Strait of Hormuz blockade in April as a critical point: CICC analyzes global supply chain restructuring and market bottom logic

Cailianpress News, March 31 (Editor: Hu Jiarong). Recently, Hong Kong stocks have continued to face pressure. The Hang Seng Tech Index has rapidly fallen from above the 5,200 level in mid-March to below 4,700, and disagreement among market participants about the “bottom area” has significantly widened. CICC’s latest research report focuses on the core variable of the Iran conflict, systematically explaining the logic behind market bottom-formation judgments and differentiated allocation strategies, providing investors with a clear decision-making framework.

Geopolitical conflict evolution: April as a key observation window

Conflict continues beyond expectations; market bargaining over “the likelihood of easing”

The Iran conflict has lasted for five weeks, with complexity and persistence significantly exceeding the initial market expectations. The current trading focus is centered on expectations around the possibility of a cooling of the situation (the “TACO” narrative). Based on market-implied probabilities (referencing betting odds), there is about a 40% probability that the conflict ends by the end of April, and another roughly 40% probability that it continues beyond the end of June, with uncertainty remaining high.

Two key turning points determine April’s trend

Political milestone: Trump will postpone actions against Iran’s energy facilities to April 7, and the international meeting originally scheduled for late March will be postponed to May 14–15. This adjustment suggests that policymakers expect the situation to become clearer in April.

Supply-chain milestone: Oil tanker transport cycles show that by the end of March, tankers passing through the Strait of Hormuz have basically already reached East Asia. If the strait remains under blockade in early April, Southeast Asian countries will face a substantive supply gap—countries such as Thailand, Vietnam, and Indonesia have already launched emergency measures such as working from home and limited fuel supply.

Risk transmission chain: Long-term blockade of the Strait of Hormuz → energy shortages in Southeast Asia → production interruptions in manufacturing → global supply-chain disruptions → worsening growth expectations. As this region is a core destination for China’s exports, fluctuations in its capacity will shock global markets through the “external demand-cycle-technology” chain.

This means that tankers that passed through the Strait of Hormuz before the Iran situation broke out in late February have basically already been delivered to their destinations, while after late March and into early April, they enter a state of insufficient availability. Although offshore floating storage, strategic reserves, and alternative sources can serve as buffers, if the Strait of Hormuz remains under a complete blockade in early April, the risk of tighter supply—or even localized shortages—will become real.

Among these, Southeast Asian countries with relatively smaller reserves and a high dependence on overseas supply are also the “weak links” that need particular attention. Currently, multiple countries in Southeast Asia—including Thailand, Vietnam, Indonesia, and the Philippines—have begun rolling out working from home; Myanmar has implemented odd-even day license plate driving restrictions; and Cambodia’s main suppliers have announced a pause in supplying liquefied petroleum gas and natural gas. Major Southeast Asian countries, as key export destinations for China over the past two years, have also become important supply-chain and production links after trade frictions have escalated. Therefore, countries such as Vietnam are prioritizing—so far as possible—ensuring energy supply for production.

If a long-term blockade of the Strait of Hormuz triggers an energy-supply contraction, Southeast Asia’s manufacturing industries, which are highly dependent on imports, may suffer a substantive hit. This path may also transmit disturbances in financial markets to the real economy, amplifying global growth concerns, so it is necessary to stay highly vigilant.

Asset pricing analysis: Significant divergence in expectations; insufficient pricing in equity markets

Benchmark scenario implies deeply pessimistic expectations

The futures market has pushed back the timing of the Federal Reserve’s first rate cut to December 2027, and the implied pricing points to a grim scenario in which the conflict continues into the second half of the year and the international oil-price benchmark remains above $100 per barrel.

Ranking of pricing sufficiency: Safe-haven assets are priced more fully; equity assets have an expectation gap

The current degree to which assets have priced in the pessimistic scenario shows a clear gradient:

More fully priced: U.S. Treasuries, gold, copper, etc. (weak rate-cut expectations / strong rate-hike expectations implied);

Less fully priced: Global major equity markets (U.S. stocks, A-shares, Hong Kong stocks). They do not sufficiently reflect potential shocks, leaving risks of correction.

