Rising geopolitical tensions in the Middle East and a collective hawkish stance from major central banks have heightened risk aversion and tightening expectations, unsettling global capital markets. In recent sessions, international oil prices have surged, while traditional safe-haven assets like gold and global risk assets have weakened simultaneously. The Shanghai Composite Index even fell below the key 4,000-point mark. Multiple mutual fund companies believe the market is shifting toward "stagflation trading" as liquidity tightens, with elevated energy prices and constrained macro liquidity emerging as the core drivers of asset pricing. Investment strategies now emphasize position control, reduced reliance on index performance, and greater focus on energy security and hedging—prompting a wave of portfolio realignment around new themes.
The recent "oil up, everything down" trend has seen Brent crude surge over 40% since March, briefly topping $119 per barrel amid escalating tensions in the Strait of Hormuz. Meanwhile, traditional safe-haven and risk assets have declined together. On March 20, the Shanghai Composite fell 1.24%, breaking below 4,000 points, while the more liquidity-sensitive Hang Seng Tech Index dropped 2.48%. The previously leading nonferrous metals sector has now weakened for nine consecutive sessions. Even gold, often seen as a safe-haven anchor, experienced a sharp pullback, with COMEX gold falling over 10% in a single week—its longest losing streak since October 2023.
Fund managers widely attribute the broad-based asset decline to the interplay of spreading geopolitical conflict and synchronized hawkish signals from global central banks, which have tightened liquidity expectations. Regarding the Middle East, Liu Yang, a fund manager at Tianhong Fund, noted that joint U.S.-Israel military strikes against Iran have increased global uncertainty. In the short term, this disrupts oil prices, inflation expectations, and the Fed's rate-cut path, potentially ushering commodities and major equity markets into a high-volatility phase. On the macro liquidity front, Huaan Fund highlighted that last week's "super central bank week"—featuring rate decisions from the Fed, Bank of Japan, Bank of England, and ECB—coincided with Middle East escalation and oil above $100, leading to a rare synchronized hawkish pivot that has become a key macro headwind.
Liu added that March and April are critical months for validating China’s economic recovery—particularly household spending and the property sector’s trajectory—as well as gauging whether global cycles are bottoming, which would affect export sustainability. As such, inflation-related data carries greater significance this year than in the past. If economic conditions improve more than expected, it could significantly alter asset allocation logic.
With high oil prices fueling inflation expectations and central banks maintaining tight policies to curb inflation—potentially hampering growth—classic stagflation risks have emerged. "Stagflation trading" has gained clear momentum, pressuring risk assets. The IMF recently warned that if energy prices remain elevated, global inflation could rise by 40 basis points for every 10% increase in oil prices by year-end, while global output may fall 0.1–0.2%. Huang Zihan, senior strategist at Tianhong Fund, pointed out that Strait of Hormuz disruptions, ongoing U.S.-Iran tensions, and persistent supply chain threats are exacerbating stagflation fears. With the Fed likely holding rates steady in the first half of the year and overseas liquidity expectations worsening, position models suggest maintaining low-to-medium exposure.
Bridgewater also recently noted that structural U.S. inflation pressures are building. Even before the Middle East conflict, inflationary structural pressures reminiscent of the 1970s had emerged. The conflict now adds a significant new upside risk—ongoing shocks to global commodity supply.
Domestically, however, funds remain relatively optimistic. Yu Guang, head of equity investment at Invesco Great Wall, stated that China’s February inflation data was relatively positive, with CPI turning positive and PPI declines narrowing. He expects stable inflation expectations and high investment activity in emerging industries to continue driving structural opportunities. His strategy focuses on upstream resources like gold and copper after pullbacks, as well as high-end manufacturing leaders with cost advantages, technological edges, and global expansion potential—firms whose valuations may be reassessed regardless of sector.
Although short-term oil price volatility may increase imported inflation pressure, Liu Yang noted that China’s current deflationary environment limits the impact. Long term, China’s push for technological self-reliance remains firm. While external factors may increase market volatility, they won’t alter China’s internal economic rhythm—the key lies in addressing domestic challenges proactively.
In response to liquidity tightening and stagflation risks, fund managers are adjusting portfolios to navigate high volatility in risk assets. Zhou Hanying, a fund manager at Invesco Great Wall’s international investment department, believes recent Middle East escalation raises global stagflation and recession risks. Her team has adjusted positions, increased holdings in HALO assets, high-quality cash flow, and high-ROE assets to buffer volatility, while reducing exposure to high-volatility sectors like new energy vehicles and biotech where near-term earnings are uncertain.
Another fund manager observed that macro narratives are now largely consensus, leaving mispricing opportunities mainly in domestic demand—though validation will take time, making returns harder to achieve. He recommended following the 2022 playbook: continue exploring broadly appreciating strategic resources, control position sizes, and focus more on individual stocks and sectors than index movements.
HuaBao Fund also suggested that A-shares may continue wide fluctuations, with energy security and hedging likely dominating near-term trends. They advise caution on tech stocks due to limited catalysts and inflation concerns from rising oil prices. Energy prices are expected to remain high, possibly hitting new peaks, reinforcing the importance of energy and supply chain security. Even if geopolitical tensions ease, energy security themes may not reverse sharply, and the market may award higher valuation premiums to related assets. In chemicals, coal-chemicals are outperforming due to energy price trends, and may remain a key theme if oil stays elevated. In nonferrous metals, aluminum warrants attention—though Qatar’s aluminum output cuts were less severe than expected, Bahrain’s announcement of production halts has kept LME aluminum prices strong, suggesting trading value around $3,300.
Amid heightened equity volatility, fund firms are also revisiting traditional safe havens. Despite short-term pressure, bonds and gold retain long-term appeal. Regarding bonds, some managers believe imported inflation from oil will have limited impact on China’s bond market. Lü Ruijun, manager of the Bosera China Development Bank ETF, argued that since recent price increases are supply-driven, passthrough to consumer prices may be limited. With CPI likely to remain subdued, China’s low-inflation environment appears unchanged. He remains bullish on domestic bonds.
As for gold’s recent slump, institutions generally agree its long-term value remains intact. Huaan Fund noted that during the 2022 inflation shock from the Russia-Ukraine war, gold saw a maximum drawdown of about 20%. The current pullback from the peak of $5,599 has reached 16%, nearing historical extremes. They advise investors to stay patient and watch for technical rebound opportunities. Structurally, gold’s role in hedging against "fragmented international order" and "sovereign currency risk" remains valid—central bank gold buying amid de-dollarization trends continues, while U.S. debt expansion steadily erodes dollar credibility, reinforcing gold’s portfolio diversification benefits.