Open-Source Strategy: Historical Review of Overseas Shocks, A-Shares Recovery Market Full of Potential

Report Summary

The market is still further confirming its expectations gap.

The Middle East conflict has entered its third week, with intensity and spillover scope significantly expanding. It has evolved from a single strike to a multi-dimensional risk covering energy facilities, shipping, and regional political structures. As we clearly stated in our 3.2 report “The Largest Expectation Gaps in US-Israel-Iran Conflict—Duration and the Strait of Hormuz,” the market may be overly optimistic about a quick resolution of the US-Iran-Israel conflict: “The duration of the conflict and the Strait of Hormuz are likely the most apparent expectation gaps currently.”

Total Perspective: External shocks—position management as both response and source of excess returns

Since 2020, when facing public events that can trigger global equity resonance, A-shares have shown strong resilience, with negative impacts usually ending within a week. In responding to short-term shocks, it is advisable to “stay calm and avoid action”; when shocks ferment over a longer period and impact scope is unclear, the priority is “reduce positions and control risks.”

When the impact boundary of an event becomes clear or influence diminishes, it signals a re-entry opportunity. In our 3.15 report “The Next Signal: Volatility Convergence,” we proposed that: the most important next signal is not the final level of crude oil prices, but when their volatility converges.

At a high level, indices are likely to recover to pre-shock levels. Therefore, even if there is an unexpected escalation, holding cash to gain excess returns can be gradually increased, and positions can be added accordingly.

Equity Allocation: Dividend strategies dominate during adjustment periods; industry supply and demand are key factors for sector outperformance

During global equity volatility exceeding ten days, besides reducing positions and risk exposure, how should A-shares be allocated? Structurally:

(1) Style: Dividend assets are favored during adjustment periods, as the impact at the end of a bear market amplifies relative gains. However, the essence of dividend assets remains risk assets, with poor absolute return performance.

(2) Industry: During overseas shocks and downturns: sectors with independent industry cycles perform best. During the Russia-Ukraine conflict, sectors benefiting included: medical demand (pharmaceuticals/biotech), energy security, and policy stabilization (coal). The current Middle East situation has similar logic: rising industry demand (upstream AI computing power and power grid equipment), energy security (coal, photovoltaics, hydropower, energy storage). Post-bottom rebound: ①Policy and industry supply/demand are critical for sector selection; ②The rebound phase is somewhat related to pre-shock market favorites. From 2019-2021, consumption was prominent; after the Russia-Ukraine conflict, there is stronger recognition of industry prosperity.

Investment Strategy—mainly response, layout for recovery, focus on prosperity and policy opportunities

(1) Before the next key signal (crude oil volatility convergence):

Defensive: Stabilize dividend base holdings to smooth volatility. Consider high-dividend ΔG stocks: coal, non-bank financials, media, petrochemicals, transportation.

Offensive: Focus on rising industry demand (upstream AI computing power and power grid equipment), energy security (coal, photovoltaics, hydropower, energy storage).

(2) During index recovery (after crude oil volatility convergence):

Pre-shock leaders, with unchanged industry logic: AI chain’s computing power capital (computing, storage, semiconductors, robotics), liquid cooling, power capital (power equipment), platform applications (AI4S); Potential reversal resilience: assets stabilized on balance sheets driving optional consumption, service consumption recovery (high-end commercial property, outdoor sports, tourism, hotels, catering).

Risk Warning: Unexpected macro policy changes; geopolitical risks exceeding expectations; past data does not predict future performance.

Main Body of the Report

01

The market continues to confirm its expectation gap

This week, market indices showed divergence: Shanghai Composite -3.38%, Shenzhen Component +2.90%, ChiNext +1.26%, STAR Market -3.51%. Average daily turnover was 2.21 trillion yuan, about 287.6 billion less than last week. Sector-wise, except for slight gains in communications and banking, most sectors declined, with non-ferrous metals, basic chemicals, and steel leading the downturn.

On Friday, markets rose then fell back, with increased divergence. The Shanghai index broke below 4,000 points; ChiNext surged up to 3%. Leading weights like new energy and computing hardware rose against the trend, while small and micro caps declined. Sector leaders included power equipment, communications, and coal, with photovoltaic, energy storage, and CPO sectors performing well; computer, defense, and media sectors declined sharply.

