Xiong Yuan: The Great Era of Capital Expenditure

``` This issue covers the report delivered by Dr. Xiong Yuan at the 2026 Guosheng Securities Spring Capital Market Forum. Content of this Issue From a macro perspective, at the current point in time, the most important thing is undoubtedly to analyze the impact and influence of the recent situation in Iran. I have been thinking: was the US and Israel attacking Iran at the end of February a sudden event, or something we didn’t anticipate? Is there a good framework, a grand narrative, that can relatively fully and coherently incorporate this war into subsequent analyses of the global economy and market performance? This is a question I’ve been pondering for the past few years. Looking at the past seven to eight years, the world (including China) has not been peaceful, experiencing many unexpected shocks, such as the 2018 China-US trade frictions, the 2020 public health event, the 2022 Russia-Ukraine conflict, the US imposing reciprocal tariffs on the world in April 2025, etc. Despite the global economy suffering multiple shocks, except for the relatively special and significant downturn in 2020, since 2021, the GDP growth rates of major economies have not slumped. Therefore, it’s necessary to consider what logic and factors have enabled the global economy to remain relatively strong and “resilient” under multiple external shocks. I have looked at a lot of data and materials, and there is one perspective that can probably explain it well: over the last seven or eight years, most countries, driven by various underlying security needs, have continued to increase capital expenditures, focusing on three main types: technology-related (AI, electricity), security-related (energy, resources, industrial and supply chains), and defense-related (military industry, military trade). Multidimensional data shows that the main support for global resilience in recent years has been these three types of capital expenditures, which have also brought notable excess returns to equity assets globally. Some data shows that in the past seven to eight years, global economic growth has been supported by this wave of capital expenditure expansion. Taking the US as an example, the 2025 GDP grew by 2.1%, and from a demand perspective, technology investments represented by AI contributed about 0.7 percentage points—a historical high. AI tech investment is gradually surpassing traditional consumption in supporting the US economy. China is the same, reflecting Sino-US tech competition. Similarly, the global explosion in electricity investment has benefited from AI-related capital expenditure. In recent years, “computing power as the foundation, electricity as king” has become a grand narrative framework. So-called “security-type capital expenditure” is also straightforward. In recent years, due to various shocks, all countries have placed greater emphasis on energy. From the US action against Venezuela at the start of the year, its intention to buy Greenland, to the strike on Iran—these all have various reasons, but undoubtedly considerations about resources and energy are among them. China has also increased its investment in energy in recent years, remaining the world’s largest energy investor. Another dimension to “security-type” capital expenditure is industrial and supply chain security. Since 2018’s trade friction, US reciprocal tariffs, and the impact of the 2021 public health event, global supply chains have been greatly affected. In recent years, issues around containers, canals, and ports frequently became market hotspots, and are closely related. Countries accelerated industrial and supply chain reconstruction, or reindustrialization, leading to significant redundant investment. For defense-type capital expenditure, i.e., military industry and military trade, there’s no need to elaborate. Focusing on the three types of capital expenditure—technology, security, and defense—if you charted the capital market performance of relevant sectors, you’d find these three types of spending have led to significant excess returns. These have also been the absolute main lines in global capital markets over the last few years. Such large-scale capital expenditure obviously requires funding support, meaning fiscal and monetary policies need to remain accommodative. Indeed, apart from the rapid US inflation and rate hike cycle in 2022, most of the last few years have seen major global economies in generally loose environments. Now, the question arises: with the outbreak of the Iran war, what will change? Has the grand narrative described above changed? Up to March 23, the main assets that rose most were crude oil, those that fell most were gold and silver. In this big framework, the issue to consider is: will the US-Iran conflict, and the evolution of the Iranian situation, change things? In my view, this conflict will undoubtedly further heighten security needs. On the other hand, with rising oil prices, no matter the analytical path or calculations, a fairly objective short-term result is that global inflation, especially in the US, will undoubtedly rise. Currently, the market is already pricing in the possibility that the US may not cut rates this year, or may even raise rates. At the March 19 Fed meeting, they discussed the need for a rate hike, though didn’t see it as the base case. In other words, if oil prices continue to drive up inflation, rate hikes become an option. A key support for the global economy over the years has been capital expenditure expansion, which rests on loose liquidity; if prices keep rising and liquidity tightens suddenly, this expansion could hit the pause button. The market is already pricing this in; in the short term, there could be “stagflation.” If high oil prices persist longer than expected, worries