Zhongjin: Industry shows "killing valuation" characteristics, A shares are over-allocated to basic chemicals, machinery and other sub-industries.

Zhongjin released a research report stating that since the occurrence of the conflict between the US and Iran and the blockade of the Hormuz Strait, crude oil prices have fluctuated significantly, leading to concerns about "stagflation" and even "recession" guiding global trading behavior. From February 28 to now, the US dollar index has been on the rise, and global risk assets have shown weakness. The A-share market has also performed poorly, experiencing a decline followed by a slight stabilization in sentiments recently. At the industry level, there are characteristics of "killing valuation," and stocks in sectors such as high-dividend companies with safe-haven attributes, coal, power, and battery companies with energy substitution logic have shown resilience in their stock prices. The main viewpoints of Zhongjin are as follows: In the short term, the Iranian situation is in a stage of game escalation where both sides have not reached an agreement, and the uncertainty of the developments has led to a spread of risk aversion sentiment. In March, the transportation volume through the Hormuz Strait has significantly decreased, and the current supply pressure caused by the blockade of the strait has had a more negative impact on the market than the actual production capacity damage. According to the bulk commodities team at Zhongjin, if the trade interruption through the Hormuz Strait continues for 3 months, the Brent oil price centers in each quarter of this year are expected to be 80, 120, 90, and 80 US dollars per barrel; if the trade interruption continues for 6 months or more, the expected Brent oil price centers in the quarters are 85, 150, 110, and 90 US dollars per barrel. The direct supply impact, the negative restraint of high prices, and the negative feedback from the demand side make it difficult for oil prices to sustain at high levels. The impact of the Iranian situation on industry fundamentals is reflected in several aspects: Firstly, the conflict has led to transportation channel interruptions, manufacturers being forced to reduce production or having damaged production capacity, causing a shrinkage in the supply of commodities such as oil, natural gas, and basic chemicals (such as urea, fertilizers). The demand for alternative energy sources outside the Middle East has increased. Secondly, the rise in energy and raw material prices has transmitted downstream through the industry chain, with the price increases at each link influenced by factors such as economic conditions, bargaining power, etc. The bank had previously stated that based on the GDP impact and the cost transmission effect of input-output tables, it is estimated that if oil prices rise, the coal and non-ferrous metal industries are expected to benefit from price increases and profit improvements, while the banking, non-banking, pharmaceutical, computer, and communication industries are less affected. And the basic chemical and transportation industries may be simultaneously pressured by the decline in demand and the rise in costs, with profit growth rates facing drag. Thirdly, the significant fluctuations in oil prices have exposed the vulnerability of the traditional fossil energy system, making it more urgent to promote energy transition, with long-term demand for wind power, solar power, energy storage, and power grids expected to be supported. April is the disclosure phase of the first quarter reports for listed companies in 2026. After years of production capacity contraction, some areas, especially cyclical industries, have seen improvements in supply and demand. Affected by the input factors of the contraction of capital expenditures of listed companies, the implementation of the "anti-overwork" policy, and the rise of global commodity prices, as of February, the year-on-year decline in PPI narrowed to -0.9%, and the month-on-month change has been positive continuously since October 2025. Since the beginning of this year, prices of lithium battery materials, chemicals, and AI industry chain hardware products (such as optical fiber cables, storage, target materials, MLCC) have risen, and the bank believes that the performance of relevant listed companies is expected to improve. The high-frequency data tracked by the bank shows that the real estate chain remains weak, and the high prosperity industries are mainly concentrated in the AI industry chain. The Scaling Law implies that with the expansion of computational volume, parameter scale, and training data volume, the performance of large language models shows a stable power law improvement. It can be observed that artificial intelligence is in a stage of new technology iteration and application, and the exponential growth in demand for energy and cost due to new model training. Demand trends favor growth styles, and related sectors have been trading focus in the past two years, with stock prices having reflected much already. Looking ahead, although there are still uncertainties in the short term, the current period may be a relatively low point for A-shares in the medium term, and the release of risk and downward adjustments are expected to bring better allocation opportunities. Although there is still some uncertainty in the short-term trend, after undergoing adjustments, the risk in the A-share market has been further released, and the bank believes that valuations are at relatively reasonable levels. On a medium-term scale, there has been no fundamental change in the macro environment in which the market operates, and the logic of supporting the A-share market's "stable progress" is still valid. The release of risk and downward adjustments are expected to bring better allocation opportunities. Considering industry development trends and production capacity cycles, the bank suggests a more balanced allocation strategy. Focus on: 1) Prosperity growth: Industries benefiting from the landing of AI technology such as optical communication; new energy-related sectors such as batteries and energy storage. 2) Cyclical resource stocks: Considering the position in the production capacity cycle, focus on subfields supported by supply and demand patterns that promote price increases and performance certainty, such as power grids, chemicals, etc. 3) High dividend stocks may still show phase-oriented and structural performance this year, with a focus on matching cash flow. Overweight industries in April: Basic chemicals, machinery, electrical equipment, electronic hardware, power generation, and power grids. Underweight industries in April: Construction and engineering, textile and apparel, tourism and hotel catering, education, light industry and home furnishings.