conflict duration and the Strait of Hormuz》, we clearly state that the market may be overly optimistic about a rapid resolution to the U.S.-Iran conflict: “Conflict duration and the Strait of Hormuz may be the most apparent expectation gap in the current U.S.-Iran conflict.”

Whether it’s the expectation gap in conflict duration or in the Strait of Hormuz, the most direct impact is on crude oil prices. And because crude oil prices and their supply dynamics further propagate through a long chain of effects across global factors, crude oil prices have become the core observation point for current global asset price trends. Since the U.S.-Iran conflict began, crude oil prices have moved opposite to other major asset price trends, showing the rare phenomenon of “crude oil rallies on its own while everything else falls together.”

Although crude oil prices have risen quickly, volatility is still very high. As for how this affects various categories of assets—long term or short term, beneficial or damaging—the next most important signal does not actually come from where “crude oil prices end up,” but from when crude oil price volatility converges. Only then can the impact on different asset categories be more certain and actionable. This is the most core right-side signal for investor decision-making.

(1) How to respond during high-volatility periods: In our 3.2 report, 《The biggest expectation gap in the U.S.-Iran conflict—Iran’s conflict duration and the Strait of Hormuz》, we clearly propose the investment strategy to respond to post-conflict expectation gaps: hold to the right path while using surprise tactics, and focus on “three-layer” positioning—

① “Certainty-oriented” categories: Shipping (oil shipping/dry bulk), gold, energy upstream (oil, coal, coal chemical industry), chemical products (methanol, urea);

② “Trend” categories to respond to future developments: Defense and military industry (military AI, drones, missile defense), cybersecurity, and export-manufacturing substitution;

③ “Non-consensus” allocations from a macro perspective: Agriculture, forestry, animal husbandry, and fisheries (hedging inflation risk), volatility strategies (not easily shorting volatility).

(2) How to respond when volatility falls: the medium- to long-term framework after volatility returns—

① AI tech: ΔG + profit redistribution: power capital (power equipment), compute capital (compute, storage, semiconductors, robotics), platform applications (AI4S);

② Cyclicality under a “price-increase” logic: non-ferrous metals (energy metals, minor metals), chemical and petrochemical, insurance, building materials;

③ 2026 theme “big year”: AI+ (AI4S), embodied intelligence, nuclear fusion energy, quantum technology, brain-computer interfaces;

④ Increased allocation value of high dividends in 2026: high dividends considering ΔG: coal, non-bank financials, media, petrochemicals, transportation and logistics.

02

Right-side signal assessment criteria: two volatility measures—OVX and VIX

Amid market turmoil triggered by geopolitical conflict, stepping out of a single “event-driven” logic and shifting to a quantitative volatility framework and cross-asset indicators is the core for defensive positioning or left-side setups by institutional investors. At present, the market is being disturbed by geopolitical news; compared with positive rumors, it seems the market reacts more quickly and more intensely to negative rumors, showing a certain degree of “asymmetry” and “irrationality,” which also reflects that the market pays greater attention to potential risks during moments of geopolitical turbulence. Facing an environment with too much noise and rising complexity in investment research work, all of this boils down to the market lacking a single core, quantifiable main handle that the market recognizes.

The current “U.S.-Iran uncertainty” should validate entry timing through “volatility range contraction,” rather than “events clearing.” Since the conflict began, the trajectory of the U.S.-Iran situation has shown dynamism and volatility; it has exceeded market expectations. It seems there is no single unified node that can be used to judge whether the conflict will escalate, and the signal that the conflict ends also seems hard to judge by the appearance of one event at a particular time. Therefore, for investors looking to find entry timing, if geopolitical turning points are judged by “events clearing,” there is a risk of missing the best entry timing. As with how market conditions and the intensity of the conflict have exceeded market expectations, going forward, the actual turning point in geopolitics is very likely to also fall outside the market’s current understanding.

To effectively observe volatility, we introduce two volatility indicators: OVX and VIX. OVX, the crude oil ETF volatility index, measures market expectations for crude oil volatility over the next month and represents energy supply risk; VIX, the Chicago Options Exchange volatility index—commonly known as the fear index—measures market expectations for S&P 500 volatility over the next month and represents recession risk. If we are concerned about whether the market’s worry about energy supply risk will transmit to the economy, leading to system-wide risks such as the economy, we can assess and capture this by looking at the trends of OVX and VIX.

