The Middle East conflict may become a catalyst for a change in market structure

The geopolitical impact of the Middle East conflict is significant, but its actual impact on Chinese assets is limited; however, the conflict has triggered a sudden change in risk appetite, with the sectors most structurally affected being those with high valuations, high trading volumes, and strong consensus. The factors supporting the collective rise of micro-cap stocks are showing signs of cracking, making these sectors more prone to volatility in the near future. The weakening of the small-cap and thematic rotation model also means that the logic of returning to strong industrial trends represented by AI will strengthen; another clue worth tracking is returning to policy, as the continued and generally sluggish price signals may become a new catalyst, but patience is required. Overall, downplaying macro disturbances, returning to industrial trends, and being vigilant about micro-cap volatility remain the core strategic thinking for the next phase.

The geopolitical impact of the Middle East conflict is significant but has limited actual impact on Chinese assets

From a strategic perspective, predicting such geopolitical issues is extremely difficult. The commodity market may react impulsively, and the stock market may have localized short-term reactions, but due to unpredictability, it is hard to become a dominant variable in the market. The trade war in April reminded us that when the long-term revaluation of Chinese assets has become a consensus, any excessive reaction to external shocks tends to have a high error rate in hindsight. However, rising oil prices can temporarily alleviate the downward pressure on industrial product prices; more importantly, high oil prices will hinder the decline of U.S. inflation. Since February this year, the U.S. CPI energy component has entered a year-on-year decline range, causing the overall CPI year-on-year growth rate to drop from a peak of 3.0% in January to 2.4% in May. If oil prices soar due to supply factors later, this suppressive effect will inevitably weaken. The resurgence of U.S. inflation risks and conflicts arising from the expulsion of illegal immigrants may affect the advancement of tax reduction bills and also limit Trump's maneuvering space on trade issues. From this perspective, the conflict in the Middle East may not have a negative impact on Chinese assets.

The sudden change in risk appetite has the greatest impact on sectors with high valuations, high trading volumes, and strong consensus

1) The factors supporting the collective rise of micro-cap stocks are showing signs of cracking. The overall downward risk in the market is limited under the support of institutions like Central Huijin, but there are no signs of a general improvement in profitability for the time being. Subjective bullish institutional funds are weak, while quantitative incremental funds are strong and biased towards micro-cap stocks, creating an environment where micro-cap stocks trend upward while large-cap stocks remain sluggish. However, these factors are beginning to show signs of loosening. In an environment where the China-U.S. trade war has entered a stable state, without systemic shocks, institutions like Central Huijin have no need to enter the market in large numbers to stabilize it. After the China-U.S. Geneva talks, we estimate that Central Huijin has not continued to buy ETFs, and the number of announcements for share reductions by listed companies has significantly increased. Additionally, the number of companies issuing suspension warnings due to stock price fluctuations is increasing; from last December to this April, only 2 companies issued suspension warnings, but since May, at least 5 companies have issued warnings for abnormal suspensions, not including cases of direct abnormal suspensions. Historically, whenever the frequency of abnormal suspensions rises, the sentiment for small-cap and thematic speculation tends to cool down The advantages of quantitative products are also significantly weakened in the case of deep discounts in index futures. As of June 13, the annualized discount rate of the IM quarterly contract (excluding dividends) reached 14.7%, while very few long positions in quantitative strategies can achieve an annualized excess return close to 15% relative to the CSI 1000. The decline in the excess advantage of quantitative products may lead to a subsequent decrease in the number and issuance scale of registered products, reducing the incremental funds supporting the collective rise of micro-cap stocks.

2) The deterioration of risk appetite may lead to volatility in such high-position and collective sectors. On Tuesday, market 震动 was triggered by news of US-China negotiations, primarily originating from some high-position collective sectors, and the funding strategies exhibited extremely high consistency, reflecting the current high-position collective sectors' extreme sensitivity to external environmental variables. As of June 13, our investor sentiment indicator, constructed based on turnover rate and closing price, recorded 54.3 (with a range of 0-100), down 12.8% from the April peak of 62.3, while the closing price of the Shanghai Composite Index has risen to the 85.7 percentile over the past year. The divergence between the sentiment indicator and market trends also indirectly confirms that rational investors are becoming relatively cautious. In addition to micro-cap stocks, some high-prosperity hot sectors also exhibit high short-term congestion. For example, the constituent stocks of Hong Kong's innovative drugs (excluding CXO) contributed 11.5% of total trading volume, the highest historical percentile since 2019, with the rolling 1-year P/S percentile currently recorded at 83%, also at the highest level since 2019, exceeding July 2020; the overall trading amount of new consumption and pharmaceutical sectors in A-shares accounted for 11.6%, at the 84.4% percentile since 2019, with the rolling 1-year P/S percentile currently recorded at 72.1%, and the valuation center has shown a significant increase in 2025.

The weakening of the small-cap and theme rotation model also means that the logic of returning to trends in industries like AI will strengthen.

