Should the Middle East conflict de-escalate, how should short-term sector allocation be approached? First, identify sectors with potential for oversold rebounds. Historically, the initial rebound at market bottoms primarily stems from oversold conditions. Data shows that the decline in the two months preceding market stabilization offers the strongest predictive power for future performance, with oversold rebounds typically lasting around five weeks. Second, focus on sectors with high correlation to the VIX index. Past Middle East conflicts have often triggered rapid spikes in the VIX. When the VIX subsequently declines, equity assets tend to perform better. Third, moderately allocate to dividend-yielding assets to hedge against volatility. The relative outperformance of dividend strategies over the broader market has persisted for 12 months, and valuations remain reasonable compared to the overall market. From a PB and PE perspective, high-dividend sectors are not at absolute valuation peaks.

In the medium to long term, how should sector allocation be adjusted if Middle East tensions ease? First, consider sectors that benefit from lower oil prices through reduced costs and potential stock appreciation. If conflict abates and oil prices decline, industries with costs positively correlated to oil prices but stock prices negatively correlated would see significant advantages. Second, evaluate sectors likely to experience demand improvements. Using the Iraq war as a reference, Iraq’s accelerated imports post-2017 most benefited automotive and electronics sectors. Should Iran’s imports recover, Chinese industries such as automobiles and home appliances may see heightened dependency and demand growth.

Risks include major shifts in global geopolitics leading to abrupt changes in risk appetite, and unexpected fluctuations in market liquidity. Historical data does not guarantee future outcomes.