Institutional assessment indicates that external shocks are diminishing in marginal impact

As the second quarter approaches, the impact of uncertainty abroad and geopolitical conflicts on the market has gradually weakened. Public fund focus has returned to firms’ intrinsic value. Several fund companies have judged that the most intense phase of valuation adjustment in the market may already be behind us, and that future market performance will be more closely driven by fundamentals. In the face of pronounced differentiation in first-quarter results and generally under pressure heavy holdings, public funds, while staying committed to the technology main theme, are placing greater emphasis on the certainty of earnings, and using high-dividend assets to smooth portfolio volatility, pointing the way for a second-quarter layout.

Funds face valuation compression challenges

In the first quarter of 2026, the overall investment difficulty for public funds increased significantly, and fund performance showed clear differentiation. Under the impact of the external environment and fluctuations in the industrial chain, most heavily held stocks faced valuation pressure. Synchronized technology stocks were broadly adjusted, while only a small number of products focused on niche segments such as storage achieved standout performance, with relatively dispersed holdings.

Among them, the first-quarter champion of the entire market’s actively managed equity funds delivered a 60% return through a concentrated allocation to the storage sector. The fund in second place, from the same theme, had a return 23 percentage points lower, highlighting that even within the same technology track, fund performance can diverge significantly. This also reflects that, against the backdrop of broad market pressure, relying on only a few high-enthusiasm niche directions is not enough to reverse the overall challenges faced by public fund investing.

Taking actively managed equity QDII funds oriented toward Hong Kong stocks as an example, this type of fund generally performed lackluster in the first quarter. Most products hovered between marginal profit and losses, contrasting with global technology QDII funds that performed relatively better overall. QDII products leading in performance typically hold multiple positions in U.S. stocks and markets in Asia-Pacific, such as semiconductor and storage leaders, including Micron Technology, SanDisk, TSMC, Samsung, SK hynix, and others.

In addition, only a small number of QDII funds achieved positive returns through high-dividend and low-valuation strategies. These products tend to overweight traditional blue-chip sectors such as finance and energy, avoiding high-volatility technology growth stocks. This reflects that, in the current market environment, institutions remain cautious about valuation risks in Hong Kong growth stocks.

Return to fundamental pricing

As global risk appetite gradually cools, heavily held stocks by funds continue to face valuation pressure. Several public fund practitioners believe that in the second quarter, after the market gradually absorbs geopolitical and macro risks, the marginal impact of external volatility on stock prices will weaken, and certainty in corporate earnings and fundamentals will once again become the core of pricing.

Wei Fengchun, chief economist at CEF Capital (Cingjin Hexin) Fund, judges that the Middle East conflict boosts energy risk premiums. Energy and utilities have earnings rigidity and a defensive value. Capital has shifted from high-valuation growth to low-valuation defense, reflecting the logic that safety is prioritized in the short term, while the long term still focuses on industrial upgrading. Although there is a window for potential downgrading in April, the geopolitical landscape has undergone profound changes. Issues such as energy security and proxy conflicts will persist long term. Going forward, it is necessary to dynamically track key variables to grasp the pace of asset allocation.

Wang Li, senior macro strategy researcher at Great Wall Fund, believes that the conflict between Iran and the U.S. is an important factor triggering the A-share adjustment in the first quarter. On one hand, geopolitical tensions have been stalemated, pushing up the oil price’s base; on the other hand, market structure rotates quickly in line with the intensity of the conflict. When tensions are high, defensive assets tend to take the lead; when sentiment eases, technology stocks then come back for a repair.

He said that the direction of geopolitical developments and first-quarter report performance will be the key variables determining how funds allocate in the second quarter. Current market sentiment indicators have already shown bottoming signals. If geopolitical pressure eases, consensus around going long with capital is expected to consolidate. And if first-quarter reports can provide clear clues on business conditions, they will also increase funds’ willingness to allocate toward high-visibility directions.

Liu Fangyuan, an index research analyst at E Fund, said that stock selection for the second quarter of 2026 should return to fundamentals, focusing on earnings certainty and the path to realization. Growth sectors represented by Hang Seng Tech remain relatively higher certainty directions. The AI industry is moving from the investment stage toward commercialization and on-the-ground implementation. Areas such as cloud computing, computing power, and internet platform applications have higher industry momentum, stronger trackability of performance, and thus are relatively stable in the current environment. Meanwhile, high-dividend sectors with stable cash flow and dividend capability can serve as an important supplement for portfolios; when interest rates remain high and market volatility increases, they provide defensive support.

Technology remains the main allocation theme

In choosing investment tracks for the second quarter, the technology sector remains a core direction for multiple public fund institutions.

Wei Fengchun cited Zhang Xueji Motorcycle’s double championship at the WSBK Portuguese round as an example, saying he is optimistic about China’s long-term advantages in high-end manufacturing and AI enabling its overseas expansion. He believes that this breakthrough breaks the long-standing monopoly of European, American, and Japanese brands over decades, and is a landmark event marking China manufacturing’s shift from low-end price-and-volume internal competition to high-end external competition. It also confirms that the Zhugela cycle trend driven by high-end manufacturing is clear. A resonance between equipment upgrades and industrial upgrading is under way; manufacturing is shifting from competing over existing scale to achieving incremental breakthroughs, and near-term disruptions will not change the direction of medium- to long-term technical breakthroughs.

Liu Fangyuan is bullish on three directions. First is the AI and related technology industry chain, including cloud computing, computing power infrastructure, and internet platforms, which benefit from AI commercialization advancing. Second is the internet platform and digital economy space—leveraging advantages in users, data, and scenarios, it has strong capability to convert AI applications. Finally is the high-dividend sector, covering companies with stable cash flow such as finance, utilities, and energy, which have allocation value amid market turbulence.

People from Morgan Stanley Fund likewise emphasize that AI remains the core of the technology sector, with more reliance on performance catalysts going forward. Although the AI sector is influenced by volatility in U.S. technology stocks, overall earnings certainty remains stronger. OpenClaw is driving a surge in Token demand; domestic platform call volumes have increased by tenfold, and the trend of related products raising prices has continued for several months. The Middle East situation further reinforces expectations of price increases. Even if geopolitical pressure later eases, it will be hard to reverse this trend. Domestic-demand-related products are about to undergo performance verification, and some targets have already moved out of the bottom.

(Editor: Zhang Yan)

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