Market Update: US-Iran Ceasefire Collapses, Conflict Re-escalates

Event Summary: Ceasefire Collapses, Conflict Re-escalates

The interim ceasefire memorandum reached between the US and Iran in mid-June has failed to hold. The memorandum has collapsed and the conflict has re-escalated: US forces have conducted multi-night sorties deploying aircraft and warships against inland Iranian targets including surveillance posts, military logistics infrastructure, and underground weapons depots, while simultaneously attempting to reinforce the maritime blockade. Iran has responded by launching ballistic missiles against US military bases in Jordan over consecutive nights, and has struck US facilities in Bahrain, Kuwait, and other Gulf locations, resulting in US casualties in Jordan and Iraq. Fresh reports of tanker explosions and fires in the Strait of Hormuz have emerged. President Trump has warned Iran of a response many times over in scale, with the risk of full-scale escalation a live possibility. Meanwhile, mediators are actively working to broker a 10-day ceasefire arrangement; Iranian Interior Ministry officials have also travelled to Pakistan to explore diplomatic options to salvage the collapsed ceasefire process. Given that events are moving rapidly and remain highly uncertain, this note offers no assessment of how the conflict itself will evolve. Our focus is on what this means for the China equity allocation thesis — a thesis we believe is robust to geopolitical reversals of this kind.

Impact Assessment: External Transmission Dominates; Domestic Logic Unchanged

We characterise this episode primarily as an externally-transmitted geopolitical disturbance. The US-Iran conflict is an exogenous development in the Middle Eastern geopolitical landscape; China is not a party to the conflict, and its impact on Chinese markets operates mainly through two external pathways: oil prices and energy supply on one hand, and global risk appetite on the other. This is qualitatively distinct from shifts driven by domestic fiscal, monetary, or industrial fundamentals.

It is worth noting that with the conflict rekindling, the gradual normalisation of Strait passage that had been underway has come under renewed pressure — fresh tanker incidents in the Strait of Hormuz have caused shipping risk and insurance costs to rise again, interrupting the tentative recovery in physical throughput. However, as we explain below, the China allocation thesis does not depend on the near-term status of Strait access; whether it normalises or is disrupted again does not alter our medium-to-long-term view on Chinese equities.

On the oil price trajectory: the ceasefire breakdown, combined with multi-night US airstrikes against inland Iranian targets and the attempt to tighten the maritime blockade, alongside renewed tanker incidents in the Strait, has reversed the earlier oil price decline that had been driven by ceasefire expectations. Oil prices and geopolitical risk premia have re-firmed. The disruption to physical crude supply, together with higher shipping insurance costs, has renewed near-term upward pressure on imported inflation. Crucially, these price repricings tend to occur faster than actual changes in physical flows. The oil price level will ultimately be determined by the duration of the conflict and the progress of diplomatic mediation — which is precisely why we view this as an external disturbance rather than a determining factor for the China allocation thesis.

For China, the more important structural context is this: even during periods of elevated oil prices, China's inflation has consistently remained below major overseas economies. This relative resilience stems from the diversification of China's energy mix — coal and renewables together account for a significant share of total energy consumption, rising EV penetration has further reduced household and industrial fuel demand exposure, and the combination of pipeline-based and diversified import sourcing naturally dilutes the pass-through from crude oil price movements to domestic energy costs and CPI. In other words, China's ability to maintain a relatively stable inflation environment has never depended on oil prices remaining low.

This relative resilience is not unique to China — it is more broadly evident across major Asian economies. The following growth figures were recorded during the period of Strait closure, and underscore the low sensitivity of Asian earnings logic to Strait access:

Market	Q1 2026 GDP Growth	Note
Taiwan	+14.6%	Recorded during Strait closure
Singapore	+6.0%	Recorded during Strait closure
China	+5.0%	Recorded during Strait closure
Japan	+2.1%	Recorded during Strait closure
Source: Official data from respective national statistical agencies.

For this reason, our view on the direction of Chinese monetary easing rests on domestic factors, not on oil price dynamics. Domestic price levels have gradually moved out of the earlier subdued range — Q2 nominal GDP grew 5.9% year-on-year, with the GDP deflator turning positive year-on-year at +1.6% for the first time in thirteen quarters. Corporate revenues and earnings are measured in nominal terms, not real terms, and this directional shift in the price environment carries a positive implication for equities. Core inflation is moderate, bank net interest margins are near historical lows, and these domestic conditions together support a sustained easing policy bias. The tighter stances maintained by major overseas central banks in response to imported cost pressures do not materially constrain China's policy space. In this sense, whether external energy pressures ease or re-intensify is simply an external variable; the domestic "valuation × earnings" flywheel is anchored in domestic fundamentals and does not depend on it as a precondition.

