Chinese Shares Are Top Bet During Iran War: Jefferies
Speakers
Christopher Wood -- Global Head of Equity Strategy at Jefferies
— Chopping Block co-host
Summary
- Markets exhibit remarkable complacency towards geopolitical events, treating them as buying opportunities, but prolonged Iran conflict increases downside risk.
- Chinese mainland equities are the top asset to own during the Iran war due to China's energy independence from oil reserves and advanced renewable energy, making it less geared to global oil price shocks.
- China's stock market is in a government-supported slow bull market, with measures to boost dividends, buybacks, and control IPOs to prevent boom-bust cycles; the market bottomed at ~7x earnings in late 2024.
- Deflation in China may end as PPI turns positive, partly driven by the conflict, which could be bullish for domestic stocks as mainland fund managers focus on PPI.
- For stagflation hedging, the best positions are Chinese stocks and energy stocks; gold is in a consolidation phase between $4,500 and $5,500 after not making new highs on conflict outbreak.
- Gold has long-term upside due to central bank buying, moving towards a de facto gold standard, but short-term consolidation is expected, with gold mining stocks also consolidating due to higher energy costs.
- VIX levels are well below pandemic and taper tantrum highs, indicating complacency; escalation in the conflict could spike volatility.
- Bank of Japan's failure to raise rates despite being behind the curve increases the risk of yen weakening beyond 160 against the dollar, a key technical level.
Trade Ideas
Speaker explicitly stated that the Chinese mainland equity market is the best equity market to own globally during the Iran war, citing China's decent oil reserves, dramatic advances in renewable energy, and cheap power from solar being cheaper than coal. Prolonged conflict and high oil prices damage global GDP growth, but China is least geared to these negatives due to energy independence, making its equities a relative outperformer. LONG because Chinese equities offer a hedge against stagflation, are in a government-supported slow bull market, and benefit from potential end of deflation via PPI turning positive. Rapid de-escalation of the Iran conflict or a worsening of China's economic deflation beyond expectations.
Speaker identified energy stocks as one of the two single best hedges against stagflation resulting from the Iran war, alongside Chinese stocks. Elevated and sustained oil prices directly benefit energy companies by boosting revenues and earnings, providing a direct offset to global energy cost inflation. LONG because energy stocks serve as a straightforward hedge to geopolitical risk and rising energy prices, which are likely to persist if the conflict continues. A swift resolution to the Iran conflict leading to a sharp drop in oil prices, undermining energy stock valuations.
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Speakers: Christopher Wood · Tickers: FXI, XLE