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

Executive Summary

● The next signal—volatility convergence

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

Regardless of the expectation gap in conflict duration or in the Strait of Hormuz, the most direct impact is on crude oil prices. And since crude oil prices and their supply further propagate through a long chain to influence global factors, crude oil prices have become the core observation point for current global asset price trends. Since the U.S.-Iran conflict began, crude oil prices and the trajectories of other major asset prices have moved in opposite directions, showing a rare phenomenon: “crude oil rallies while everything else falls together.”

Although crude oil prices have moved up quickly, volatility remains high. The question of whether the impact on various categories is long-term or short-term, beneficial or harmful, is not actually determined by where crude oil prices eventually land; rather, it depends on when the volatility of crude oil converges—only then can the impact on various categories be more certain and take shape. This is the most core right-side signal for investors’ decision-making.

(1) How to respond during high volatility: In our 3.2 report “The Largest Expectation Gap in the U.S.-Iran Conflict—Duration and the Strait of Hormuz,” we clearly proposed the following as an investment strategy to address post-conflict expectation gaps: go with what is correct while acting unexpectedly, and focus on “three-tier” allocation—

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

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

③ “Non-consensus” allocation from a macro perspective: agriculture, forestry, animal husbandry and fishery (hedging inflation risks), volatility strategies (not easily shorting volatility).

(2) How to respond when volatility falls: the medium- to long-term view after volatility normalizes—

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

② Pro-cyclical opportunities under a “price-hike” logic: nonferrous metals (energy metals, specialty metals), chemical and petrochemical, insurance, building materials;

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

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

02

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

In the market turmoil caused by geopolitical conflicts, stepping away from a single “event-driven” logic and moving to a quantitative volatility framework and cross-asset indicators is the core for defensive positioning or left-side layout by institutional investors. At present, the market is being battered by geopolitical headlines. Compared with good-news rumors, it seems to react faster and more sharply to bad-news rumors, showing a certain “asymmetry” and “irrationality,” and also reflecting that the market is paying more attention to potential risks at moments of geopolitical turbulence. With too much noise in the environment and the market, the complexity of investment research and development increases. All of this can be traced to the market lacking a single core, quantifiable main handle that is widely recognized.

The current “U.S.-Iran uncertainty” should be validated by “range/volatility contraction,” not by “event clearance.” Since the conflict began, the U.S.-Iran situation has shown dynamic and volatile characteristics, and has gone beyond market expectations. It seems there is no single uniform point to judge whether the conflict will escalate, and therefore it is also difficult to judge signals that the conflict is ending by the appearance of a particular event at a particular time. As with this conflict—where market pricing and intensity have exceeded expectations—looking ahead, the actual inflection point in the geopolitical situation is likely to be beyond what the market expects as well.

To effectively observe volatility, we introduce two volatility indicators: OVX and VIX. OVX is the crude oil ETF volatility index, measuring market expectations for crude oil volatility over the next month; it represents energy supply risk. VIX is the Chicago Board Options Exchange volatility index—commonly known as the “fear index”—measuring market expectations for S&P 500 volatility over the next month; it represents recession risk. If we want to gauge whether the market is concerned that energy supply risk will transmit into the economy and lead to systemic risks such as economic downturns, we can measure and capture it by looking at the trends of OVX and VIX.

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

Looking back at the past, there were three periods when OVX significantly exceeded VIX, and energy supply risk exceeded recession risk. All of these occurred during periods when energy prices fell sharply. Since 2007, periods when OVX notably exceeded VIX include 2014.11-2015.2, 2015.12-2016.2, and 2020.1-2020.4—all of which were periods of major declines in WTI crude oil prices. Compared with historical VIX readings, the current level is lower than the VIX value during 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”:

Faced with a highly uncertain geopolitical situation and the current market environment, “volatility” and “fragility” are the difficulties investors face. We propose using volatility as the core analytical framework, and suggest validating entry timing through “volatility/range contraction” rather than “event clearance.” Focus on OVX and VIX: they respectively represent the energy supply risk and recession risk faced by the market. On investment recommendations, the emphasis is on responding first—with a “hedging” mindset—to capture the “Volatility Four Quadrants”:

Industry allocation suggestions under the Volatility Four Quadrants:

(1) OVX high + VIX oscillating: the market is in a localized energy crisis. For allocation, overweigh traditional energy/energy alternatives, and prioritize directions with strong price-transmission ability. Recommended: power equipment, coal, and coal chemical industry;

(2) OVX elevated + VIX rising rapidly: a geopolitical-driven systemic recession/liquidity risk—defense first;

(3) OVX peaks and then declines + VIX oscillates downward: the crude oil volatility term structure starts shifting from backwardation to normal. The crisis has passed. Rotate to technology growth. Recommended: compute power, semiconductors, Hong Kong stock internet, robots, storage, price-hike beneficiaries, AI4S, etc. The thematic investment cycle enters a major year;

(4) OVX declines + VIX spikes abnormally: geopolitics ends, but the impact of high oil prices on the economy is still present—rotate to high-dividend/low-volatility.

