CITIC SEC: The market will focus on narrowing the circle and pay attention to four directions of AI hardware, resources, cyclical price increases, and dividends.

CITIC SEC has released a research report stating that the probability of the US and Iran reaching a consensus on their core demands in negotiations is not low, and the actual impact of the war process and negotiations on the market is diminishing. The key variable that will impact the market in the future is the actual volume of maritime traffic. The interruption in the navigation of the strait is lengthening, and economic and liquidity uncertainties are still accumulating. After a widespread short covering rebound, the market will focus on narrowing down, rather than expanding. The four directions in which the market narrows down include AI hardware, resources, periodic price increases, and dividends. The main expectation gaps exist in domestic AI hardware and periodic price increase sectors. In terms of allocation, focus continues to be on China's superior manufacturing. The main points of CITIC SEC are as follows: Although the demands of the US and Iran in negotiations seem to have many differences, the probability of reaching a consensus on their core demands is not low. From the perspective of the US core demands, if Iran can abandon uranium enrichment, it will become the most core achievement for the US, and also the biggest "achievement" that Trump can use to appease the domestic audience. This conflict has had a significant negative impact on the midterm elections and needs to be resolved early. Since the Iran Islamic Revolution, the US has lost control of Iran's nuclear capabilities, and U.S. presidents in the past few decades have failed to address this issue, severely impacting US Middle East strategy. Compared to the huge political propaganda value of Iran's "abandoning nuclear achievements," the indirect link between oil prices and inflation may have a smaller impact on elections, therefore, the Trump administration may compromise on issues such as controlling the Strait of Hormuz. From Iran's perspective, this war has demonstrated that the blockade of the strait and the threat to Middle East infrastructure is a crucial balance point, even more destructive and flexible than the threat of nuclear weapons. Compared to the high cost and difficult to control scale of nuclear weapons, blocking the strait and attacking infrastructure only require low-cost drones to have a huge impact on the US and global economy, making them a tool for Iran to counterbalance the US. Both the US and Iran have repeatedly stopped short of large-scale infrastructure destruction, indicating that the probability of extreme escalation of war is not high, and the likelihood of extreme oil prices, severe recession, or stagflation is decreasing. The post-war risks have been eliminated, and the recovery of actual maritime traffic is the key to determining the subsequent market pricing. 1) The elimination of post-war risks has reduced the actual impact of war and negotiations on the market. Since the conflict began at the end of February and Iran blocked the strait, the implied volatility of the CBOE Crude Oil ETF options rapidly climbed to a high of 120.91% on March 11, then fell to around 90%, and after the ceasefire between the US and Iran, it fell to 78%, falling below 80% for the first time since March 5. The pricing of the market's post-war risks has significantly decreased. Even with reduced war risks, the impact of high oil prices on the global economy and liquidity remains. For the US, as long as it achieves the "solution to the Iranian nuclear issue," the duration of high oil prices and its impact on inflation are not that important, as the US economy and stock market supported by AI-related infrastructure still shows resilience. For Iran, the blockade of the strait has a minimal impact on its economy compared to other Gulf countries. According to LSEG data, Iran's oil export revenue in March increased by 37% year-on-year, while Oman, which has ports outside the Persian Gulf, grew by 26%, Saudi Arabia by 4.3%, and ports mainly along the Persian Gulf coast in the UAE, Iraq, Kuwait, and Qatar were severely affected. However, for the global economy, the longer the oil supply is cut off, the longer it will take to restore balance, the larger the amount of inventory needed to be replenished, the higher the oil price will rise, and the impact is difficult to estimate. 2) The key variable influencing market money trends in the future is the substantial actual volume of maritime traffic, not the seemingly newsworthy negotiations. Currently, maritime traffic has not resumed, and Iran has established a complex verification and charging mechanism through intermediaries. Shipping companies incur significant costs in operations, and the problem of low morale among crew members due to war risks remains unresolved. The maritime traffic volume agreed upon by the two sides in the next two weeks will determine whether the market sentiment will quickly recover or remain subdued. If substantial blockade continues, a series of economic indicators may face downward revisions, and the recovery of physical and financial conditions will take months. The spread between the front-month Brent Crude Oil contract and the 1-year forward contract, initially widened during the conflict outbreak, as the market priced in short-term supply shocks, however, after the conflict eased in April, the front-month contract fell significantly, but the forward contract did not show a significant decline, indicating a reduced spread, as the market began pricing in the long-term blocking of the strait. 