ETF Daily Report: Most sectors declined, with only communication, consumer electronics, and other sectors ending in the green. The largest declines were seen in building materials, coal, and biopharmaceuticals.

Today, China’s A-share market opened higher but then fell and moved downward in a volatile trading session. By the close, the Shanghai Composite Index printed a mid-to-bearish candle, closing at 3880.10 points, down 1.00%. The Shenzhen Component Index fell 0.99%, and the ChiNext Index fell 0.73%. At the individual stock level, more stocks declined than rose: more than 4700 stocks fell, while only about 700 stocks declined. Regarding trading activity, the combined turnover of the Shanghai and Shenzhen markets was approximately 1.67 trillion yuan, shrinking by nearly 16.7k yuan versus the previous day. With the market’s risk-avoidance sentiment running high, pessimistic expectations have not been fully released.

At the sector level, most sectors fell; only sectors such as Communications and Consumer Electronics recorded gains; Building Materials, Coal, and Biopharmaceuticals were among the worst performers.

This week, the Shanghai index generally saw frequent swings driven by repeated changes in overseas conflict expectations, with multiple instances of opening higher or lower by a gap. This significantly increased the difficulty of short-term trading. On Monday, affected by expectations of an escalation in the situation, A-shares opened lower, dipped briefly, and then gradually stabilized, regaining the 3900-point level. On Tuesday and Wednesday, the Trump administration released signals of easing; with sentiment turning optimistic, the Shanghai index filled last week’s gap. However, Trump’s statement on Thursday did not provide a clear timeline for a ceasefire. Instead, it threatened to further increase the intensity of military strikes. The Shanghai Composite fell throughout the day in a choppy decline, and the upward trend line since the rebound was broken. On Friday, although overnight U.S. stocks turned red by the end, A-shares had heavy risk-avoidance sentiment ahead of the holiday and traded lower with volatility all day.

Recently, against a backdrop where overseas conflict news has been plentiful and even contradictory, A-shares have shown characteristics of multiple overnight gap-ups/gap-downs and large intraday swings. Many investors directly call out, “I’ve been slapped in the face repeatedly by a ‘monkey market’—so how should I invest?”

Our view is: stay cautious and don’t go all-in; let value beat short-term moves; and be patient to invest in China.

In terms of positioning, in a market environment characterized by repeated volatility and a significant rise in uncertainty, keeping a certain proportion of cash can provide an essential safety buffer and operational flexibility for the overall investment portfolio.

On the one hand, cash functions as the portfolio’s “stabilizer,” effectively hedging volatility risk of held assets. When the market adjusts abruptly and risks are released quickly, it can reduce the overall drawdown magnitude and prevent getting stuck passively due to pressure from an all-in allocation. On the other hand, ample cash also means you have the initiative to capture opportunities. When high-quality targets suffer emotional mispricing and present reasonable buying points, or when geopolitical and policy developments reach a temporary turning point, you can arrange positions calmly and add at lower levels—truly achieving a contrarian allocation.

In terms of execution, short-term trading is facing high difficulty. We do not recommend that investors chase rallies or sell off in response to market and sentiment fluctuations. Instead, you should firmly adhere to a value-investing philosophy, dig deeper into investment opportunities that the market has mispriced, and focus on the value of long-term asset allocation.

Before chasing recent strength, it is not very advisable to bet on defensive sectors that can hold up better or on short-term earnings performance. Because current asset prices are repeatedly fluctuating under the influence of developments in the situation, while predicting the unfolding and development path of the conflict is beyond the capability range of most investors. Therefore, we suggest sticking to an allocation mindset, reducing the emphasis on short-term trading. “Mr. Market” will reward investors who can stay rational amid volatility and hold value firmly amid risks.

From a directional perspective, Chinese assets have certain valuation advantages and a margin of safety, and are highly attractive in a time when uncertainty is growing day by day. On the valuation front, the TTM P/E ratio of the CSI A500 is only 17x, far below the S&P 500’s 27x, meaning the valuation advantage is clear. This valuation edge, on the one hand, can effectively resist the risk of valuation compression during a stagflation/slow growth with inflation cycle; on the other hand, it can also attract global capital to keep allocating, forming a positive feedback loop of “valuation repair + capital inflows,” further strengthening the resilience and investment value of the A-share market.

Coupled with China’s relatively large policy space for fiscal and monetary measures, a sound industrial chain and supply chain system, and a stable environment for economic development, Chinese assets are expected to become the “anchor weight” and “safe haven” for global capital. On the one hand, domestic macro policy still maintains substantial fiscal and monetary policy space; measures to stabilize growth are continuously implemented, providing solid policy downside support to the market. On the other hand, China has a complete and highly resilient industrial chain and supply chain system; overall economic operations are steady, and the development environment is stable and controllable, providing good soil for corporate profit recovery. Moreover, since RMB-denominated assets have relatively low correlation with overseas market risks, they can effectively diversify the tail risks of global portfolios.