1) While the market's attention is highly focused on small-cap and theme rotation, changes in the AI industry have not stagnated. The usage of AI application tokens by mainstream North American companies is rapidly increasing, and user activity continues to maintain high growth. Google stated at the I/O 2025 conference that the amount of tokens processed monthly has grown from 9.7 trillion in May 2024 to the current 480 trillion, an increase of about 50 times. According to the statistics from May on AI product rankings, OpenAI's ChatGPT and Sora web access reached 5.68 billion times (+6.8% MoM, same below) and 63 million times (+121.3%), respectively; Google's Gemini and AI Studio access reached 540 million times (+28.9%) and 80 million times (+11.6%). Behind this, one reason is the improvement in models' long text and memory capabilities, providing users with a better experience. On the other hand, North American tech giants have begun to shift from a model arms race to a user acquisition phase, with Perplexity and OpenAI's search engines putting immense pressure on traditional giants like Google and Microsoft It has also prompted major companies to strengthen the flow of existing users, such as providing free AI search services, which further boosts inference demand. We believe that the cycle of "inference computing power enhancement → user stickiness → greater inference demand → more inference computing power demand" has already formed in North America, having passed the stage where a significant product catalyst is needed to generate a pulse market.

2) The perception of this issue domestically may lag a bit, but it won't be far behind. The domestic market's attention to AI will also return as the high-level clustered sectors cool down. Of course, the most important thing is that hardware companies in the North American AI computing power chain have already demonstrated the first wave of profit effects. From the perspective of industry rotation relative strength indicators, as of the week of June 13, the optical module and PCB sectors within the AI industry chain have entered a relatively leading phase. The performance of these sectors itself attracts market attention and will prompt investors to start re-focusing on the subtle changes occurring in the AI field. From the perspective of sector interpretation logic, the best varieties currently remain in the North American AI supply chain. The logic of domestic AI may only begin to unfold after domestic inference demand explodes continuously like in North America. In terms of market sequence, we believe the path will be "North American AI supply chain → domestic application inference token explosion → domestic computing power → edge devices."

The sustained and generally sluggish price signals may become a new policy catalyst, but patience is required.

After the disturbances of the trade war cool down, the bottlenecks in the internal circulation will again become the focus of market attention, discussion, and pricing. According to Iceberg Big Data, as of June 8, the average listing price of second-hand houses in first-tier cities in China has seen a month-on-month decline for 14 consecutive weeks, with a cumulative drop of 3.5% since 2025. In terms of industrial product prices, as of June 13, the South China Industrial Product Price Index has continued to decline by 7.2% compared to the peak at the end of March, and it is still operating at a low level recently. The effects of the previous round of domestic demand-boosting policies have begun to wane, with many regions across the country experiencing a "rollback" phenomenon in old-for-new subsidies. On June 9, the "Opinions on Further Ensuring and Improving People's Livelihoods and Focusing on Solving Urgent and Difficult Issues for the Public," issued by the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council, was publicly released. The publication of such documents likely indicates that the approach to boosting domestic demand is gradually shifting from simple consumer subsidies to broader areas such as strengthening social security, which is an extremely correct directional guidance. The recent rise in the public discourse on "anti-involution" is becoming more pronounced, and related industries may become very important clues in the second half of the year. We believe that the resolution of these issues will not happen overnight, but as long as open discussions can be formed and a consensus from top to bottom is established on the need to solve these problems, a new round of targeted policy intensification will not be far off.

Diminishing macro fluctuations, returning to industrial trends, and remaining vigilant about micro fluctuations will still be the core strategic thinking for the next stage.

We recommend focusing more on the investment logic that returns to industrial trends during the semi-annual report season from June to August, avoiding excessive reactions or trading based on macro information, while also being wary of fluctuations in micro-market styles. In terms of specific allocations: 1) For A-shares, we suggest paying attention to the AI chain, with a focus on the computing power supply chain (such as AI servers, PCBs, ASIC chips, optical modules, switches, computing power leasing, etc.); the application segment needs to be continuously monitored, with clear trends in multimodal visual understanding applications. We recommend focusing on ByteDance ecosystem companies and components and module companies that grow with branded clients, and in terms of categories, we suggest paying attention to products like AI glasses and AI toys; 2) Hong Kong stocks are entering a bottom-up stock selection phase. Against the backdrop of geopolitical disturbances and sudden changes in environmental variables, Hong Kong stocks serve as a safe haven for global risk assets, and we recommend continuing to balance the allocation between A-shares and Hong Kong stocks; 3) We suggest starting to pay attention to policy signals again, as further widespread downward price signals in the future may trigger a new round of policy intensification, but patience is required.

Risk Factors

Increased friction in technology, trade, and finance between China and the United States; domestic policy strength, implementation effects, or economic recovery falling short of expectations; macro liquidity tightening beyond expectations both domestically and internationally; further escalation of conflicts in Ukraine and the Middle East; slower-than-expected digestion of real estate inventory in China; unexpected shifts in the focus of Trump’s policies.

Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk