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

Securities Times reporter An Zhongwen

As the second quarter approaches, the market’s impact from overseas uncertainties and geopolitical conflicts has gradually weakened. The focus of publicly offered fund management has returned to companies’ intrinsic value. Several fund companies have judged that the most intense phase of valuation adjustments may already be behind us, and that future market performance will be more closely driven by fundamentals. Faced with the situation in which first-quarter results are significantly differentiated and heavily held stocks are generally under pressure, publicly offered funds, while staying committed to the technology mainline, are paying even more attention to the certainty of earnings. They also use high-dividend assets to smooth portfolio volatility, pointing the way for second-quarter positioning.

Funds face valuation compression challenges

In the first quarter of 2026, the overall investment difficulty for publicly offered funds increased significantly, and fund performance showed clear differentiation. Under the influence of external environment factors and fluctuations along the industry chain, most heavily held stocks encountered valuation pressure. Consensus positioning in tech stocks was widely adjusted, while only a few products focusing on sub-sectors such as storage performed notably, with relatively diversified holdings.

Among them, the first-place fund in the first quarter among all-market actively managed equity funds achieved a 60% return thanks to concentrated positions in the storage sector. The fund ranking second in the same theme had a return that differed by 23 percentage points, highlighting that even within the same technology track, fund performance can vary significantly. This also reflects that, under overall market pressure, relying solely on a small number of high-growth, high-visibility sub-directions is not enough to reverse the overall challenges publicly offered funds face.

Taking actively managed equity QDII funds that focus on Hong Kong stocks as an example, this type of fund generally performed rather flat in the first quarter. Most products hovered between marginal profits and losses, in contrast to global technology QDII categories that performed relatively stronger overall. QDII products leading in performance held multiple positions in U.S. and Asia-Pacific markets’ semiconductor and storage leaders, such as 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, under the current market conditions, institutions still take a cautious view of valuation risks for Hong Kong growth stocks.

Return to fundamentals in pricing

As global risk appetite gradually cools down, heavily held stocks by funds continue to face valuation pressure. Multiple publicly offered 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. The certainty of corporate earnings and fundamentals will once again become the core for valuation.

Wei Fengchun, chief economist at CICC Fund Management, judged that the Middle East conflict raises the energy risk premium. Energy and utilities have earnings rigidity and value as a safe-haven. Funds shifting from high-valuation growth to low-valuation defense reflects the logic of prioritizing safety in the short term while still focusing on industrial upgrading in the long term. Although there was a de-escalation window in April, the geopolitical landscape has undergone profound change. Issues such as energy security and proxy conflicts will persist for the long run. Going forward, it will be necessary to dynamically track key variables in order to grasp the rhythm of asset allocation.

Wang Li, a senior macro strategy research analyst at Great Wall Fund, said that the conflict between Iran and the U.S., and between Israel and the U.S., is an important factor that triggered the A-share adjustment in the first quarter. On one hand, geopolitical conditions remain locked, pushing up the oil price center of gravity. On the other hand, the market’s structure rotates quickly in line with the intensity of the conflict. When tensions are high, defensive assets take the upper hand; when sentiment eases, technology stocks are expected to experience a rebound.

He said that the direction of geopolitical developments and first-quarter earnings performance will be the core variables determining how funds allocate in the second quarter. Market sentiment indicators have already shown bottoming signals. If geopolitical pressure eases, market participants’ consensus to go long could gather. And if first-quarter reports can provide clear signals on business conditions, it will also increase funds’ willingness to allocate to high-growth directions.

Liu Fangyuan, an equity index research analyst at E Fund, said that stock selection in the second quarter of 2026 should return to fundamentals, with a focus on earnings certainty and the path to realization. Growth sectors represented by Hang Seng Tech remain the direction with relatively higher certainty. The AI industry is moving from the investment stage toward commercialized deployment. Areas such as cloud computing, computational power, and internet platform applications have relatively high industry visibility, improving the trackability of earnings and making performance relatively stable in the current environment. At the same time, high-dividend sectors with stable cash flows and dividend capacity can serve as an important complement to portfolios, providing a defensive role when interest rates are relatively high and market volatility increases.

Technology remains the main allocation line

In choosing investment tracks for the second quarter, the technology sector remains a core direction targeted by multiple publicly offered fund institutions.

Using Zhang Xueji, a Formula Racing motorcycle rider, winning a double crown at the WSBK Portugal round as an example, Wei Fengchun said he is optimistic about China’s long-term advantages in high-end manufacturing and AI-enabled overseas expansion. He believes that this breakthrough breaks the decades-long brand monopoly held by Europe, the U.S., and Japan. It is a landmark event marking China manufacturing’s move from low-end price-driven competition to high-end outward-looking competition. It also confirms that the Zuguela cycle trend led by high-end manufacturing is clear. The resonance between equipment upgrades and industrial upgrading is shifting the manufacturing industry from games over existing scale toward incremental breakthroughs. In the short term, disturbances will not change the direction of the medium- to long-term technology breakthroughs.

Liu Fangyuan is optimistic about three major directions. First is the AI and related technology industry chain, including cloud computing, computational power infrastructure, and internet platforms, which benefit from the advancement of AI commercialization. Second is the internet platform and digital economy fields. Relying on user, data, and scenario advantages, they have strong capabilities to convert AI applications. Finally, it is the high-dividend sector, covering companies with stable cash flows such as finance, public utilities, and energy, which have allocation value amid market turbulence.

Related personnel at Morgan Stanley Fund also emphasized that AI remains the core of the technology sector, with subsequent developments relying more on earnings catalysts. Although the AI sector is influenced by volatility in U.S. tech stocks, its overall earnings certainty remains relatively strong. OpenClaw drives a surge in token demand; domestic platform call volume has increased by tenfold. Related products’ price increase trends have continued for several months. The Middle East situation further reinforces expectations for price hikes. Even if geopolitical pressure eases later on, it will be hard to reverse this trend. Domestic-demand-related products are about to undergo earnings verification, and some targets have already moved out of their bottoming phase.

(Editor: Dong Pingping)

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