Worst case scenario still not priced in, says PNC's Yung-Yu Ma

Summary

• Yung-Yu Ma argues that worst-case geopolitical scenarios, such as energy infrastructure being destroyed and offline for years, are not fully priced into markets, as seen in VIX levels and oil futures curves.
• He believes a little more risk should be priced in, citing VIX at 26 as slightly low, but does not expect dramatic spikes (e.g., VIX at 40) or extreme equity drawdowns.
• Markets are behaving rationally due to the wisdom of crowds, with investors cautious about reducing longs prematurely, reminiscent of misplaced concerns in April last year.
• China has leverage over Iran through substantial trade and investments in the Middle East, and is likely pushing for de-escalation to ensure regional stability.
• Backdoor diplomatic channels are applying pressure, which may lead to de-escalation in the coming days, reducing immediate risks.
• Looking 9-12 months out, China's growth is expected to be driven by the tech sector, particularly AI innovation, where it remains competitive with the U.S.
• The market's resilience, including a rally in the last 30 minutes of trading, shows quick reactions to news, which he views as somewhat premature nervousness.
• Key uncertainty is the low-probability but high-impact risk of escalation causing energy supply disruptions, which is not currently anticipated by markets.
• Narrow nuance: The specific risk of long-term energy infrastructure damage is a worst-case scenario that markets are not braced for, even if unlikely.