Navigating the Geopolitical 'Fragile Balance': US-China Presidential Summit Scenarios and a Dynamic Allocation Framework

Core Conclusion

The upcoming US-China presidential summit is a highly complex geopolitical catalyst event. However, its overall impact on market indices is expected to be far lower than levels seen in 2025. The key to investing lies not in betting on a single outcome, but in identifying two points the market may currently underestimate: First, the complexity of the Iran situation is diluting the summit's potential outcomes, leading to diminished index-level volatility. Second, sector performance will diverge dramatically. Therefore, investors should establish a dynamic allocation framework based on scenario probabilities, flexibly adjusting exposures to sectors like TMT, cross-border activities, and localization beneficiaries around a defensive core position. This approach aims to capture structural opportunities while managing tail risks.

Evidence Chain

Index Impact Expected to be Muted; Market Overestimates Systemic Risk

The overall impact of this summit on market indices is projected to be more limited. Even under the most pessimistic scenario of summit cancellation, a pullback in Chinese market indices is not expected to exceed 10%. This magnitude is significantly lower than the market's violent swings during periods of reciprocal tariff imposition and truce in 2025. This indicates that, after years of strategic competition, the market's baseline expectations for US-China relations are already fully priced in. The marginal shock of geopolitics on the overall market is becoming blunted. The investment implication is that one should not systematically reduce equity exposure due to concerns over the summit outcome. Instead, one could look for 'buy-on-dips' opportunities during excessive selling triggered by pessimistic scenarios.

Iran Situation is the Key 'X-Factor', Amplifying Scenario Complexity

Middle East tensions, particularly US-Iran conflict, constitute the core uncertainty variable affecting the summit's prospects and market reaction. The US positioning of maintaining the free flow of the Strait of Hormuz as a 'strategic gift' to China and others suggests geopolitical bargaining chips are directly incorporated into bilateral negotiations. The evolution of the Iran situation widens the range of potential outcomes and makes market reactions more complex. The investment implication is that critical signals to watch ahead of the summit should include developments in Iran and shipping traffic through the Strait of Hormuz. These metrics will directly influence the probability weights assigned to different scenarios and serve as leading indicators for adjusting portfolio risk appetite.

Sector Performance Will Diverge Dramatically; Structural Opportunities Outweigh Overall Direction

Under different scenarios, the market will exhibit significant sector rotation rather than broad-based moves. Under Scenario B (Limited Truce), opportunities will concentrate in the TMT sector, particularly in Artificial Intelligence and data centers. Scenario D (Status Quo with Upgrade Risk) favors localization beneficiaries like semiconductor equipment/materials and rare earths, but pressures sectors like AI, data centers, biotech business development, and airlines. This confirms the high asymmetry between geopolitical risks and opportunities. The investment implication is that one must abandon bets on the overall index direction. Instead, deep analysis of the differential impact of specific policy changes on supply chains, market demand, and valuations across different sectors is required for precise sector and stock selection.

Key Divergences and Risks

• Unexpected Escalation of US-Iran Conflict: Prolonged or worsening tensions could directly lead to summit cancellation and severely impact global energy supply and risk asset pricing.
• High Uncertainty Around Summit Outcome: The report's assessment of probabilities for intermediate scenarios like a limited truce or status quo is merely "relatively higher," lacking a high-confidence baseline forecast.
• Secondary Shocks of Geopolitics on Global Supply Chains: Tensions could spill over into energy, critical minerals, and other areas, triggering broader inflation and growth concerns, with impacts far exceeding the bilateral US-China relationship.

Valuation or Trading Implications

Investment should not be based on a single baseline scenario; instead, a dynamic scenario response strategy should be established:

1. Build a Defensive Core Position: Allocate to sectors like Utilities and Consumer Staples across all scenarios to weather volatility.
2. Implement Dynamic Adjustments with Probability Weights: Dynamically adjust risk exposures based on key observed signals (Iran situation, shipping traffic). If signs point to easing (Scenarios B/C), increase allocation to TMT (AI/data centers), cross-border healthcare, and transportation. If signs point to stalemate or escalation (Scenarios A/D), increase allocation to localization beneficiaries like semiconductor equipment, materials, and rare earths.
3. Exploit Market Mis-pricing: View any index overshoot (approaching -10%) triggered by pessimistic scenarios as an opportunity to increase holdings in structural growth names. If an optimistic scenario pushes indices higher, be wary of valuations in some sectors prematurely pricing in easing expectations.

Appendix Data Summary

Table 1: Definition and Market Impact Overview of Four Summit Scenarios

Table 2: Sectors Likely to Outperform/Underperform Across Different Scenarios