On the risk appetite channel, the ceasefire breakdown has re-elevated geopolitical tail risks that had partially receded over the preceding months, and may temporarily weigh on global risk assets while episodically dampening EM risk appetite. The key distinction, however, is that this shock operates primarily through sentiment and premium repricing — it is an external disturbance. Precisely because external noise has amplified again, investors should anchor allocations in verifiable domestic fundamentals rather than in unpredictable Middle Eastern geopolitical trajectories. This is the fundamental reason we maintain our medium-to-long-term view on Chinese equities through this episode.

Medium-to-Long-Term Allocation Thesis: Three Pillars Remain Intact

It bears emphasising that the core case for Chinese equities was established before this conflict began, and does not depend on how geopolitical events unfold. The renewed escalation has not altered any of these pillars; if anything, it has highlighted the resilience of some of them. Three pillars constitute the core of the allocation thesis.

"AI+" has been inscribed in the Government Work Report as a standalone economic concept; the deployment of AI agents across all industries has been set as an explicit mandate; and information technology has emerged as one of the policy-enabled sectors with the longest-duration horizon. Concurrently, the scaled commercialisation of AI applications and the persistently elevated level of global compute capex continue to transmit through supply chains and software monetisation into the earnings of relevant index constituents, creating a relatively visible earnings growth pathway for the technology sector. This transmission is already appearing in trade and earnings data — Q2 imports and exports grew 18.4% year-on-year; H1 integrated circuit exports rose approximately 96%; compute hardware imports and exports grew 56.6%; and the most recent CSI All-Share Information Technology Index constituents recorded aggregate net profit growth of more than 70% year-on-year.

From a structural transmission perspective, this earnings growth has clear value chain layers: upstream semiconductor and domestic compute names benefit from the ramp in inference demand and domestic substitution; midstream AI server and hardware manufacturing benefit from elevated domestic and overseas data centre capex; and downstream application software progressively monetises as AI applications scale. The CSI All-Share Information Technology Index covers all three layers, so its earnings growth does not depend on a single link in the chain but rather captures structural expansion across the entire value chain. Policy support provides further downside protection: Xinchuang (信创) substitution represents a recurring and predictable government and enterprise procurement flow, while compute infrastructure build-out is embedded in long-term fiscal priorities — together reducing uncertainty around the technology sector's earnings trajectory. This logic is consistent with the macro signal that growth momentum in Q2 has rotated toward AI and semiconductors.

On the fiscal side, the proactive stance continues, with the deficit ratio maintained at a historic high for the second consecutive year. Public budget expenditure and ultra-long-term special government bonds together provide a predictable demand-side underpinning for recovery in key index sectors. On the monetary side, policy communication has shifted from conditional easing to a more proactively deployed toolkit, with the easing direction relatively well-established. This "valuation × earnings" framework is the foundation of our view on the CSI 300's allocation value.

As discussed above, energy structure diversification is not merely a thematic investment narrative — it is China's structural buffer against external energy shocks and a key enabler of relative inflation stability. This buffer becomes more valuable, not less, when the conflict re-escalates. The energy mix, dominated by coal and renewables, together with diversified import sourcing and adequate strategic reserves, structurally dilutes the pass-through from Middle East oil price volatility to domestic prices. Regardless of whether near-term oil prices rise on conflict developments or ease on diplomatic progress, China's ability to maintain a relatively stable inflation environment is not contingent on a single oil price path.

Valuation and Upside Potential

Despite the year-to-date gains accumulated in Chinese equity assets, forward valuations across major broad-based indices suggest meaningful room for further recovery to fair value. The CSI 300 and iShares MSCI China ETF continue to trade at broadly reasonable forward P/E levels, with 2027 earnings growth expected to accelerate in parallel. The Hang Seng Tech Index, having troughed on a per-earnings basis in recent years, is positioned for a material improvement in earnings growth from 2027 onwards, offering higher recovery beta. The return profile for these valuation recovery scenarios is driven primarily by earnings growth; should valuations simultaneously re-rate toward fair value, that would provide additional upside above the earnings growth component. The foregoing represents scenario analysis and does not constitute a guarantee of returns. For specific investment vehicles, our focus within this framework is on the technology names with the highest earnings visibility that are most directly positioned to benefit from the AI industrial trend, as detailed below.

