Institutional analysis indicates that external shocks are diminishing at the margin, and the market will revert to pricing based on corporate fundamentals.

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Securities Times reporter An Zhongwen

As the second quarter approaches, the impact of overseas uncertainties and geopolitical conflicts on the market gradually eases, and public fund managers’ focus returns to companies’ intrinsic value. Multiple fund companies believe that 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. Faced with the situation in which performance in the first quarter showed significant divergence and heavily held stocks were generally under pressure, public funds are, while staying committed to the technology main theme, paying even more attention to earnings certainty. They also use high-dividend assets to smooth portfolio volatility, pointing the way for second-quarter positioning.

Funds face the challenge of valuation compression

In the first quarter of 2026, the overall difficulty of investments for public funds increased significantly, and fund performance showed clear divergence. Under the impact of external environment changes and fluctuations in the industrial chain, most heavily held stocks encountered valuation pressure. Crowd-invested technology stocks were broadly adjusted, while only a few products that focused on niche segments such as storage achieved standout results, with relatively diversified holdings.

Among them, the overall first-quarter champion among all active equity funds achieved a 60% return through a concentrated allocation to the storage sector. The second-place fund in the same theme saw a return 23 percentage points lower, highlighting that even within the same technology track, fund performance can differ significantly. This also reflects that, against the backdrop of overall market pressure, it is difficult to reverse the broader challenge public funds face by relying only on a few high-growth sub-directions.

Taking active equity QDII funds oriented toward Hong Kong stocks as an example, this type of fund generally performed poorly in the first quarter. Most products hovered between modest profits and losses, contrasting with global technology QDII funds overall, which performed relatively stronger. QDII products with leading performance typically held heavy positions in US 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 focus more on traditional blue-chip sectors such as financials and energy, avoiding high-volatility technology growth stocks, which reflects that, in the current market environment, institutions still take a prudent stance on valuation risk for Hong Kong growth stocks.

Return to fundamental valuation

As global risk appetite gradually cools, heavily held fund stocks continue to face valuation pressure. Many public fund insiders 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 the certainty of corporate earnings and fundamentals will again become the core of valuation.

Wei Fengchun, Chief Economist at CCB and CitiC, judged that the Middle East conflict boosts an energy premium; energy and utilities have both earnings rigidity and value as a defensive hedge. As funds shift from overvalued growth to undervalued defense, it reflects the logic that safety is prioritized in the short term, while in the long term the focus remains on industrial upgrading. Although April has a window in which the situation may be downgraded, the geopolitical landscape has already undergone profound changes. Issues such as energy security and proxy conflicts will persist over the long run, so it will be necessary to dynamically track key variables afterward in order to grasp the asset allocation timing.

Wang Li, senior macro strategy researcher at Great Wall Fund, said that the Iran–U.S. conflict is an important factor triggering the adjustment in China’s A-share market in the first quarter. On one hand, geopolitical tensions remain stalled and push up the oil-price benchmark. On the other hand, the market structure rotates rapidly in line with the intensity of the conflict. When tensions are high, defensive assets take the lead; when sentiment eases, technology stocks also see a rebound and repair.

He said that the direction of geopolitical developments and the performance in the first-quarter reports will be the core variables determining second-quarter fund deployment. Currently, market sentiment indicators have shown bottom signals. If geopolitical pressure eases, consensus to buy and hold (go long) is expected to gather. And if the first-quarter reports can provide clear clues about sector conditions, it will also strengthen funds’ willingness to allocate to high-visibility, high-growth directions.

Liu Fangyuan, an index research analyst at E Fund, said that stock selection in the second quarter of 2026 should return to fundamentals, focusing on earnings certainty and the path to realization. The growth segments represented by Hang Seng Tech remain the direction with relatively higher certainty. The AI industry is moving from the investment phase toward commercialization and real-world deployment. In areas such as cloud computing, compute power infrastructure, and internet platform applications, industry conditions are relatively strong, earnings traceability is higher, and performance is relatively stable in the current environment. At the same time, high-dividend sectors with stable cash flows and dividend capability can serve as an important complement for portfolios, providing defense when interest rates are relatively high and market volatility increases.

Technology remains the main allocation theme

In choosing investment tracks for the second quarter, the technology sector is still a core direction for the allocation by multiple public fund institutions.

Using Wei Fengchun’s example of Zhang Xueji Car achieving a double championship at the WSBK Portugal round, he said he is optimistic about China’s long-term advantages in high-end manufacturing and AI enabling exports. He believes that this breakthrough breaks the decades-long brand monopoly held by Europe, the US, and Japan, and is a landmark event marking China’s manufacturing shift from low-end “involution” to high-end “outward competition.” It also confirms that the Juglar cycle trend driven by high-end manufacturing is clear. A resonance between equipment upgrades and industrial upgrading is underway; manufacturing is moving from competition within existing capacity to incremental breakthroughs. In the short term, disruptions will not change the direction of medium- to long-term technological breakthroughs.

Liu Fangyuan is also bullish on three major directions. First is the AI and related technology industrial chain, including cloud computing, compute infrastructure, and internet platforms—benefiting from the advancement of AI commercialization. Second is internet platforms and the digital economy—leveraging advantages in users, data, and scenarios, they have strong capability to convert AI applications. Finally is the high-dividend sector, covering companies with stable cash flows such as financials, public utilities, and energy, which have allocation value during market turbulence.

Morgan Stanley Fund-related insiders also emphasized that AI remains the core of the technology sector, and going forward more of it will rely on performance catalysts. Although the AI sector is affected by volatility in US tech stocks, overall earnings certainty remains relatively strong. OpenClaw has driven a surge in Token demand; domestic platform call volumes have increased tenfold. Related product price-increase trends have continued for months. The Middle East situation further reinforces expectations of higher pricing, and even if geopolitical pressure eases later, it will be difficult for this trend to reverse. Domestic-demand-related products are about to undergo earnings verification, and some targets have already been the first to move out of the bottom.

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Editor: Ling Chen