3) Economic and liquidity uncertainties are still accumulating, and after a widespread short covering rebound, the market will focus on narrowing down, rather than expanding. The current moment suggests that the marginal direction of war and negotiations may not be as important for the market, as the likely outcome is a consensus. The market has priced in some of these expectations, as seen in the significant short covering observed in the A-share market this week. The daily reading of the investor sentiment index constructed by the bank (ranging from 0-100) surged from 25.0 on April 7 to 68.1 on April 8, remaining around 47 in the following two trading days. According to CITIC SEC channel research, the bank's estimate of the ratio of total market margin to market capitalization has sharply fallen this week, indicating a decrease in the previously high proportion, suggesting that investors holding cash and waiting on the sidelines have slowly returned to the market. The bank believes that the future logic of the market will shift from pricing war to pricing the actual economic impact, transitioning from pricing expectations to continuous pricing of reality. The key to determining reality is the actual maritime traffic situation and the real price feedback from the middle and downstream. Looking at it from this perspective, the situation in the Middle East may not have fundamentally improved, and the negative effects of supply chain disruptions continue to accumulate. For example, as of April 9 this year, the North Sea spot oil price benchmark Forties Blend surged to nearly $146.7 per barrel, surpassing the historical high before the 2008 financial crisis of $143.3 per barrel on July 3, 2008; however, on that day, the settlement price of the ICE Brent crude oil main contract was $95.9 per barrel, with a premium of $50.8 per barrel. The market may narrow down to four major trends: AI hardware, resources, periodic price increases, and dividends In the A-share market, there are only four major trends that have fundamental grounds and are still above the rising trend after the adjustments in March: AI, resources, periodic price increases, and dividends. Using A-share ETF as a sample and classifying them after excluding duplicate products that track the same index, the bank constructed equal-weight portfolios. Since March 23, the net value increases of the AI, resources, periodic price increase, and dividend portfolios have been 5.5%, 7.1%, 6.5%, and 1.3% respectively (with a 5.9% increase for the dividend portfolio from early February to mid-March), and there is no clear evidence of overshooting or mutual exclusion among these four trends because they all have fundamental logic and stable funding behind them. As for other industries and themes, valuations can fluctuate in both directions, rising significantly when sentiment and liquidity are positive, and falling similarly when sentiment cools down, lacking stable valuation anchoring and funding support. Apart from these four major categories, innovative drugs could be considered a relatively independent trend, fulfilling the criteria of having industry logic, fundamentals, and a stable funding base; stock prices in this sector have generally returned to the long-term upward trend line, with the only issue possibly being the high threshold for picking winners in the absence of beta elasticity. Among the four trends that are still on the rise, the main expectation gaps exist in domestic AI hardware and periodic price increases The North American AI chain is currently an area where expectations and pricing are relatively sufficient, while the expectation gap for domestic chains is starting to widen. The basic logic of the North American chain is that "even the worst can make profits," and as a typical prosperity-driven sector, pricing in the North American AI chain has "narrowed" to the storage and optical communication sectors, the two most in-demand and price-sensitive segments. As long as there is no clear price turning point in the most in-demand segment, the fund's holdings in the North American chain may not see systemic loosening. On the other hand, the domestic AI sector suffers from relative lack of expectations and pricing. Following the introduction of DeepSeek last year, the market had high expectations for domestic AI, but the North American AI chain has pulled far ahead in terms of returns, leading fund managers to maintain a cautious approach towards domestic AI. However, after over a year of development, the domestic AI ecosystem has made significant progress, with an independent open-source ecosystem, engineering innovation circumventing memory and process constraints. According to ATOM Project data, China's share of global micro-adjustments and derivative models has reached 70%, far surpassing the US (26%) and Europe (4%), with token shares reaching 72.7%. Although investors remain cautious about profit margins