Open-source strategy: The conflict "second derivative" has emerged. The opportunity for left-side layout is now visible!

Executive Summary

● Next Signal—Volatility Convergence

In our 3.2 report, “The Biggest Expectation Gap in the U.S.-Iran-Israel Conflict—Duration and the Strait of Hormuz,” we clearly state that the market may be overly optimistic about the rapid resolution of the U.S.-Iran-Israel conflict: “The conflict duration and the Strait of Hormuz may be the most evident expectation gap in the current U.S.-Iran-Israel conflict.”

Whether it’s the expectation gap in conflict duration or the Strait of Hormuz, the most direct impact is on crude oil prices. And crude oil prices, along with their supply effects that further propagate through long chains, influence all kinds of global factors. Therefore, crude oil prices have become the core observation point for current global asset price trends. Since the U.S.-Iran-Israel conflict began, crude oil prices have been moving opposite to other major asset prices, showing the rare phenomenon of “crude oil leading higher while everything else falls together.”

Although current crude oil prices are rising quickly, volatility remains high. For all kinds of assets, whether the impact is long-term or short-term, beneficial or harmful—the next most important signal does not actually come from the final level where crude oil ends up, but from when crude oil volatility will converge. Only then can the impact on various assets become more certain and tangible—this is the most core right-side signal for investors’ decision-making.

**（1）How to respond while volatility is high: **In our 3.2 report, “The Biggest Expectation Gap in the U.S.-Iran-Israel Conflict—Duration and the Strait of Hormuz,” we clearly propose: as an investment strategy for dealing with the post-conflict expectation gap—stay disciplined and break the mold, focusing on a “three-tier” allocation—”

① “Certain” sectors: shipping (oil shipping / dry bulk), gold, upstream energy (oil, coal, coal-chemical), chemical products (methanol, urea);

② “Trend” sectors to respond to subsequent developments: defense and military industry (military AI, drones, missile defense), cybersecurity, export-manufacturing substitution;

③ “Non-consensus” allocations from a macro perspective: agriculture, forestry, animal husbandry and fishery (hedging inflation risk), volatility strategies (do not easily short volatility).

（2）How to respond when volatility falls: medium- and long-term thinking after volatility returns—

① AI technology: ΔG + profit redistribution: power capital (power equipment), compute capital (compute, storage, semiconductors, robotics), platform applications (AI4S);

② Cyclicality under a price-hike logic: nonferrous metals (energy metals, minor metals), chemical & petrochemical, insurance, building materials;

③ The big-year themes for 2026: AI+ (AI4S), embodied intelligence, nuclear fusion energy, quantum technology, brain-computer interfaces;

④ Improved allocation value of high dividends in 2026: considering ΔG-linked high dividends: coal, non-bank financials, media, petrochemicals, transportation.

02

Standards for judging right-side signals: two volatilities—OVX and VIX

In market turmoil triggered by geopolitical conflicts, moving beyond a single “event-driven” logic and shifting to a quantitative volatility framework and cross-asset indicators is the core approach for institutional investors to build defensive allocations or left-side positioning. At present, the market is being heavily disturbed by geopolitical headlines. Compared with positive rumor narratives, it seems to react more quickly and more intensely to negative rumor narratives, showing a certain degree of “asymmetry” and “irrationality,” and also reflecting that when geopolitics is in turmoil, the market focuses more on potential risks. With too many disturbances in the environment and the market, the complexity of investment research and portfolio work increases. All of this can be attributed to the market lacking a single core, quantifiable, and widely accepted main handle.

The current “U.S.-Israel-Iran uncertainty” should be validated by “volatility contraction,” not by “event clearance.” Since the conflict began, the trajectory of the U.S.-Israel-Iran situation has shown dynamism and volatility—beyond market expectations—and it doesn’t seem to be possible to identify a unified single node to judge escalation, nor is it easy to judge the end of the conflict by the appearance of any one event node. Therefore, for investors who want to find an entry timing, using “event clearance” to judge a geopolitical turning point carries the risk of missing the best entry timing. As this conflict’s market impact and intensity have exceeded market expectations, looking forward, the real turning points in geopolitics are also likely to exceed what the market can recognize.