When OVX rises rapidly and VIX responds with a relatively lag, it indicates that risk is still concentrated in the energy segment and has not fully transmitted to global macro credit risk or earnings expectations. Once the two move in sync and resonate upward together, it often implies that geopolitical risk has already triggered a liquidity crisis or heightened expectations of a global recession. Current risk is still concentrated in energy supply risk and has not fully transmitted to global macro credit risk or earnings expectations.

Looking back at the past, there were three periods in which OVX significantly exceeded VIX—when energy supply risk was above recession risk—each occurring during periods when energy prices saw sharp declines. From 2007 to today, periods when OVX significantly exceeded VIX include 2014.11-2015.2, 2015.12-2016.2, and 2020.1-2020.4, all of which were during periods when WTI crude oil prices fell sharply. Compared with historical VIX readings, the current reading is lower than the VIX value during the April 2025 U.S.-China trade conflict.

Before the right-side signal clearly appears, we provide a typical response framework: the “volatility four quadrants” [Volatility Four Quadrants]:

Given the geopolitical situation with extremely high uncertainty and the market environment today, “volatility” and “fragility” are what make investing difficult at the moment. We propose using volatility as the core analytical framework and suggest validating entry timing through “volatility range contraction,” rather than “events clearing.” Focus on OVX and VIX—these represent the energy supply risk and recession risk faced by the market, respectively. In terms of investment advice, we focus on responding; adopt a “hedging” mindset; and capture the “volatility four quadrants”:

Industry allocation suggestions under the “volatility four quadrants”:

(1) OVX high + VIX oscillating: The market is in a localized energy crisis. For allocation, over-allocate to traditional energy/energy alternatives, and prioritize directions with price transmission capability. Recommended: power equipment, coal, coal chemical industry;

(2) OVX elevated + VIX quickly turning upward: Systemic recession/liquidity risks triggered by geopolitics—defense comes first;

(3) OVX tops out and rolls over + VIX oscillates downward: The crude oil volatility term structure starts shifting from backwardation to contango, the crisis has passed, and the focus turns to tech growth. Recommended: compute power, semiconductors, Hong Kong-listed internet, robotics, storage, price-increase beneficiaries, AI4S, etc.; theme investing enters a big year;

(4) OVX declines + VIX spikes unusually: Geopolitics ends, but the impact of high oil prices on the economy remains. Shift to high dividend / low volatility.

03

The conflict’s “second derivative” is already showing; the left side can move to attack, but it’s still not right-side confirmation

(1) The latest development is that, not only have both sides of the conflict started to release signals of “making room to leave an exit,” countries beyond the conflict have also taken more proactive actions:
　　① The current statements and engagement between both sides of the conflict are closer to the “political game” stage of “fighting to push for talks”:
　　Iranian President Pezeshkian said Iran is willing to end the war, but only on the condition that its demands are met—especially receiving guarantees of “not being subjected to aggression again.” Iranian Foreign Minister Aragchi also confirmed that Iran is still receiving messages from U.S. representative Witkoff; while this is not yet formal negotiations, it suggests that the communication chain has not been interrupted.

Meanwhile, on the U.S. side, recently it has maintained military pressure on one hand, while continuing to release signals of engagement through communication and potential arrangements on the other. Trump said the U.S. could end hostilities with Iran within “two to three weeks,” and even ruled out the possibility of pushing for a convergence of the war effort before a formal agreement. On the other hand, in an interview on an NBC News phone call, Trump said that if U.S. military aircraft are shot down, it would not affect negotiations with Iran. Overall, Trump’s remarks have shifted toward “hard with softness.”

② The Strait of Hormuz has also seen marginal changes in traffic flows:
　　Over the past week, there have been signs of marginal repair in near-term passage through the Strait of Hormuz. Vessels related to Oman, Japan, and France, as well as tankers carrying Iraqi crude oil, have already passed. According to Reuters citing reporting from Iran’s Tasnim on April 4 local time, Iran has allowed ships carrying basic living necessities to travel through the Strait of Hormuz to its ports.