in the domestic chain, even in the "expansion phase of quantity," a typical prosperity-driven strategy is enough to support a part of the technology funds that were originally focused on the North American chain. The resources sector has already undergone a relatively complete pricing process since last year. The narrative of "resource nationalism" is widely understood by the market, and precious metals have brought significant emotional and liquidity premiums to the sector, making it difficult to determine whether there is still an expectation gap in the overall sector. In this context, the opportunities in the resources sector this year may be more focused on structural alpha rather than systematic beta. The core approach is to identify directions supported by logical increases in volume, rather than relying solely on profit elasticity from price fluctuations. Overall, basic metals and energy metals remain suitable for core positions without making strong assumptions about liquidity and macro environment, while the dependence of precious metals on liquidity and narrative drivers is high, making future operations more difficult, and the overall expectation gap of the sector is not significant. The transmission chain from "crude oil PPI cyclical corporate profits" stands as a direction that combines expectation gap, high certainty, and potential for growth over the course of the year, essentially corresponding to the trend of rising prices in a broad range of cyclical industries. Changes in oil prices and global demand may affect the breadth of the transmission of PPI to corporate profits, but the Middle East conflict has already triggered a localized process of clearing supply-side capacities: the share at the end of the supply chain is shifting to enterprises with sufficient inventory or diversified raw material sources. In this process, sectors like refining and coal chemical processes with high cyclical potentials are likely to benefit significantly, and as long as oil prices stabilize, basic chemical processes also possess profit elasticity. Investors have already reached a certain consensus on the above logic, but the combination of "consensus + lack of stable holdings" itself implies an expectation gap. The conflict in the Middle East in March led to a significant reduction in absolute return funds, and industries such as chemicals, non-ferrous metals, and new energy, driven mainly by absolute return funds, are vulnerable to position shifts. Having consensus does not mean there is no expectation gap; the structure of holdings is the key factor in expressing genuine market expectations. In terms of allocation, the bank suggests to continue focusing and narrowing down around China's superior manufacturing. The bank recommends constructing core holdings based on the revaluation of China's superior manufacturing pricing power, with a focus on industries such as chemicals, non-ferrous metals, power equipment, and new energy. Among these, the chemical industry may be the most catalytic industry in this round of disrupted supplies in the Middle East and subsequent cyclical price increases, while non-ferrous metals are expected to gradually reshape their pricing properties after the liquidity shock. This week, the "Regulations on the Security of Industrial Chain Supply Chains" issued by the State Council were announced, marking the discussion on export controls for solar equipment in the new energy sector. The Bank believes that similar to lithium battery equipment, the trend is towards export technology review (rather than comprehensive control) of key equipment from the perspectives of safeguarding the industrial chain security, preventing rapid establishment of alternative production capacities overseas. While this may be short-term negative, it is crucial for restoring the long-term relative competitiveness, supply-side clarification of the industrial chain, and the recovery of pricing rights for long-term leading companies. Apart from these four core industries, it is recommended to closely monitor the progress of domestic AI, as a breakout in hardware "quantity" logic could present a substantial expectation gap on the AI chain, considering that many investors exited last year due to substantially lower expectations for the domestic chain. Furthermore, it is advised to continue to increase allocation in undervalued stocks, with a focus on securities firms and insurance companies. For the cyclical industries, refineries might be the most obvious beneficiaries in this round of Middle East conflict, while it is also recommended to continue to follow the four directions suggested by the bank: 1) Chemicals with alternative raw materials/process lines under the impact of oil price shocks (these industries in China usually have a higher "coal content" than their overseas competitors); 2) Industries with a large share of Middle Eastern/Western European production capacity, as supply interruptions are likely to create additional demand-supply gaps and trigger price expectations; 3) Industries where alternative products are affected by cost increases and demand drives up supply-demand gaps; 4) Industries that were already in the rising price cycle and have a cost increase provide a favorable pricing window, such as supply-demand balance products.