Among them, the U.S. stock market: even under a pessimistic scenario, there may still be room for an 8%–10% pullback. The S&P 500 valuation still contains part of the rate-cut expectations, and the impact on earnings from sustained high oil prices has not been fully reflected. Prior calculations indicated that if the situation continues to escalate, the U.S. stock market may face around a 10% pullback; the U.S. stocks’ “catch-up selloff” last week initially validated this view. Of course, if the conflict ends within the second quarter, valuations could recover. However, the mid-year rise in oil prices still suppresses earnings, and the S&P 500 year-end target range has been lowered from 7,600–7,800 to 7,100–7,200.

China market: A-shares and Hong Kong stocks also are not fully priced for the pessimistic scenario. On one hand, the valuation pressure from fluctuations in U.S. Treasury yields and the U.S. dollar has not been fully reflected—especially for Hong Kong and A-share growth styles that are more sensitive to liquidity, and for small-cap stocks. On the other hand, if disruptions caused by the closure of the Strait of Hormuz further affect production activities in Southeast Asia and recession expectations warm up, it would also transmit through the demand logic in the order of “external demand-cycle-technology”: as global demand falls, the space for domestic valuation advantages narrows, and the export chain may face pressure first—such as chemicals, construction machinery, etc. Then the pressure spreads further through demand and supply to cyclical commodities like copper and aluminum.

Finally, valuations in the technology sector are affected through interest rates and risk preferences. Currently, adjustments in some export chains and pro-cyclical sectors have already reflected the beginning of this transmission path, but at the index level, the pessimistic scenario has not yet been fully priced in.

CICC’s calculations show that if the situation continues to escalate and the oil-price benchmark stays at high levels around $100 through the third and fourth quarters, the probability of a Federal Reserve rate cut within the year will decline noticeably. Assuming the Federal Reserve does not cut rates within the year, the corresponding year-end U.S. Treasury yield would be 4.2%. If the oil-price benchmark rises by 50%, and the price-transmission coefficient is estimated at 0.5, then corporate profits could fall by about 12.5%. If the increase in risk premium is referenced to the change in the Russia-Ukraine conflict—from the earlier phase to the conflict becoming normalized—then the Hang Seng Tech Index may drop by roughly 4% to 4,500–4,600, and the Hang Seng Index may fall by about 7% to around 23,000. Different A-share market indices may also face different levels of pressure, depending on valuation and earnings exposure.

How to allocate and respond? A left-side approach: hold assets with fully priced valuations, hold beneficiary assets without chasing highs, and hedge volatility with low-volatility dividends or by reducing positions

The Iran situation remains unclear, but CICC believes the following premises may have a certain degree of confidence: first, in the short term, especially in April, the situation is likely to keep fluctuating, and market expectations will swing back and forth; therefore, volatility may not end quickly, and staged escalation cannot be ruled out. Second, in the medium term, however, the situation ultimately getting out of control is not the baseline scenario. Third, even without considering the Iran situation, the second quarter is already a relatively weaker phase of China’s credit cycle.

Against this backdrop, a more effective allocation approach is to start from win probability and odds, and look for assets with better value. Specifically, there are three ways to respond:

Focus on items that have already fully priced in pessimistic expectations:

Hang Seng Tech (valuation at historical lows)

Innovative drugs (liquidity-sensitive sector)

Gold (geopolitical risk hedging tool)

For those with high allocation/positions: defensive hedging to control volatility

Allocate low-volatility dividend assets as core holdings:

Banks, utilities (stable cash flows)

High dividend certainty targets

Thematic positions: benefit from sectors while avoiding chasing higher prices

Hold energy-security logic assets (energy storage, coal), but be alert:

Trading crowding has reached the 100th percentile over the past year,

Over-discounting of expectations leads to a decline in odds.

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