Shenwan Hongyuan Strategy: Under the US-Iran conflict, the macro scenario is about to converge

1. Current A-share pricing in China’s mainland market preserves room for both upside and downside risks. It is neutral pricing, but it is not yet stable-state pricing. The market is still being catalyzed by events in the U.S.-Iran conflict, causing large adjustments to its mid-term scenario assumptions and probability distributions. In the short term, market volatility remains elevated, and it is not the moment to make a heavy bet. Mid-term macro scenarios are gradually converging, but the final key convergence is still missing (even if the U.S. begins ground operations, it would withdraw relatively quickly). If the key convergence materializes, the most impactful period of the U.S.-Iran conflict on capital markets will have passed, and risk appetite may bottom out and rebound.

A-share pricing of the U.S.-Iran conflict is not yet stable in the short term, but it has preserved room for both upside and downside risks. It can be seen as an “unstable neutral state”: if the Federal Reserve raises rates in response to an elevated inflation center of gravity, and the economy falls into a stagflation cycle, global stock markets may “fall fast, then rebound, and then fall slowly,” while capital markets have not cleared the pessimistic expectations about stagflation. Meanwhile, the market’s positive pricing for China’s energy security and supply-chain security is also insufficient. Demand Alpha in China’s export chain and the validation of the ability to pass through higher prices overseas may resonate with Middle East capital pricing + overseas fund inflows, leading to a re-assessment of relative country strength and driving A-shares to quickly return to a strong position. Upside and downside risks are not fully priced, and mid-term outlook scenarios have not yet converged. Therefore, A-shares are not a stable equilibrium in the short term, but they are also a neutral state.

In the short term, the market is still being catalyzed by events in the U.S.-Iran conflict, making large adjustments to its mid-term scenario assumptions and probability distributions. This is reflected in the fact that the market’s reaction to event catalysts remains sensitive, volatility stays at a high level, and risk appetite is suppressed. This means it is not yet the moment to make a heavy bet based on the mid-term outlook.

The mid-term macro scenarios have not fully converged, but some consensus is forming. We care most about three points: 1. The U.S.-Iran game will be a mid-to-long-term issue, and that consensus has already formed. The market has already shown some reaction to changes in the mid-term asset pricing center. 2. The market’s outlook for mid-term monetary policy is trending more objective: while the Federal Reserve responds to a higher inflation center of gravity, it also needs to deal with a weak labor market plus the push to bring manufacturing back. We reason that, when facing cost shocks, the U.S. economy is “more prone to stagnate than to overheat.” In a phase that is like stagflation, it would be a wait-and-see; in a phase that is like recession, rate cuts are likely, which may be the baseline judgment. Correspondingly, the stagflation outlook for the mid term is not the baseline assumption; confirming stagflation expectations would at least need to wait until the monetary-policy guidance is confirmed around or before the May period of the Fed’s policy communications (i.e., “Watched 5, around/after”). 3. The U.S. government’s recognition of potential landing and ground-combat objectives (avoiding getting stuck in a long, conventional war, withdrawing in time after achieving tactical objectives, leaving the Middle East order still blank), has no fundamental differences from the capital markets’ perspective. Once the U.S. starts a scenario involving landing and ground combat, that scenario is the main source of current mid-term uncertainty. If a short-term landing scenario achieves tactical objectives and a rapid withdrawal scenario is realized, it will constitute the key convergence of the mid-term macro scenario. Correspondingly, the period when the U.S.-Iran conflict impacts capital markets the most will be over, risk appetite may rebound after bottoming out, and the mid-term bottom in the A-share market may be confirmed.

2. A second bottom being realized + key convergence in the macro scenario + policies that keep course and deliver results, with sustained efforts, could place an important mid-term low point not far off. Overseas value outperforming growth has been underway since November 2025. In A-shares, after mid-January 2026, from natural-sector rotation and style switching, to HALO trading, and then to the U.S.-Iran conflict, the relative value proposition of growth has improved significantly. New economy and strategic resources are still the inflation assets of the era. Once the most impactful period of the U.S.-Iran conflict passes, bottom-up stock selection effectiveness will gradually return. This time, the market bottom is also the small-cap growth style bottom.