This week’s market was still driven by events, with risk aversion rising due to geopolitical tensions over the weekend. The conflict has entered its third week, with intensity and spillover scope expanding from a single strike to multi-dimensional risks affecting energy infrastructure, shipping, and regional politics. As we stated in our 3.2 report “The Largest Expectation Gaps in US-Israel-Iran Conflict—Duration and the Strait of Hormuz,” the market’s previous underestimation and ongoing recognition of three main expectation gaps are:

(1) The mismatch between “AI surprise attack” and “mosaic mud pit” in terms of duration.

(2) The “physical rigidity” of the Strait of Hormuz blockade versus “production increase illusions.”

(3) US strategic “watch and see” approach versus Middle East map “supporting the US.”

02

Historical review: How did A-shares perform during global public events shocks?

Looking back, how did China’s capital markets perform during global equity fluctuations? How to respond?

First, since 2020, A-shares have shown increasing resilience to overseas shocks. Second, in most cases, index recovery occurs within one month after the shock bottoms out. All external shocks except for the Russia-Ukraine conflict were recovered within three months to pre-shock levels.

Therefore, current uncertainties in the Middle East, even with potential escalation, can be viewed as an opportunity to hold cash for excess returns, gradually increasing equity positions.

In terms of equity structure:

Adjustment phase under overseas shocks: ①Style: When external shocks last longer, dividend assets are favored, as end-of-bear-market impacts amplify relative gains. Also, dividend assets are still risk assets, with poor absolute returns; ②Industry: sectors with independent industry cycles are most resilient.

Post-bottom rebound: ①Sector selection: Policy and industry supply/demand are key; ②Sector performance: Unlike pre-shock market favorites, during rebounds, tech growth does not always benefit from risk appetite recovery, but correlates with pre-shock outperformers; for example, from 2019-2021, consumption and blue chips were prominent, with stronger industry prosperity recognition after the Russia-Ukraine conflict.

From a total perspective: External shocks—position management is both response and source of excess returns

Overall, during events that can resonate globally, A-shares are resilient, with negative impacts usually ending within a week. In short-term responses, “stay calm and avoid action”; when shocks ferment over longer periods and impact scope is unclear, “reduce positions and control risks” is preferred.

When the impact boundary becomes clear or influence diminishes, it signals a re-entry. Since indices are likely to recover to pre-shock levels, even with unexpected escalation, holding cash for excess returns can be increased, and positions added gradually.

We analyze the dates when Chinese, US, and Japanese markets experienced significant adjustments post-2018. These features are:

(1) External shocks led to narrower declines and shorter impact durations in A-shares. 2020 marked a watershed: in response to external shocks, domestic investors shifted from “exploration to maturity.”

Duration: Since 2020, out of 17 significant global equity shocks, only 3 lasted more than 10 trading days; in 2018-2019, 4 out of 6 shocks exceeded 10 days.

Decline magnitude: Post-2020, the median maximum decline of the CSI All Share Index was -3.74%; in 2018-2019, it was -7.8%.

This performance is due to two reasons: first, 2018 was a year of profound external environment change, with no effective reference for China’s response to US tariffs, leading to a period of exploration; second, in 2020, China controlled COVID-19 early, resumed work and production, and achieved positive economic growth, boosting national confidence and demonstrating the importance of China’s supply chain, unaffected by economic blockades or tariffs.

Regarding current Middle East tensions, these two features persist: China’s economy and markets are more resilient after years of practice; additionally, China’s role in this conflict is non-localized, non-participatory, and does not directly impact its economic operations. Energy supply shocks are mitigated by China’s complete renewable energy industrial system, providing cleaner, more efficient alternatives globally.

From a turning point perspective, as we proposed in our 3.15 report “The Next Signal: Volatility Convergence,” the key signal is not the final oil price level but when its volatility converges.

(2) The second feature: Post-2020, the probability of index recovery increases.

How strong and how fast is recovery after external shocks? In most cases, indices bottom out and recover to pre-shock levels within one month, with a recovery probability of about 68.8% (11 out of 16 recoveries), significantly higher than pre-2020.