about recession may later be traded in. Recently, market volatility and corrections have already reflected some of the potential liquidity shock and panic from rising oil prices. But so far, we haven’t seen significant real-impact on countries, enterprises, industries, or individuals due to higher oil prices. In other words, the price action so far reflects expected, not real, high oil price shocks; the actual effect is yet to play out. This means that in the next few weeks, some countries may feel the real impact, and the global economy might take substantive hits. Under the base case scenario, if oil remains in the $90–100 range for two to three weeks or longer, the shock will undoubtedly be significant; in other words, persistently high oil prices actually represent an underpriced “gray rhino.” For China specifically, the most direct effect is a rapid rebound in the PPI (Producer Price Index). Based on current trends, March’s PPI year-on-year will likely turn positive—the first in nearly 40 consecutive months of negative readings. For those investing in China’s capital market this year—in stocks or bonds—a key fundamental change will be price trends. This year’s “Two Sessions” in March introduced a key change: the 2026 goal is to “promote the general price level from negative to positive.” In the past three years, China’s GDP deflator was negative; thus, while real GDP grew ~5%, nominal growth, after price effects, was ~4%. However, the Two Sessions set a GDP target of 4.5%–5%, aiming for better outcomes. Given current oil price and CPI/PPI forecasts, it’s likely the GDP deflator will approach zero or even turn positive this year, meaning companies’ nominal revenues will be noticeably higher than previous years. Hence, for investors, whether in stocks or bonds, focus closely on changes in the nominal price chain and their impact on corporate profits. More importantly, based on this, the current price rise is still mainly supply-driven, and nominal price increases will improve corporate earnings, but more so in mid- and upstream sectors. Downstream and consumer sectors will be further hit. This year is likely to see even greater divergence in industry profits, with upstream doing much better than mid- and downstream; the real shock for downstream profits may only appear after two or three months, with a lag. Another important factor is exports. Higher oil prices may drag down the global economy, leading to a decline in total demand. For many years, exports have supported China’s economy. If oil price effects exceed expectations, future exports could come under pressure. Based on this framework, we need to ask: will the April Politburo meeting shift its stance? The “Two Sessions” in March didn’t fully factor in oil price impacts in policy and target setting. The April meeting is expected to take a more proactive tone, but mid-April will also see the release of Q1 economic data, which based on Jan–Feb numbers, indicates GDP growth above 4.8%, better than Q4 last year (4.5%). So, even with oil price impacts, the real hit to China may come after Q2. Thus, the April Politburo meeting may take a relatively positive tone, but in terms of action, will mainly stress “preparing incremental policies, policy reserves, and guard against possible further downturns in coming months and H2.” Major stimulus is unlikely in April. Based on these assumptions, in looking at the market, it’s crucial to closely track oil prices. Regarding A-shares, bonds, and gold, a few brief conclusions: Stock market: Based on the above, as high oil prices are still an underpriced “gray rhino,” the market will feel short-term pressure, but medium- to long-term trends of “slow bull, long bull, healthy bull” are expected, and I remain optimistic on Chinese assets medium- to long-term. Bond market: Consider five aspects—economic health, price level, monetary policy easiness, allocation strength, regulatory stringency. The most important issue now is the rising price level’s pressure on rates. In past oil shocks, it was hard for interest rates to fall much in the short term. Global yields have hit new highs, while China’s have been relatively stable. After Q2, as China’s fundamentals come under pressure and the US likely restarts more aggressive fiscal policy (possibly “fiscal deficit monetization” ahead of mid-terms), rates are likely to fall in H2. Gold: To the macro point—over the past three weeks or so, gold fell from $5,500/ounce to $4,100/ounce, mainly due to oil price shocks and war-related panic. The core logic supporting gold—dollar weakening—has paused, but this doesn’t mean gold loses its safe-haven role; rather, recent USD strength has short-term suppressed its hedging attributes. Past research indicates that both strategically and tactically, gold remains a buy. Any substantial correction is still a buying opportunity. In sum, to connect the framework pre- and post-war: Over the past seven to eight years, driven by latent security needs, the world has consistently boosted capital expenditure with the capability and willingness to maintain loose liquidity. Post US-Iran war, security needs will further rise, and in the short run, liquidity may tighten, though medium- to long-term accommodation still likely. As of now, the tense Iran situation means “rising oil—higher inflation—Fed pauses cuts (even hikes)—greater possibility of stagflation or recession” is more probable. In a word, persistently high oil prices—a “gray rhino” not yet fully priced in—require vigilance for deeper market corrections. Risk Disclaimer: The “Masters Class” features selected third-party qualified individuals delivering research theory courses. The content does not constitute a recommendation to buy or sell any specific product or investment advice. 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