Institutional assessment indicates that external shocks are diminishing in marginal impact

As the second quarter approaches, overseas uncertainties and geopolitical conflicts’ impact on the market has gradually weakened, and public mutual funds’ focus has returned to companies’ intrinsic value. Several fund managers believe the most intense phase of valuation adjustments in the market may already be behind us, and that future market performance will be more closely driven by fundamentals. Given the significant divergence in first-quarter results, with heavy holdings generally under pressure, public funds—while sticking to the technology main theme—place even greater emphasis on earnings certainty. They also leverage high-dividend assets to smooth portfolio volatility, pointing the way for second-quarter positioning.

Funds face challenges of valuation compression

In the first quarter of 2026, the overall investment difficulty for public mutual funds increased significantly, and fund performance showed clear differentiation. Under the influence of external conditions and fluctuations across the industrial chain, most heavy-held stocks faced valuation pressure; the crowded trade in technology stocks was broadly adjusted. Only a few products focused on sub-sectors such as storage, and those with relatively diversified holdings delivered standout performance.

Among them, the first-place active equity fund across the entire market in the first quarter achieved a 60% return thanks to its concentrated allocation to the storage sector. The second-place fund within the same thematic category returned 23 percentage points less, highlighting that even within the same technology track, fund performance can vary dramatically. This also reflects that, against a backdrop of overall market pressure, relying on only a handful of highly favorable niche directions is not enough to reverse the overall challenges public funds face.

Taking an active equity QDII in Hong Kong stocks as an example, such funds generally performed mediocrely in the first quarter. Most products hovered between small profits and losses, contrasting with global technology QDII peers that performed relatively better overall. QDII products that led performance held multiple positions in U.S. and Asia-Pacific markets’ semiconductor and storage leaders, such as Micron Technology, SanDisk, TSMC, Samsung, and SK hynix.

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

Reverting to fundamental-based pricing

As global risk appetite gradually cools, the valuation pressure on stocks heavily held by funds has continued. Many public fund professionals believe that in the second quarter, after the market gradually digests geopolitical and macro risks, the marginal impact of external volatility on stock prices will weaken, and certainty around corporate earnings and fundamentals will once again become the core driver of pricing.

Wei Fengchun, Chief Economist at CICC? (Wait—this is likely “Cjenjin Hexin Fund”; keep original proper noun?), at Cijn?—Actually text: “创金合信基金首席经济学家魏凤春”. Translate: “Wei Fengchun, Chief Economist at Chuangjin Hexin Fund”.
Wei Fengchun of Chuangjin Hexin Fund judges that the Middle East conflict boosts an energy risk premium; energy and utilities have earnings rigidity and serve as defensive, risk-hedging assets. As capital shifts from high-valuation growth to low-valuation defense, it reflects a logic of prioritizing safety in the short term while still focusing on industrial upgrading in the long run. Although there is a geopolitical downgrade window in April, the geopolitical landscape has undergone profound changes; issues such as energy security and principal-agent conflicts will persist for the long term. Going forward, key variables must be dynamically tracked to grasp the rhythm of asset allocation.

Wang Li, Senior Macro Strategy Researcher at Great Wall Fund, believes that the conflict between Iran and Israel is an important factor driving the A-share adjustment in the first quarter. On one hand, geopolitical stalemate pushes up the crude oil price’s baseline; on the other hand, market structure rapidly rotates in line with the intensity of the conflict. When tensions are high, defensive assets tend to outperform, and when sentiment stabilizes, technology stocks are set to recover again.

He said that the direction of geopolitical developments and first-quarter report performance will be the core variables determining second-quarter capital allocation. Currently, market sentiment indicators have shown signs of a bottom. If geopolitical pressure eases, a consensus for going long may gather strength. Moreover, if first-quarter reports can provide clear signals about business conditions, they will also increase investors’ willingness to allocate to highly favorable growth directions.

Liu Fangyuan, an index research analyst at EF (Eastspring?)—Text: “易方达基金指数研究员刘方元”. Translate: “Liu Fangyuan, an index research analyst at E Fund”.
Liu Fangyuan of E Fund believes that stock selection in 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 a relatively higher-certainty direction. The AI industry is moving from the investment phase toward commercial implementation. Areas such as cloud computing, computing power, and internet platform applications show relatively high industry favorability, with stronger trackability of earnings, leading to relatively stable performance in the current environment. At the same time, high-dividend sectors with stable cash flows and dividend-paying capacity can serve as an important supplement to portfolios, offering defensiveness when interest rates remain high and market volatility increases.

Technology remains the main allocation theme

In choosing investment tracks for the second quarter, technology is still a core direction allocated to by many public fund institutions.

Wei Fengchun, taking Zhang Xueji (Wait: “张雪机车” is likely “Zhang Xueji”??) at the WSBK Portugal round winning a double crown as an example, looks favorably on China’s long-term advantages in high-end manufacturing and AI enabling overseas expansion. He believes this breakthrough breaks the decades-long monopoly of brands in Europe, the U.S., and Japan, and is a landmark event signaling China’s manufacturing moving from low-end “involution” to high-end “over-turning” (external competition). It also confirms that the Zhugela cycle trend, driven by high-end manufacturing, is becoming clear. As equipment upgrades and industrial upgrading resonate together, manufacturing is shifting from competing over existing share to making incremental breakthroughs, and short-term disruptions will not change the direction of the long-term technical breakthroughs.

Liu Fangyuan favors three directions. First is the AI and related technology industry chain, including cloud computing, computing power infrastructure, and internet platforms, which benefits from the advancement of AI commercialization. Second is the internet platform and digital economy sector; relying on advantages in users, data, and scenarios, it has strong capabilities for converting AI applications. Finally, the high-dividend sector, covering companies with stable cash flows such as financials, utilities, and energy, has allocation value during market turbulence.

Morgan Stanley Fund’s related personnel also emphasized that AI is still the core of the technology sector, and going forward it will depend more on earnings catalysts. Although the AI sector is affected by volatility in U.S. tech stocks, overall earnings certainty remains relatively strong. OpenClaw drives a surge in Token demand; domestic platform call volumes have increased by tenfold. The related product price-hike trend has continued for several months, further reinforcing price-hike expectations in the Middle East. Even if geopolitical pressure eases later, it will be difficult to reverse this trend. Domestic-demand-related products are about to undergo earnings validation, and some targets have already moved out of the bottom early.

(Edited by: Zhang Yan)

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