03

The “second derivative” of the conflict is already showing; the left side can be positioned, but it is not yet a right-side confirmation

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

① The current statements and contacts by both conflict sides are closer to the “political game” phase of “fighting to promote negotiations”:

President Pezeshkian of Iran said Iran is willing to end the war, but on the condition that its demands are met, especially guarantees of “not being subjected to aggression again.” Iran’s foreign minister Aragchi also confirmed that Iran is still receiving information from the U.S. representative, Witcoff; although it is not yet formal negotiations, it shows that the communication chain has not been interrupted.

Meanwhile, on one hand, the U.S. has recently maintained high military pressure, and on the other hand, it continues to send signals about communication and potential arrangements for contact. Trump said the U.S. may end its war with Iran within “two to three weeks,” and even ruled out the possibility of pushing for the war’s resolution before a formal agreement. On the other hand, in a phone interview with NBC News, Trump said that the shooting down of U.S. aircraft will not affect negotiations with Iran. Overall, Trump’s statements have shifted into “toughness with softness.”

② The Strait of Hormuz has also shown marginal changes in traffic volume: Over the past week, there have been signs of marginal repair in transit through the Strait of Hormuz. Ships related to Oman, Japan, France, and tankers carrying Iraqi crude oil have already passed through. On April 4, local time, citing a report by Reuters referencing Iran’s Tasnim, Iran has allowed ships carrying basic living supplies to travel through the Strait of Hormuz to its ports.

③ In recent times, the international community has emphasized more diplomacy and economic/political coordination to help restore navigation through the Strait of Hormuz:

On April 2, the UK chaired an online ministerial meeting to discuss ways to restore navigation through the strait. Notably, the United States did not participate. Participating countries include more than 40 countries such as France, Germany, Italy, Canada, and the UAE. This reflects that European powers are concerned that the U.S. (the Trump administration)’s extreme pressure could lead to the strait being permanently closed. They are trying to engage Iran directly through “diplomatic and political means,” to achieve “ceasefire in exchange for opening the strait.”

On the China side, on March 31 China and Pakistan jointly released the “Five-Point Initiative,” which directly wrote “immediately ceasefire and stop fighting,” and called for “restoring normal navigation through the strait as soon as possible.” On April 2, the Ministry of Foreign Affairs also made consecutive statements, emphasizing that “only by stopping the fighting and achieving ceasefire can international shipping lanes be fundamentally maintained to remain safe and open,” and stated that “achieving ceasefire and ending the fighting as soon as possible, and restoring peace and stability in the Strait of Hormuz and nearby waters, is a common aspiration of the international community.” This is a very clear and progressively strengthened public stance.

Pakistan is one of the most active mediators in this round. It has upgraded from general appeals to hosting multi-country foreign ministers’ meetings and working to push specific proposals. On March 29, Pakistan hosted a meeting of foreign ministers with Turkey, Egypt, and Saudi Arabia in Islamabad. Reuters explicitly wrote that they discussed “possible ways to bring an early and permanent end to the war,” and “reopen the Strait of Hormuz” was set as an early discussion focus. On March 31, Pakistan jointly submitted the “Five-Point Initiative” with China, also calling for ceasefire and restoration of safe passage.

(2) This means that the “second derivative” of the war narrative is already starting to change.

Earlier, the market traded the worst-case scenario of “conflict prolonged + spillover escalating + supply disruptions deepening.” Now, although the conflict sides are still attacking on the surface, both sides are leaving room to downgrade the situation. In other words, although the war itself has not yet ended, the stage that is “getting worse and worse” may be approaching its end.

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

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 state of “nothing is happening.” Right-side confirmation requires seeing further declines in crude oil volatility (OVX).

(4) But from an allocation perspective, the left-side signal has already appeared. You can be somewhat more proactive than in the earlier phase. However, it is still important to emphasize: the left-side signal is a key timing point in a relative-return game, while the right-side signal is the best entry time for absolute returns.

In the short term, the technology categories that were most severely damaged earlier are often the ones that benefit the most. In the long term, what still deserves genuine attention is ΔG growth. If oil prices and related volatility continue to fall in the future, market risk appetite may continue to repair—then growth is still one of the directions with the highest potential for repair elasticity.

04

Investment approach: it’s time to position on the left side; capture opportunities with ΔG technology + high dividends

Given the highly uncertain geopolitical situation and the current market environment, “volatility” and “fragility” are the difficulties investors face. We propose using volatility as the core of the analytical framework, and recommend validating entry timing through “volatility/range contraction,” rather than “event clearance.” Focus on OVX and VIX—both represent the energy faced by the market

For the next steps, we believe: the conflict hasn’t ended, but the worst repricing phase may be behind us. You can start trying to build offensive positions on the left side, but you should not be overly aggressive. Meanwhile, technology growth remains the most worth focusing on.

Allocation approach:

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

(2) We emphasize that high dividends in 2026 are better than in 2025. Focus on high dividends that incorporate ΔG: coal, non-bank financials, media, petrochemicals, and transportation;

(3) Real estate as “options” after a potential bottoming in prices: optional consumption and service consumption recovery driven by stabilization in the balance sheet (high-end commercial properties, outdoor sports, tourism, hotels, catering, etc.).

05

Risk Warning

Accelerating recovery process due to macro policy changes beyond expectations.

Risk of geopolitical deterioration.

Risk that industrial policy changes.

（Source: Open-source Securities）