Extending recovery to three months, only in early 2022 did two cases fail to recover, but those were special cases: first, multiple shocks in Q1 2022, including Russia-Ukraine risks and Shanghai pandemic; second, the market was in a bull-bear transition, with the CSI All Share Index falling below the annual moving average, suppressing risk appetite.

Considering current overseas geopolitical risks, the momentum for index recovery is stronger:

• Market environment: The current shock occurred mid-bull market, with the index center still upward, supporting subsequent recovery.

• Regulatory environment: Authorities continue to signal stability, with recent central bank meetings emphasizing financial stability and liquidity support, bolstering market confidence.

2.2. Style allocation: dividends favored but not absolute safe havens

During global asset price fluctuations, besides reducing positions and risk exposure, how should equity assets be allocated?

Analyzing several prolonged impacts since 2018, the conclusions are:

First, in style: dividend assets outperform significantly during overseas shocks exceeding ten days, supported by solid fundamentals and risk aversion.

Second, at the end of bear markets, dividend assets’ relative advantage is more pronounced, e.g., October and December 2018. During late bear phases, valuations are often at historical lows, investor sentiment is more long-term, and panic selling is less. Conversely, in bull or volatile markets, dividend assets also enjoy valuation premiums driven by liquidity and sentiment, but during systemic shocks, valuation impacts are similar across styles.

From an absolute return perspective: In global risk asset shocks, dividend sectors are not absolute safe havens. They remain risk assets, with significant drawdowns during global crises. For example, during COVID-19 in Feb 2020 and Russia-Ukraine conflict in Feb 2022, the CSI All Share maximum declines were 15.28% and 14.66%, respectively; the CSI Dividend Index maximum declines were 13.4% and 12.23%. In the current Middle East conflict (March 3-21, 2026), maximum declines are 6.70% (CSI All Share) and 3.4% (CSI Dividend).

Current Middle East tensions see both Iran and US adopting aggressive postures, with direct strikes on energy infrastructure, possibly prolonging conflict duration.

2.3. Industry allocation: lessons from history, performance during Russia-Ukraine war

Recent Middle East and Russia-Ukraine conflicts are both geopolitical risks. Using the latter as a reference, we review industry performance during the Russia-Ukraine conflict, categorizing companies by their share of gains/losses.

Two phases:

(1) Conflict escalation, market adjustment:

• Most affected: sectors directly impacted by geopolitical risks (oil & petrochemicals, non-ferrous metals, steel), durable consumer goods (automobiles, appliances).

• Relatively independent: medical demand (pharmaceuticals/biotech), energy security, policy stabilization (coal).

• Resilient: financials (non-bank financials, banks), food security (agriculture, forestry, animal husbandry, fishery).

The current Middle East risk follows similar logic: rising industry demand (upstream AI computing and power grid equipment), energy security (coal, photovoltaics, hydropower, energy storage).

(2) Rebound phase:

• In 2022, the Russia-Ukraine rebound was notable for high returns (>20%), with the highest gains in real estate, building materials, coal, social services, agriculture, media, and diversified sectors.

• Key factors for rebound: ①Policy and industry supply/demand are critical for sector selection; ②Contrary to market intuition, during rebound, tech growth sectors do not always benefit from risk appetite recovery, with higher proportions of negative returns in communications, computing, electronics, defense, and power equipment sectors, and overall lower high-return (over 10% or 20%) stocks.

This phenomenon relates to pre-shock industry performance, not style dominance. From 2019-2021, consumption and blue chips outperformed, with stronger industry prosperity recognition.

Currently, medium-term focus remains on technology, following AI-driven wealth reconfiguration and “re-distribution” of control over allocation; also, identifying high-elasticity sectors with potential for expectation reversal, with growth at the production end, narrowing investment drag, and moderate price center rebound, accelerating service consumption recovery.

(1) Pre-shock leaders, with unchanged industry logic: AI chain’s computing power capital (computing, storage, semiconductors, robotics), liquid cooling, power equipment, platform applications (AI4S).

(2) Potential reversal: assets stabilized on balance sheets driving faster recovery of service consumption (high-end commercial properties, outdoor sports, tourism, hotels, catering).

04

Risk Warning

Unexpected macro policy changes;

Geopolitical risks exceeding expectations;

Past data does not predict future performance.

(Source: Kaiyuan Securities)