Summary

• A war against Iran launched by the US and Israel would pose a major threat to the global economy and markets. First, the US lacks clear, realistic objectives for launching such a war. Even achieving a "secondary objective" such as eliminating Iran’s ability to threaten shipping in the Strait of Hormuz would be difficult for the US. Second, with no clear domestic authority in Iran and ongoing bombardment, Iran would be unlikely to resume negotiations with the US and Israel. Ending the closure under such circumstances would require the US and Israel to destroy Iran’s military-industrial capabilities and military infrastructure, which is highly unattainable and would likely take a very long time.

• Before the war, the Strait of Hormuz carried approximately 20 million barrels of crude oil per day. Most are exported to Asia, especially China, Japan, South Korea, India, and Southeast Asian countries. Considering these countries’ dependence on daily oil shipments through the Strait and their domestic crude oil reserves, Southeast Asian manufacturing economies and India are likely to be the first to suffer disruptions if shipping through the strait is halted, followed by China, Japan, and South Korea. Overall, if the “Iran war” ends and shipping resumes within 60 days, the impact on the global economy will be relatively contained. However, if the conflict exceeds this timeframe, the associated risks could escalate rapidly.

• The Two Sessions have lowered China’s GDP growth target for 2026 to 4.5–5%. However, we believe this will not be an easy target to achieve. The main reason is that exports are unlikely to contribute more than 1.5 percentage points to annual GDP growth, as they did in the previous two years. We forecast it will fall to around 0.7 percentage points. This means domestic demand will need to contribute at least an additional 0.44 percentage points compared to last year to meet the minimum 4.5% growth target. Therefore, policy support will still be needed to boost domestic demand to achieve this year’s growth objectives.

• We maintain our neutral-to-cautious view on US stocks and Hong Kong stocks. A-shares will also likely face short-term pressure, but we believe the overall downside for the index is relatively limited. Therefore, if the A-share index falls by more than 5% from current levels, investors may consider gradually accumulating.

• A-shares will also face short-term pressure, but the index’s overall downside for the index is relatively limited. We continue to expect that gold and non-ferrous metals will likely fluctuate below their previous highs. If the conflict drags on, oil prices still face significant upside risks in the short term, which will drive up prices of other downstream chemical products in tandem. However, for investors who cannot grasp geopolitical issues, caution is warranted when participating in such commodity trades, and leverage risks must be properly controlled.

  
  

Previous Views:

We believe that even after the new Fed Chair, Warsh, takes office, he will not be able to truly implement the policy mix of interest rate cuts combined with quantitative tightening (QT). The massive capital expenditures and debt issuance by US tech stocks have raised concerns in the market. Therefore, we would only suggest buying on dips if the U.S. market experiences a sharp correction first. We maintain our overall view of a slow bull market in A-shares. For 2026, we still forecast a 10%–15% rise in major A-share indices. However, investors should still avoid excessive short-term momentum trading. Gold and non-ferrous metal prices will likely fluctuate below previous highs in the short term, but we remain relatively positive on gold and copper over the medium term.

Views in March:

I. “The Iran War” Poses Great Uncertainties to the Market

On February 28, the US and Israel launched military strikes against Iran, reportedly killing its top leader. Iran retaliated against the US and Israel with missiles, drones, and other weapons, and has effectively restricted shipping traffic through the Strait of Hormuz.

We believe this event poses a major threat to the global economy and markets. First, the US and Israel lack clear and realistic objectives in launching this war. US President Trump stated that the goal is to defeat Iran and force its surrender completely, but this objective is fundamentally unattainable through airstrikes alone without a ground offensive. Meanwhile, following the killing of senior Iranian government officials, it is currently impossible for Iran to produce a leadership capable of maintaining overall control while simultaneously negotiating with the US. In effect, Trump’s military operation has essentially closed the door to the possibility of renewed US-Iran negotiations in the near term.