From a positioning standpoint, although fundamental data constraints are a source of resistance to the current market, they are also a target. For example, using the CSI A500 and CSI 300: the indices have not yet recovered their 2021 peak levels. The market still has the demand and momentum to further probe target levels. Fundamental data lags and, while it may suppress the pace of upside in the short term and become resistance for market stabilization and adjustment, it also points the direction for the market’s subsequent breakout and becomes the goal for the market to gradually tackle the challenge. Investors can pay attention to the mid-to-long-term investment value of the CSI A500 ETF (159338) and the CSI 300 Enhanced ETF (561300).

The conflict has already been going on for more than a month. Oil prices have continued at high levels, and investors’ outlook for the future must maintain a more cautious attitude.

If the conflict intensity continues to spiral upward, “high oil prices and low risk appetite” will harm the economy far more than inflation alone: business operations will face pressure, residents’ consumption will shrink, and market risk-avoidance will heat up—each can gradually drag the economy into the quagmire of stagflation.

• Business operations under pressure: transportation and raw material costs for enterprises may face another round of sharp spikes. For energy-intensive industries such as manufacturing, transportation, chemicals, logistics, etc., the share of energy costs will rise significantly, directly squeezing companies’ limited profit space. Many enterprises will be forced to cut capacity, delay investment and expansion plans, and even see layoffs and shutdowns—thereby weighing on the stability of the employment market and weakening one of the core drivers of economic growth.
• Resident consumption shrinking: rising oil prices directly lift the prices of refined oil products, which then transmit through channels such as logistics and retail. This raises the prices of necessities such as food and daily-use goods, creating a chain reaction of “oil prices up → prices up,” further compressing residents’ disposable income. Residents will be forced to cut back on non-essential consumption; consumption willingness will remain subdued, and the momentum for a rebound in domestic demand will be thoroughly throttled.
• Risk-avoidance sentiment heating up: an escalation in geopolitical conflict will intensify the market’s worries about the future economy. Businesses won’t dare to invest and residents won’t dare to consume. Funds will flow heavily into safe-haven assets such as gold and the U.S. dollar, tightening liquidity in capital markets. Volatility in risk assets such as stocks and bonds will increase, and investment vitality will continue to decline.

Stepping back, even if the conflict ends abruptly in a matter of weeks as Trump claims, this absurd drama that was started recklessly and ends hastily has completely disrupted the balance of geopolitics and reveals, in full, the final veil over the empire’s twilight. In traditional valuation frameworks, the baseline assumptions about U.S. hegemony and energy security have undergone an irreversible fundamental change.

• On U.S. hegemony: Previously, the U.S. relied on its absolute advantages in areas such as the military, economy, and technology, and played the role of a “global order leader.” Many viewed it as an “unshakable hegemony.” Its military deterrence, the position of the dollar hegemony, and control over global logistics routes together formed the core support of its hegemony, and also made the international community form an entrenched perception of “order stability under U.S. leadership.”
• On energy security: Predictability has been completely broken. Energy supply disruptions caused by the conflict have made the market realize that the risk of energy shortages is not far-fetched. Uncertainty in global energy supply has risen sharply, and fluctuations in energy prices are no longer likely to be short-lived pulses—they could become a long-term norm.

In addition, we are not optimistic about the prospects for negotiations and their impact on capital markets.

On the one hand, there are major disagreements among the parties’ demands regarding the conflict, and negotiation prospects still carry significant uncertainty. Capital still needs to price the probability and consequences of a negotiation breakdown. The possibility that Iran’s neighboring countries may also get involved could further worsen the situation—this is another incremental risk that should be highlighted. As the saying goes, “What you can’t get on the battlefield, is even less likely at the negotiating table.” Iran’s demonstrated ability to blockade the Strait during the conflict, the U.S. military’s retreat without fighting, or any further aggravation of surrounding countries’ sense of insecurity—these all plant the seeds for a potential escalation of the Middle East situation. In this context, it is difficult for the market to form sustained and stable risk appetite; any sudden incident could trigger investors to flee to safety again, suppressing the overall rebound’s height and continuity.

On the other hand, for the market, seeds of confusion, volatility, and doubt have already been planted. The expectation of a “reunion after breaking” for risk appetite is unrealistic. In traditional valuation frameworks, the baseline assumptions about U.S. hegemony and energy security have undergone an irreversible fundamental change. The global environment of low volatility and low risk premium that characterized the globalization era is gone for good. What is even more worth vigilance is that the underlying foundation that traditional valuation frameworks of global capital markets relied on over the past several decades—namely, the U.S.-led unipolar order, a stable global energy supply system, and smooth globalized trade supply chains—is being continuously pressured and shaken.