To observe volatility effectively, we introduce two volatility indicators: OVX and VIX. OVX is the crude oil ETF volatility index. It measures market expectations for crude oil volatility over the next month and represents energy supply risk. VIX is the Cboe Volatility Index, commonly known as the “fear index.” It measures market expectations for the S&P 500 index’s volatility over the next month and represents recession risk. If we want to assess whether the market’s concern about energy supply risk transmitting into the economy—leading to systemic risks like the economy—we can evaluate it through the走势 of OVX and VIX.

When OVX rises rapidly while VIX reacts with a relatively lag, it indicates that risks are still concentrated on the energy side and have not fully transmitted into global macro credit risk or earnings expectations. Once the two move in sync and resonate upward, it often means that geopolitical risk has already triggered a liquidity crisis or global recession expectations. Current risks are still concentrated in energy supply risk and have not fully transmitted into global macro credit risk or earnings expectations.

Looking back at the past, there are three periods when OVX significantly exceeded VIX—when energy supply risk outpaced recession risk—all occurred during periods of sharp declines in energy prices. Since 2007, periods when OVX significantly exceeded VIX include 2014.11–2015.2, 2015.12–2016.2, and 2020.1–2020.4, all during major WTI crude oil price declines. Compared with historical VIX readings, the current reading is below the VIX level under the U.S.-China trade conflict in mid-April 2025.

Before right-side signals clearly appear, we provide a typical response framework: the “Volatility Four Quadrants”:

With geopolitical conditions of extremely high uncertainty and the market environment today, “volatility” and “fragility” are what make investing difficult. We propose using volatility as the core analytical framework and suggest validating entry timing through “volatility contraction,” not “event clearance.” Focus on OVX and VIX—each representing the energy supply risk and recession risk faced by the market, respectively. In terms of investment advice, the emphasis is on responding, with an “hedging” mindset, capturing the “Volatility Four Quadrants”:

Sector allocation suggestions under the “Volatility Four Quadrants”:

（1）OVX high + VIX oscillating: The market is in a localized energy crisis. For allocation, it suggests an overweight to traditional energy / energy alternatives, prioritizing directions with strong price transmission capability. Recommended: power equipment, coal, coal-chemical.

（2）OVX elevated + VIX rapidly rising: Systemic recession/liquidity risk triggered by geopolitics—defense first.

（3）OVX peaks and falls back + VIX oscillates downward: The term structure of crude oil volatility begins shifting from backwardation to contango. The crisis is over. Move toward technology growth. Recommended: compute power, semiconductors, Hong Kong stock internet, robotics, storage, price-increase beneficiaries, AI4S, etc. Theme investing enters a big year.

（4）OVX falling + VIX unusually surging: Geopolitics ends, but the impact of high oil prices on the economy still persists—shift toward high-dividend / low-volatility.

03

The “second derivative” of the conflict has shown up; the left side can be acted on, but it is not yet right-side confirmation

（1）The latest change is that it’s not only that both sides of the conflict have started sending “leave-the-exit” signals; countries beyond the conflict have also taken more proactive actions:

① The current statements and engagement situation of both conflict parties are closer to a “political game” stage aimed at “pressing for talks through fighting”:

Iranian President Pezeshkian stated that Iran is willing to end the war, but only on the premise that its demands are met, especially receiving assurances of “not being subjected to invasion again.” Iranian Foreign Minister Araghchi also confirmed that Iran is still receiving messages from the U.S. side via Witkov, and while it is not official negotiations yet, it indicates that the communication chain has not been interrupted.

Meanwhile, on the U.S. side, on one hand it maintains military pressure; on the other hand it continues to release signals of communication and potential arrangements for contact. Trump said the United States could end its fighting against Iran within “two to three weeks,” and even did not rule out pushing for the war’s curbing before a formal agreement. On the other hand, in an interview with NBC News by phone, Trump said that the downing of U.S. aircraft would not affect negotiations with Iran. Overall, Trump’s remarks have shifted to “hardness with some softness.”

② The Strait of Hormuz has also shown marginal changes in traffic: In the past week, there were signs of marginal repair in near-term traffic through the Strait of Hormuz, with ships related to Oman, Japan, France, and tankers loaded with Iraqi crude oil already passing. On April 4 local time, according to Reuters citing an Iran Tasnim report, Iran has allowed ships carrying basic life necessities to travel through the Strait of Hormuz to its ports.