As for more realistic "secondary objectives," such as eliminating Iran’s ability to threaten oil shipments in the Strait of Hormuz, the US will also find this extremely difficult to achieve. Even with US naval escorts, it would be challenging to guarantee absolute safety for vessels passing through the strait. Large fuel-carrying ships such as oil tankers and LNG carriers face the risk of massive explosions or even sinking if struck by missiles or drones—risks unacceptable to shipowners and crews. Therefore, as long as Iran does not genuinely end its attacks on shipping in the Strait of Hormuz, it will be difficult to believe that the closure will end.

Secondly, we believe that as long as the US and Israel continue to carry out bombings against Iran can’t abandon threats against vessels in the Strait of Hormuz. Even if Trump announces a halt to the bombings or suspends the airstrike operations, it may not necessarily end this threat. The current domestic situation in Iran is chaotic and unclear, and attacks by the IRGS lack unified command and a clear decision-making authority. Therefore, shipping companies and crews will not take lethal risks in to go through the strait unless the basic safety of lives can be guaranteed. To restore shipping under such circumstances, the US and Israel would, in fact, have to destroy Iran’s military industrial capacity and military infrastructure, which is extremely difficult to achieve and might take a long time.

Before the conflict, the Strait of Hormuz carried approximately 20 million barrels of crude oil per day. Although Middle Eastern oil-producing countries can increase oil exports through alternative routes, such as Red Sea pipelines & ports, these channels are still far from sufficient to fully offset the loss of shipping capacity through the Strait of Hormuz. At present, countries still maintain certain onshore oil and gas reserves, as well as offshore floating oil detained from countries including Russia, Iran, and Venezuela. Global total oil reserves exceed 4 billion barrels, equivalent to roughly 200 days of crude oil shipments through the Strait of Hormuz. However, these reserves are unevenly distributed across countries.

China’s total crude oil reserves may exceed 1.2 billion barrels, covering more than 100 days of its total domestic oil consumption. The US holds 850 million barrels in reserves, but as a major oil-producing country, it is largely self-sufficient in crude oil. But the situation is less optimistic for some other economies. Most oil passing through the Strait of Hormuz is shipped to Asia. Apart from China, India, Pakistan, Japan, South Korea, and Vietnam, other Southeast Asian countries are highly dependent on these shipments. From another perspective, Japan and South Korea have relatively high domestic oil reserves, which can cover more than 200 days of domestic oil consumption. Overall, when considering dependence on oil shipments through the Strait of Hormuz and domestic oil reserve levels, the most severely affected economies in the short term are emerging Asian developing countries such as India, Pakistan, and Vietnam (see Figure 1).

Therefore, if the "Iran war" can be ended within 60 days and shipping through the Strait of Hormuz resumes, the overall economic impact on the global economy is likely to be relatively limited. However, if the above assumptions cannot be realized, the impact on the global economy and markets could be far greater than what is currently priced in by markets. In that scenario, some countries may also begin restricting exports of refined oil products and certain petrochemicals before then to ensure domestic consumption first. This could disrupt in the global manufacturing supply chain, further amplifying the associated economic losses.

From the perspective of financial market investors, uncertainty will inevitably reduce investor risk appetite. As a result, financial markets will most likely price in such economic risks in advance, rather than waiting 60 days to observe whether the Strait of Hormuz can reopen. Consequently, if there are no signs of de-escalation in the region within the next one to two weeks, we expect global financial markets to face another round of volatility.

 II. The Current Fundamentals of the US Economy Are Highly Vulnerable to a Surge in Oil Prices

Although the US is a net oil exporter and the closure of the Strait of Hormuz would not directly lead to an oil shortage in the US, rising global oil prices and disruptions to supply chains in manufacturing-intensive Asian economies would still exert adverse effects on the US economy. The current fundamentals of the US economy are not resilient enough to withstand a new round of high oil prices.