The market needs a longer volatility cycle to complete the re-anchoring of the valuation framework: “absorb sentiment through turbulence and trade time for space” will remain the core logic for how the market runs in the future.

This week, gold has mainly shown a pattern of stronger-than-average volatility. London spot gold prices have been repeatedly moving within the 4400-4800 range. Over the past five trading days, the Gold ETF (518800) recorded net inflows totaling nearly 1 billion yuan.

Overall, the medium- to long-term logic supporting gold remains solid, and pullbacks may well be good opportunities to add positions.

In the real economy, the U.S. economic outlook is hard to call optimistic. Doubts are growing about the persistence of high capital expenditure by AI, and concerns about “stagflation” are gradually being priced in. In Q4, the U.S. GDP year-on-year annualized growth rate? (seasonally adjusted) was revised down by 0.7pp to 0.7%; private investment + consumption growth was revised down by 0.5pp to 1.9%; resident consumption growth was revised down by 0.4pp to 2.0%. Equipment and software investment still maintains high growth, while the decline in manufacturing plant investment has widened. The U.S. economy faces “stagflation” risk—“inflation and economic stagnation coexisting.” If stagflation occurs, it will further constrain the policy space of the Federal Reserve. Under these circumstances, investors have a strong demand to ensure their assets do not lose value; gold, as a “store-of-value” asset, is favored by investors.

On geopolitics, tensions in hotspot regions are hard to de-escalate, and elevated risk-avoidance sentiment provides some support for gold prices. In the East Middle/Chinese Middle direction, the Iran-U.S. conflict has quickly escalated into a regional military confrontation, with signs it could become more intense. As for the Russia-Ukraine front, although the U.S. and Russia previously restarted diplomatic contacts and the conflict may enter a new phase of negotiations, there have been some recent reversals. In addition, Trump has claimed that Cuba is already on an action list, further increasing market concerns about his unpredictability. With geopolitical tensions high, risk-avoidance sentiment causes gold prices to be more likely to rise than fall.

The market’s main concern about gold is that after inflation reappears, the Federal Reserve may be forced to enter a rate-hiking cycle, which would be a negative for gold performance. However, we believe that under liquidity constraints, the room for Federal Reserve tightening may be lower than the market expects. The fundamental limits—including the fiscal sustainability red line of the U.S.’s more than 35 trillion U.S. dollars of federal debt, financial fragility in regional banks and commercial real estate, and weak internal economic momentum—have fundamentally locked up the space for further rate hikes. In addition, the inflation rebound this time is mainly driven by geopolitical supply-side shocks, so the effectiveness of rate hikes in controlling inflation is limited. Coupled with political constraints during the election cycle, it is difficult for the Federal Reserve to add tightening aggressively against the trend.

Looking ahead, in the medium to long term, factors such as the continuous accumulation of risks of U.S. re-inflation and even “stagflation,” weakening U.S. economic conditions, and rising systemic risks including oversupply of sovereign debt worldwide and global geopolitical issues all provide long-term positive support for precious metal prices. The Gold ETF (518800) tracks the AU9999 price of the Shanghai Gold Exchange. We recommend that investors pay attention to it. In addition, the Gold Stock ETF (517400) may also benefit from rising gold prices, and investors can keep watching.

Risk warning: Investors should fully understand the differences between fund regular investment plans with fixed intervals and amounts, and savings methods such as zero-store-collect (零存整取). Regular investment plans with fixed intervals and amounts are a simple and convenient way to guide investors toward long-term investing and averaging the cost. However, regular investment plans with fixed intervals and amounts cannot eliminate inherent risks of fund investing, cannot guarantee investors will achieve returns, and are not an equivalent wealth management alternative to savings. Whether it is stock ETFs/LOFs/split-share funds (graded funds), they are all securities investment fund products with relatively higher expected risk and expected returns. Their expected return and expected risk levels are higher than those of hybrid funds, bond funds, and money market funds. When fund assets invest in STAR Market and ChiNext stocks, they will face unique risks arising from differences in the investment targets, market systems, and trading rules, among other factors—please note. Short-term gain/loss limits for sectors/funds are listed only as auxiliary materials for analysis and viewpoints in the article; they are for reference only and do not constitute a guarantee of fund performance. Any short-term performance of individual stocks mentioned in the article is for reference only and does not constitute a recommendation, nor does it constitute a prediction or guarantee of fund performance. The views above are for reference only and do not constitute investment advice or any commitment. If you need to purchase the relevant fund products, please refer to the relevant regulations on investor suitability management, complete risk assessments in advance, and purchase fund products with risk levels that match your own risk tolerance. Funds involve risk; investing requires caution

Contributing author: Guotai Fund

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