③ The international community in recent times has placed even more emphasis on diplomatic pressure and coordination between economic and political channels to help restore navigation through the Strait of Hormuz:

On April 2, the UK hosted an online ministerial meeting to discuss ways to restore passage through the strait. Notably, the United States did not participate. Participating countries included more than 40 countries such as France, Germany, Italy, Canada, and the UAE. This reflects that European powers are worried that extreme pressure from the U.S. (the Trump administration) could lead to the strait being permanently closed. They are attempting to engage Iran directly through “diplomatic and political means,” to “exchange a ceasefire for reopening the strait.”

In China, on March 31, China-Pakistan jointly released the “Five-Point Initiative,” which directly stated “immediately stop the fighting and cease the war,” and also called for “restoring the Strait’s normal navigation as soon as possible.” On April 2, the Ministry of Foreign Affairs again made consecutive statements, emphasizing that only by stopping the fighting and ceasing the war can international shipping routes be fundamentally protected and kept safe and open. It also said that “realizing the ceasefire and ending the war as soon as possible, restoring peace and stability in the Strait of Hormuz and nearby waters, is the common aspiration of the international community.” This is a very clear public statement and has also been incrementally strengthened over the margins.

Pakistan is one of the most proactive parties in this round of mediation. It has upgraded from general calls to hosting a meeting of multiple foreign ministers and working to push forward concrete proposals. On March 29, Pakistan hosted a foreign ministers’ meeting with Turkey, Egypt, and Saudi Arabia in Islamabad. Reuters clearly wrote that the discussion was about “possible ways to bring an early and permanent end to the war,” and made “reopen the Strait of Hormuz” an initial discussion focus. On March 31, it jointly proposed the “Five-Point Initiative” with China, while also calling for a ceasefire and the restoration of safe navigation.

（2）This means that the “second derivative” in how the war unfolds has begun to change.

In the early stage, the market priced in the worst-case scenario of “conflict becoming prolonged + spillover escalating + supply disruptions deepening.” Now, even though on the surface both sides of the conflict are still carrying out attacks, both sides are leaving room for de-escalation of the situation. In other words, although the war itself has not ended, the “increasingly worse” phase may be nearing its end.

（3）Of course, this is not right-side confirmation yet.

Because hard constraints such as the Strait of Hormuz, energy supply restoration, and formal negotiation mechanisms have not been fully resolved, the market has not returned to a “nothing happens” state. Right-side information confirmation needs to see further pullback in crude oil volatility (OVX).

（4）But from an allocation perspective, the left-side signals have already appeared, so you can be modestly more proactive than in the prior phase. Still, it needs emphasis: the left-side signals are an important timing point in a relative-return game, but right-side signals are the best entry timing for absolute returns. In the short term, the technology sectors that were most heavily damaged in the prior period often benefit the most. In the long run, what is truly worth paying attention to is still ΔG growth. If crude oil prices and related volatility continue to fall afterward and market risk appetite is expected to be repaired further, then growth is still one of the directions with the greatest repair elasticity.

04

Investment Thesis: The timing for left-side positioning is here—capture opportunities with ΔG technology + high dividends

Given the highly uncertain geopolitical situation and the market environment today, “volatility” and “fragility” are the main obstacles investors face right now. We propose volatility as the core of our analytical framework and recommend validating entry timing through “volatility contraction” rather than “event clearance.” Focus on OVX and VIX—both representing the energy supply

For the operations ahead, we believe: the conflict has not ended, but the worst-pricing phase may already be passing. You can begin trying to set up offensive positioning on the left side, but you should not be overly aggressive. Meanwhile, technology growth remains the most important direction to focus on.

Allocation approach:

（1）Growth is still the strongest main theme in this cycle, but the investment approach needs to change: ΔG + profit redistribution. Focus on: power capital (power equipment, energy metals), compute capital (storage, semiconductors, robotics, liquid cooling), platform applications (Hong Kong stock internet), innovative drugs;

（2）We emphasize that high dividends in 2026 are better than in 2025. Pay attention to high-dividend stocks that incorporate ΔG: coal, non-bank financials, media, petrochemicals, transportation;

（3）“Options” after a potential bottoming in real estate prices: discretionary consumption and service consumption rebound driven by stabilization of balance sheets (high-end commercial properties, outdoor sports, tourism, hotels, catering, etc.).

05

Risk Warning

Macroeconomic policy changes beyond expectations accelerate the recovery process.

Risk of geopolitical deterioration.

Risk that industrial policies change.

（Source: Open Source Securities）