Middle East risk spillover disrupts A-shares; institutions believe short-term sentiment-driven, the positive trend remains unchanged.

The Middle East conflict has intensified, triggering a risk-averse sentiment that is spreading. The A-share market has shown volatile movements, with sectoral structural differentiation becoming prominent.

On March 2, after the Shanghai Composite Index held steady and closed in the green, the four major A-share indices experienced consolidation over the past two trading days. Following wide fluctuations on March 3, the four indices continued to decline on March 4, though the decline narrowed somewhat. Sectors such as petrochemicals and shipping, which had performed well in the previous days, saw significant pullbacks.

Yang Chao, Chief Strategy Analyst at Galaxy Securities, analyzed that the volatility in the A-share market is driven by a combination of external geopolitical shocks and market structural differentiation. The immediate short-term triggers are external shocks and trading structure adjustments, while the medium to long-term trend remains guided by domestic economic fundamentals and policy directions, maintaining the logic of long-term oscillating upward movement.

Short-term volatility influenced by geopolitical disturbances

On February 28, the full-scale outbreak of military conflict between the US and Iran occurred. As geopolitical risks continue to ferment, market investor sentiment has been affected.

On Monday (March 2), the A-share market opened lower and then oscillated upward, with the Shanghai Composite Index turning positive. As the Middle East conflict persisted and navigation through the Strait of Hormuz was obstructed, uncertainties arising from the Middle East situation led to a decline in market risk appetite. On March 3 and 4, the market experienced oscillations downward.

On March 4, the Shanghai Composite Index fell below 4,100 points, down 0.98%, closing at 4,082.47; the Shenzhen Component Index dropped 0.75%, closing at 13,917.75; the ChiNext Index declined 1.41%, closing at 3,164.37; and the STAR Market Composite Index fell 0.65%, closing at 1,717.99.

Sector-wise, there was a clear differentiation. Previously strong defensive sectors like oil refining, coal, and high-dividend industries continued to outperform against the trend. The “Three Oil Giants” hit historic daily limit-ups, and shipping-related sectors linked to the conflict also surged. Conversely, some popular growth sectors such as semiconductors, consumer electronics, and photovoltaics experienced adjustments.

On March 4, a new pattern emerged. Sectors that had performed well in the previous two days, such as shipping, gas, petrochemicals, and precious metals, saw sharp declines. Meanwhile, sectors like power generation equipment, agriculture, forestry, aerospace, and military industry led gains.

An institutional analysis suggests that while the market is digesting geopolitical shocks, it is also beginning to assess the sustainability of these events more calmly and re-evaluate its long-term investment themes. The continued correction in petrochemical and port shipping sectors indicates that the market is adjusting its pricing for extreme scenarios like “long-term blockade of shipping lanes.” Funds are shifting away from pure event-driven speculation toward areas with stronger fundamentals. The power grid equipment (UHV) sector remains strong, driven by logic beyond short-term events, aligning with the emerging “HALO” market strategy, which focuses on long-term certainty in high-voltage power grids (energy security and AI computing power), artificial intelligence, outbound logistics, and overseas infrastructure.

From a capital perspective, financing funds rebounded by 83.905 billion yuan after the Spring Festival (February 24–March 2), but experienced a net outflow of 22.501 billion yuan on March 3. Main funds continued to net outflow, totaling 248.888 billion yuan from March 2 to 4. Meanwhile, northbound funds showed a contrarian net inflow on March 3.

Yang Chao believes that the recent increased volatility in the A-share market is mainly driven by three core factors: geopolitical risks, market structural differentiation, and capital game-playing. This is reflected in broad index fluctuations and sector divergence.

So, has the investment environment in the A-share market shifted? “We can only say that the external environment has changed; the endogenous factors of the A-share market have not shifted. The market still interprets developments with a ‘my-centric’ approach,” Yang explained. Geopolitical factors exert strong disturbance; liquidity-wise, the RMB’s proactive appreciation expectations have increased this year, and the long-term outlook for RMB strength remains unchanged. Policy-driven factors may also enhance market support.

From “emotion-driven” to “fundamentals-driven” in the future

Under geopolitical risks, how will the short-term performance of the A-share market unfold, and what factors should be watched?

The Industrial Securities strategy team believes that the fundamentals of equity assets are unaffected by conflicts. However, due to time lag, equity assets will initially reflect negative impacts, potentially leading to a “golden pit” after being oversold, before gradually pricing in positive logic.

“Currently, the market is in a tug-of-war between ‘geopolitical noise’ and ‘long-term main themes.’ The foundations for a long-term slow bull market in A-shares—such as earnings recovery, policy support, incremental capital patterns, and industry upgrades driven by new productivity—remain unchanged,” said an institutional insider.

A research report from Zhongyuan Securities on March 4 also states that the current A-share market is in the early stage of emotional impact. The future trajectory of events is uncertain, requiring one to two weeks for gradual digestion and assessment. During this period, the market will mainly oscillate. Unless the conflict triggers a global economic crisis, its impact on A-shares will gradually weaken. The market is likely to continue its oscillating upward trend with sectoral differentiation, shifting the core driver from emotional speculation to policy implementation and annual report performance verification.

Yang Chao also believes that the sharp fluctuations in A-shares are not a trend reversal but a short-term release of accumulated external pressure. The medium- to long-term upward trend remains intact. The market will gradually shift from “emotion-driven” to “fundamentals-driven,” exhibiting a pattern of “oscillating digestion, increasing momentum, and focused structure.”

“Short-term risks to watch include: further deterioration of Middle East geopolitical tensions (especially when the Strait of Hormuz might reopen), uncertainties in global central bank monetary policies, and policy implementation effects falling short of expectations,” Yang warned.

From a medium- to long-term perspective, Yang sees a solid foundation for continuous recovery in the A-share market: first, ongoing policy support, such as new regulations for public funds and exchange rate adjustments; second, a gradually solidifying domestic economic recovery, with consumption warming and investment strengthening, which should sustain corporate profit improvements; third, valuation levels remain reasonable, coupled with ongoing foreign capital inflows and long-term institutional participation, confirming a clear medium- to long-term upward trend.

In terms of investment strategy, Yang continues to advocate a “light on indices, heavy on individual stocks” approach. He suggests focusing on three main themes: first, short-term certainty driven by price increases and risk aversion—if geopolitical conflicts persist, global physical assets are undergoing a value reassessment, with tensions in the Strait of Hormuz directly boosting energy and alternative demand; second, medium- to long-term certainty from improved supply-demand dynamics and industry profit recovery, emphasizing “anti-involution” concepts and dividend assets with valuation safety margins; third, the shift in the domestic economic logic toward new productivity sectors, such as storage, computing power, consumer electronics, communications equipment, semiconductors, and military industries, which are key areas in the “14th Five-Year Plan.”

(Article source: First Financial)