First, the US labor market is showing further signs of weakening. Non-farm Payrolls (NFP) decreased by 96,000 in February. Moreover, the Bureau of Labor Statistics (BLS) revised its NFP figures for 2024 and 2025 downward. Total NFP additions for 2024 were revised from 2.232 million to 1.459 million; while the figure for 2025 was lowered down from 585,000 to 116,000. This indicates that actual US employment growth has been significantly weaker than previously reported, and the deterioration is still ongoing. Notably, the US unemployment rate rose only modestly in February, from 4.28% to 4.44%, a seemingly small increase. However, the US labor force participation rate dropped sharply from 62.51% to 62.05% in February, a drop of 0.46 percentage points, which is larger than the increase in the unemployment rate. —This represents the lowest participation rate since the end of the pandemic in 2022. This pattern suggests that, in addition to rising unemployment, a growing number of working-age Americans have exited the labor force and no longer actively seek employment.

We believe this is likely related to the substitution of various office and white-collar jobs by AI applications. Many former white-collar workers, after being laid off, cannot find positions with similar income levels and are unwilling to take low-wage or manual jobs. As a result, they voluntarily choose to exit the labor market, leading to a rapid decline in the labor force participation rate. Whether through unemployment or labor force exit, overall US wage growth is likely to slow down. This could gradually weaken consumer spending power or force households to rely more heavily on savings and investment income to maintain consumption.

Secondly, the current US household savings rate has fallen to a relatively low level. As of the end of 2025, it stood at 3.6%, the lowest level since the end of the pandemic. The substantial savings accumulated during the pandemic have been nearly exhausted over the past two years, as consumer spending has outpaced income growth (Figure 3). Therefore, without a new round of large-scale fiscal stimulus introduced by the US government this year, US household consumption itself faces certain downside risks to its growth rate.

Secondly, a sharp rise in oil prices at this point would be very detrimental to overall U.S. consumption. As energy spending represents a necessary expense for US households, higher oil prices will further constrain the capacity to growth in other expenditures—especially in an environment of weakening employment and income growth.

Furthermore, if oil prices surge and fail to decline in a relatively short period, the resulting rebound in inflationary pressure would force the Fed to delay its interest rate cuts. We have observed that since the start of the “Iran war,” the scale of interest rate cuts priced in by Fed funds futures for the second half of this year has narrowed significantly (Figure 4), indicating that the market expects less room for Fed easing.

If the Fed is unable to cut interest rates further, it could not only negatively affect US consumption and the property sector, but also deal a blow to AI investment in the US. For 2026, the large leading tech companies in the U.S. stock market have announced AI-related capital expenditures totaling as much as US$700 billion, nearly half of which is expected to be financed through debt issuance. If the Fed or is unable to lower interest rates, its financing costs will rise further, and it will become increasingly difficult for the market to absorb such a large volume of corporate debt issuances. The US private credit market is already facing severe liquidity pressure, and investor risk appetite for the massive debt financing of tech companies has declined. Under these circumstances, part of the AI investment will likely have to be scaled back due to insufficient financing. Investment in AI is currently a major engine supporting U.S. economic growth.

 III. Achieving 4.5% GDP Growth Will Be Challenging for China

China’s “Two Sessions” are currently underway. In the government’s economic work report, a GDP growth target of 4.5%–5% for 2026 has been set, representing a moderate downward adjustment from the 5% growth achieved last year. However, we argue that this economic target should not be considered as easily attainable simply because the lower bound has been tuned down to 4.5%.

First, exports contributed 1.5 and 1.64 percentage points to China’s 5% GDP growth in 2024 and 2025, respectively, playing a pivotal role in meeting the growth targets over the past two years. On one hand, this underscores the remarkable resilience and competitive edge of China’s exports. On the other hand, replicating such a high level of export contribution to economic growth in 2026 will be extremely challenging. China’s current GDP stands at approximately RMB 140 trillion. A 1.5-percentage-point contribution equates to RMB 2.1 trillion or roughly US$300 billion. This means China would need to achieve an actual increase of US$300 billion in its current account surplus in 2026 to deliver a 1.5-percentage-point boost to GDP—a goal we consider highly difficult to achieve.