In the short term, uncertainty from the U.S.-Iran conflict is still suppressing risk appetite, and the second bottom is being realized. After that, if the key convergence of the mid-term macro scenario materializes, and it is reinforced by policies that steadily protect capital market stability, speeding up the clearing of pessimistic positions, we believe that an important mid-term low point may be not far away.

This low point may be both the market bottom and the (small-cap growth) style bottom. Overseas, the value style has been outperforming growth since November 2025. Domestically, after the storyline evolved through the period of computing-power “inflation,” commercial aerospace, and AI application themes, in January 2026 it also began an adjustment phase for small-cap growth. Internationally and domestically, the evolution of the market storyline has basically been consistent: starting with natural-sector rotation and style switching, then after HALO trading and the U.S.-Iran conflict, the small-cap growth style has been in a relatively high valuation-and-return state. Once the period when geopolitical conflict impacts capital markets the most is over, the macro cycle and geopolitical conflict are no longer the main contradictions; the original mid-term pattern gradually returns. New economy and strategic resources remain the inflation assets of the era. Bottom-up stock selection effectiveness will gradually return; the effect of stock selection turning into profits will stabilize; and the slow start of a new upcycle will begin. So this time, the market bottom is also the small-cap growth style bottom.

After the mid-term low point appears, the market will return to the “two-stage rally” path. The “consolidation and rest period between the two stages of rallies” will still continue for a while. The core is waiting for positive fundamental signals to accumulate and for earnings and time to digest valuation. With step-change progress in industrial trends, market structural consensus will be re-gathered. Only under the condition that accumulating profitability effects create a positive feedback loop for incremental capital can there be a “second stage rally” in 2026-2027 (possibly starting in 2026Q4). This will be a rally driven by the resonance between fundamentals and liquidity, with upside space opening up comprehensively.

3. In the oscillating consolidation and rest segment between the two stages of rallies, with the technology main line extending + the macro narrative expanding, it is still the main source of high-elasticity investment opportunities. In this stage, individual sub-industries still have standalone independent opportunities with elasticity, but sector linkages are relatively weak, making it difficult for profit-making effects to spread widely. In the “reality-heavy” technology directions that were strong before the U.S.-Iran conflict, there is still opportunity in the short term; focus on optical communications, aeronautical gas turbines, and energy storage. In the next phase, new energy, new-energy vehicles, and the export chain are the directions that can validate an improvement in business conditions. The short-term hedging effect is temporarily not great for buying; however, buying for improved business conditions later remains an important opportunity.

During the oscillating consolidation and rest segment, high-elasticity investment opportunities still come from the technology main line extending + the macro narrative expanding. Standalone trading opportunities for sub-industries rise and fall one after another, but sector linkages remain weak. Profit-making effects are difficult to spread widely. Switching needs to be done toward a small number of directions with favorable and sustained business-condition trends.

During the phase when the U.S.-Iran conflict hits risk appetite, high-elasticity investment opportunities are generally suppressed. But once the period when the U.S.-Iran conflict impacts capital markets the most passes, high-elasticity sector rotation remains effective. Specifically, in the “reality-heavy” technology directions that were strong before the U.S.-Iran conflict, there is still elasticity in the short term. Focus on optical communications, aeronautical gas turbines, and energy storage. For the next rotation directions, we focus on investment opportunities in new energy, new-energy vehicles, and the export chain. In a low risk-appetite phase, new energy is viewed as a hedging asset, but the effect is temporarily not great. Later, as orders increase, supply and demand improve, and prices can be effectively passed through overseas, markets enter a phase of investing based on business-condition improvement. In that phase, new energy, new-energy vehicles, and the export chain will still be important investment opportunities. At the same time, new energy may become a structural basis for overseas fund inflows to return, with a re-assessment of relative country strength. This forms a direction with upside elasticity and profit-making effects that can spread.

Risk Warning: Overseas economic recession is worse than expected, and domestic economic recovery is weaker than expected.

(Source: Shenwan Hongyuan)