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Recommended Vehicles and Allocation Framework

Based on the foregoing analytical framework, we express the allocation thesis through three vehicles centred on China's AI and technology theme. The three span domestically-listed semiconductors, offshore technology platforms, and the physical infrastructure underpinning AI's scaled deployment — three distinct but mutually reinforcing layers of the China AI opportunity.

Vehicle	Ticker	Market / Domicile	Benchmark Index	Role
GF CSI All-Share IT ETF	159939.SZ	Shenzhen Stock Exchange	CSI All-Share Information Technology Index	Hardware Monetisation
Hang Seng Tech ETF	3067.HK	Hong Kong Stock Exchange	Hang Seng Tech Index	Platform Monetisation
T. Rowe Price China Evolving World Fund	LU2187417386	Luxembourg (UCITS)	MSCI China All Shares Index	Physical Infrastructure
Source: Fund managers and index providers (public disclosures), compiled by iFAST Research. The above products are provided for reference only and do not constitute investment advice.

In concrete terms, the GF CSI All-Share IT ETF (159939.SZ) captures the hardware earnings that are already materialising, with near-full-invested portfolio purity covering both domestic substitution and global capex themes. The Hang Seng Tech ETF (3067.HK) provides exposure to offshore platform recovery that has not yet been fully priced in. Together, the two form a complementary pairing of hardware monetisation and platform monetisation — the absence of either leaves the China AI opportunity incompletely represented. For investors seeking additional exposure to the physical infrastructure underpinning AI's scaled deployment, the T. Rowe Price China Evolving World Fund (LU2187417386) provides a complementary lens, with portfolio positions in industrials and commercial services — sectors not covered by a pure IT index — at approximately three times benchmark weight. The above allocations are premised on a medium-to-long-term view: current AI capital investment is expected to translate into revenues and earnings progressively over the next two to three years, and price volatility during this period does not constitute grounds for adjusting portfolio structure. Investors should determine the relative weighting of each layer based on their individual risk tolerance, investment horizon, and preference for active management.

Risk Factors

• Geopolitical escalation and reversal risk: The US-Iran interim ceasefire memorandum has already broken down and the conflict has re-escalated, with the risk of further full-scale escalation remaining live. Particular attention should be paid to the Israeli dimension: (1) Israel was not party to the memorandum and continued military operations following the ceasefire announcement; (2) Netanyahu's electoral timetable is in direct tension with Phase 2 negotiations; and (3) Hezbollah has stated explicitly that a final nuclear agreement will be difficult to achieve unless Israel withdraws its forces. These factors, in combination with the current state of hostilities, may sustain downward pressure on risk appetite and keep oil prices elevated.
• Trade and geopolitical risk: Further shifts in US tariff policy, or an expansion of the scope of US-China technology friction, could generate downside pressure on earnings forecasts for export-oriented index constituents and may episodically weigh on market risk appetite.
• Macro volatility and financial risk: If the domestic property market recovery proceeds more slowly than expected, or if the resolution of local government debt proceeds unevenly, this could constrain valuation recovery in the financial sector. Sharp oil price swings coupled with subdued domestic demand could also generate disruptions to domestic price levels and corporate costs.
• Sector concentration and elevated volatility: The vehicles highlighted in this note are heavily concentrated in the information technology and technology sector, which carry significantly higher volatility and drawdown risk than broad-based indices. Within the sector, rotation among compute, memory, applications, and domestic chip sub-themes can be sharp; at the individual stock level, there is also event risk from export controls and customer concentration. Position sizing should reflect individual risk tolerance.

This report has been prepared by the iFAST China Research team and is provided for general information purposes only, distributed to the general public. It does not constitute, and should not be construed as, an offer, solicitation, or investment recommendation to buy or sell any securities, funds, or investment products, and does not take into account the investment objectives, financial situation, or specific needs of any particular recipient.

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Analyst Disclosure

As at the date of publication of this report, the author Ian Li, CFA, and his immediate family members hold no position or interest (NIL) in any of the securities or investment products mentioned herein. The author's compensation is not directly linked to the specific views expressed in this report.

Artificial Intelligence Disclosure

This report may have used AI-assisted tools in the course of drafting, data compilation, and chart preparation. All outputs have been independently reviewed and verified by the research team.