Admittedly, China’s current account surplus surged from US$423.9 billion in 2024 to US$735 billion in 2025, an increase of US$311.1 billion. However, we believe the probability of China’s current account surplus exceeding US$1 trillion this year is very low. From the perspective of the global balance of payments, the US has long been the world’s largest deficit provider of current account deficits, playing the most decisive role in shaping the overall global current account deficit. The trend of the US current account deficit expanding continuously due to massive fiscal stimulus after the pandemic peaked and began to reverse in 2025.

Therefore, barring an immediate new round of large-scale fiscal stimulus in the US this year, we expect the US current account deficit to be unlikely to rebound significantly in 2026. Among surplus countries, China has not only become the world’s largest current account surplus nation but also accounted for over 60% of the total global surplus in 2025. Thus, assuming the US deficit does not widen further, it will be very difficult for China to expand its current account surplus by another US$300 billion to reach US$1 trillion this year—unless China can push the Eurozone, Japan, South Korea, and even the Middle East into current account deficits.

Even under a relatively optimistic scenario for the global economy, China’s current account surplus this year may increase by another US$100 billion compared with last year, reaching approximately US$850 billion.

In this case, the contribution of exports to China’s economic growth this year will drop from 1.64 percentage points last year to around 0.7 percentage points. This means that even though China’s lower-bound GDP growth target this year has been reduced by 0.5 percentage points lower than last year, achieving 4.5% growth will still require domestic demand (domestic investment and consumption) to contribute about 0.44 percentage points more to economic growth than in the previous year.

It can therefore be concluded that China still faces a tough task of boosting domestic demand growth this year. Meanwhile, since RMB 300 billion in consumption subsidies was introduced domestically last year, the effectiveness of consumption stimulus may diminish this year. For 2026, the government has set a fiscal budget deficit ratio of 4%, along with RMB 4.4 trillion in new local government special-purpose bonds and RMB 1.3 trillion in new special treasury bonds, which are largely in line with last year’s levels. Accordingly, it is reasonable to conclude that achieving 4.5% GDP growth will not be an easy task for China.

 IV. Market Strategy

We maintain our neutral-to-cautious view on US stocks. At present, market pricing of oil price risks still largely assumes that the Iran war will end and that oil shipping through the Strait of Hormuz will resume within 60 days. We believe this market expectation faces risks of further downward revision. Meanwhile, weakening US economic fundamentals and tightening corporate financing conditions may put new pressure on stocks that have benefited from AI investment, which the market has favored.  Similarly, we hold a neutral-to-cautious view on Hong Kong stocks. A prolonged disruption in oil shipments would have a more direct impact on emerging Asian economies. It may trigger a reversal in international capital flows into emerging Asian markets, a trend that has persisted since Q4 last year. As a result, Hong Kong stocks may remain under pressure. However, if the Hang Seng Index falls by about 10% from current levels, investors may consider gradually buying on dips.

A-shares will also face short-term pressure, but the index’s overall downside is relatively limited. Therefore, if the A-share index falls by more than 5% from current levels, investors may consider gradually accumulating.

We continue to expect that gold and non-ferrous metals will likely fluctuate below their previous highs in the short term. Gold will show relatively more resilience due to geopolitical uncertainties, while other precious metals and non-ferrous metals may experience greater short-term volatility.

If the conflict drags on, oil prices still face significant upside risks in the short term, which will drive up prices of other downstream chemical products in tandem. However, an excessively rapid and large price increase would hurt the global economy and demand. Thus, once the market expects shipping through the Strait of Hormuz to resume, prices of these commodities could drop sharply. Therefore, for investors who are unable to assess geopolitical developments closely, caution is warranted when participating in such commodity trades, and leverage risks must be properly controlled.