Yang Delong: Current market short-term fluctuations will not change the pattern of a slow and long-term bull market

Ask AI · How exactly do Middle East conflicts affect volatility in the A-share market?

In the first quarter, the overall A-share market showed a pattern of choppy, divergent performance. In early March, the Shanghai Composite Index plunged sharply after breaking down from its high of 4,182 points. The core driver behind this sizable pullback was an escalation in the Middle East situation. The U.S. and the U.S. seized Iran with a brazen attack, carrying out headhunting actions against Iran’s top spiritual leader, Khamenei, and senior military commanders, which triggered Iran’s retaliation. Iran blocked the Strait of Hormuz, which is a vital artery for global oil transportation and controls 20% of the world’s oil and gas shipping. This caused international crude oil prices to jump directly from $73 per barrel before the war to $120 per barrel, raising investors’ concerns that the global economy could fall into stagflation. Meanwhile, the U.S. Federal Reserve, in response to potentially incoming inflation, had to delay the rate-cutting schedule, and may even not cut rates again within the year—leading to a sharp decline in the A-share market.

Compared with the market adjustment in March 2025, the core drivers of this downturn are quite different. Back then, the major selloff happened because Trump announced that the U.S. would impose additional tariffs on the whole world, kicking off a tariff war. Later, after the selloff, as institutional funds entered the market and the national team also went in, the market experienced a strong rebound. On the technical front, the Shanghai Composite Index has already broken through the 4,000-point index level and also fell below the 60-day bull-bear boundary line. Whether this Middle East conflict will end A-shares’ slow bull and long bull trend is a question on many investors’ minds. My view is very clear: the core logic behind this slow bull and long bull cycle has not changed fundamentally. This conflict disrupted the timing of the bull market, but it did not change the bull market’s trend. The market’s decline is an opportunity to position in high-quality stocks or high-quality funds. After a policy floor gradually emerges, the market may see repeated volatility and then gradually move toward a true market bottom.

From April to June last year, after an emergency selloff, the market staged a V-shaped repair, with the index rising in a sideways-to-upward trend driven by a resonance between policy support and fundamentals. In this year’s second quarter, the A-share market may replicate the repair trajectory from the same period in 2025, potentially delivering a sizable rebound, and it may even run an independent performance and set new highs within the year. Because in the second quarter, as annual reports are disclosed, some sectors and individual stocks whose earnings exceed expectations may gain opportunities for valuation repair. On top of that, with Trump facing significant domestic anti-war pressure in the U.S., he has already developed second thoughts and wants to find a dignified way to exit the war. Once the Middle East situation eases and the Strait of Hormuz returns to normal navigation, the A-share market may also be in line for a big rally.

At present, external markets continue to churn, rate-cut expectations from the Federal Reserve keep narrowing, and Middle East geopolitical conflicts continue to flare up. These external disturbances change the A-share market’s own operating rhythm, but they do not change the long-term trend of A-shares. For the A-share outlook in the second quarter, the biggest marginal factor is still when the war ends. It is expected that in April, the three sides at war may resolve major differences through negotiations, temporarily halt hostilities, and it is even possible that the war could end in April—this would have a significant impact on the market and could help drive a bottoming rebound.

At the end of the first quarter, the market’s financing balance showed a phase of decline, and some funds temporarily exited, mainly due to the market adjustment and the foggy outlook for the war. After the market warms up in the second quarter, this withdrawn capital may flow back into the market again. The sources of incremental funds entering the A-share market in the second quarter are twofold: on the one hand, institutions may increase holdings after the market stabilizes; on the other hand, funds from outside the market may enter as residents’ savings shift toward the capital market. The core triggering condition for a large-scale inflow of incremental funds is the end of the Middle East war. Currently, institutions still maintain high exposure. In the second quarter, institutions overall will continue to position at lower levels, adding to core assets in moderation. The main directions for increasing exposure are concentrated in two areas: first, technology-related; second, HALO assets with heavy asset bases and low volatility. The former is an industry empowered by AI, which will see major development in the AI era; the latter is an industry that AI cannot replace, and it is also a foundational infrastructure in the AI period.

If the second-quarter market shows downside volatility risks beyond expectations—for example, the war situation becomes more tense and enters a protracted war phase—then large declines in the market could occur. Funds might not be ruled out from entering to stabilize the market in a way similar to last April, through purchases of ETFs or blue-chip stocks via Huijin. At the same time, insurance capital and public funds may also increase their holdings. These actions would provide a significant boost to market sentiment, attract more off-market funds into the market, and stabilize market performance—helping the market return to the trajectory of a slow bull and long bull.

The market generally expects that, in the second quarter, A-shares will shift from liquidity-driven performance to earnings-driven performance. With the initial release of annual report results, and the dense period of first-quarter report disclosures arriving in mid-to-late April, this shift may be gradually completed. Sectors and individual stocks with better earnings growth are likely to attract inflows of funds, while some companies whose performance fails to deliver may face sizable adjustments. In the first quarter, the directions with earnings that exceeded expectations were still mainly concentrated in technology sectors, including high-visibility areas such as semiconductor chips, power grid equipment, and compute algorithms.

The main themes of this cycle are two lines: the “price-increase” concept and “AI + big technology,” both of which can traverse volatility. The core logic driving these two themes is expected to be gradually realized in the second quarter. The price-increase concept mainly focuses on sectors such as lithium batteries, chemicals, and related tracks tied to new quality productive forces. The AI technology theme may see its sub-industries perform even more prominently, becoming the core investment main line for the second quarter—for example, semiconductor chips, humanoid robots, compute algorithms, and other areas that have performed strongly before but recently experienced corrections. Investors can capture opportunities by positioning in related high-quality leading stocks or high-quality themed funds.

During the March 2025 adjustment period, small-cap stocks significantly outperformed benchmark-heavy stocks. In the first quarter of 2026, AI growth themes are expected to lead, while defensive sectors such as banking and coal lagged at the bottom. In the second quarter, A-share market style may see some rotation, with some switching between large/small caps and technology stocks. The recent frequent strong performance of traditional blue-chip “old leaders” is also a reflection of market style switching. In asset allocation, investors should maintain balance and pursue a balanced allocation: half allocated to growth stocks and half allocated to value stocks.

In the second quarter of 2026, the core risks investors need to focus on are mainly whether the Middle East war risks getting out of control—that is the most important risk. Another risk is to be careful about companies that may experience earnings blowups. Recently, some ST-designated targets have seen sharp adjustments. For investors, if fundamentals may continue to deteriorate and earnings blowups may occur, it is crucial to stay cautious and stay away from low-earnings underperformers. This is especially true for ST stocks. ST stocks generally post losses for two consecutive years. If performance cannot improve later, they may face delisting risk. In the current environment of slowing overall economic growth, it is very difficult for ST stocks to stage a turnaround; many are essentially stocks that trade themes and concepts.

The second quarter is highly likely to be a choppy, range-bound market. In terms of position management, investors can keep a moderate exposure of around 50% to 60%. In terms of portfolio structure, allocate half to technology leading stocks and half to blue-chip stocks with strong performance. Only then can you achieve a defensive-and-offensive balanced allocation, and you should not lean too heavily toward one side. Given the current international situation is murky and unpredictable, sticking to the value investing philosophy is crucial. (Views are for reference only; invest cautiously. Source of image: web)