③ In recent times, the international community has emphasized diplomacy, economic and political coordination, to help restore navigation through the Strait of Hormuz:
　　On April 2, the UK chaired an online ministerial meeting to discuss ways to restore passage through the strait. Notably, the U.S. did not participate. Participating countries included more than 40 nations such as France, Germany, Italy, Canada, and the UAE. This reflects that European powers are concerned that the extreme pressure from the U.S. (the Trump administration) could lead to the strait being permanently closed. They are trying to engage Iran directly through “diplomatic and political tools,” aiming for “a ceasefire in exchange for open navigation.”

For China, on March 31, China and Pakistan jointly released a “five-point initiative,” which directly stated “immediately stop the fighting and end the war,” and also demanded “restore normal navigation through the strait as soon as possible.” On April 2, the Ministry of Foreign Affairs also repeatedly stated that “only by stopping the fighting and ending the war can international sea-lane safety and smooth passage be fundamentally maintained,” and said that “achieving a ceasefire and ending the war as soon as possible, restoring peace and stability in the Strait of Hormuz and nearby waters, is a common aspiration of the international community.” This constitutes very clear public statements, and with marginal but continuous escalation.

Pakistan is one of the most proactive mediators in this round. It has upgraded from general calls for action to hosting meetings with multiple foreign ministers and working to push for concrete proposals. On March 29, Pakistan hosted a foreign ministers meeting in Islamabad with Turkey, Egypt, and Saudi Arabia. Reuters explicitly wrote that they discussed “possible ways to bring an early and permanent end to the war,” and “reopen the Strait of Hormuz” was listed as a key focus of early discussion. On March 31, Pakistan also jointly proposed a five-point initiative with China, while calling for a ceasefire and the restoration of safe navigation.

(2) This means that the “second derivative” in the unfolding of the war has begun to change.

Earlier, the market priced in the worst-case scenario of “conflict becoming prolonged + spillovers escalating + supply disruptions deepening.” Now, although on the surface both sides of the conflict are still carrying out attacks, both sides are making room to de-escalate the situation. In other words, while the war itself has not ended yet, the phase of “getting worse and worse” may be nearing its end.

(3) Of course, this is still not right-side confirmation.

Because hard constraints such as the Strait of Hormuz, repairs to energy supply, and formal negotiation mechanisms have not yet fully come through, the current market has not returned to a “nothing is happening” state. Right-side confirmation requires seeing further declines in crude oil volatility (OVX).

(4) But from an allocation perspective, left-side signals have already appeared, so investors can be modestly more proactive than before. Still, we need to emphasize: left-side signals are an important timing point in a relative-return game, but right-side signals are the best entry time for absolute returns.

In the short term, tech categories that were most severely damaged earlier often benefit the most; in the long term, what truly deserves attention is still ΔG growth. If crude oil prices and related volatility continue to fall afterward, market risk appetite may recover further, and growth is still likely to be one of the directions with the greatest recovery elasticity.

04

Investment thesis: The timing for left-side positioning is here; seize opportunities with ΔG tech + high dividends

Faced with a geopolitics situation with extremely high uncertainty and the market environment today, “volatility” and “fragility” are the difficulties investors are encountering right now. We propose using volatility as the core analytical framework and suggest validating entry timing through “volatility range contraction,” rather than “events clearing.” Focus on OVX and VIX; together they represent the energy

Regarding the next steps, we believe: The conflict has not ended, but the worst pricing phase may be in the past. The left side can start to attempt an offensive positioning, but it should not be overly aggressive, while tech growth remains the most worth emphasizing direction.

Asset allocation approach:

(1) Growth is still the strongest main theme this cycle, but the investment approach must change: ΔG + profit redistribution. Key areas to focus on: power capital (power equipment, energy metals), compute capital (storage, semiconductors, robotics, liquid cooling), platform applications (Hong Kong-listed internet), innovative drugs;

(2) We emphasize that high dividends in 2026 are better than in 2025, and we focus on high dividends that have considered ΔG: coal, insurance, media, petrochemicals, and transportation and logistics;

(3) “Options” among real estate-related assets after potential bottoming in property prices: optional consumption and the recovery of service consumption driven by stabilization in balance sheets (high-end commercial properties, outdoor sports, tourism, hotels, food and beverage, etc.).

05

Risk warning

Faster pace of macro policy changes beyond expectations toward recovery.

Risk of worsening geopolitics.

Risk of changes in industrial policy.

（Source: Open Source Securities）