Q1 Market Review [Ping An Asset Management (Hong Kong) Market Quarterly Commentary]

1. Overview of macro and global markets

In the first quarter of 2026, at the macro level, the domestic economy exhibited clear asymmetric recovery characteristics: on one hand, new forms of productivity represented by artificial general intelligence (AGI) and advanced manufacturing accelerated their formation, with computational power infrastructure and the semiconductor supply chain becoming key growth drivers for the economy; on the other hand, the real estate market remained in a prolonged bottoming-out and credit restructuring phase, while the consumer market showed a more rational divergence.

On the capital markets front, Hong Kong stocks experienced a highly dramatic 'style reversal.' At the beginning of the quarter, driven by global technological momentum and favorable domestic policies, risk appetite for growth sectors rebounded sharply, with the Hang Seng Tech Index once leading gains across major indices. However, in March, the sudden escalation of tensions between the US and Iran became the core variable disrupting offshore markets. Geopolitical concerns triggered risk aversion, causing funds to quickly withdraw from high-beta growth sectors and shift into dividend assets with high certainty.

Although geopolitical volatility caused a temporary pullback, high-dividend assets represented by energy, telecommunications, and large financial institutions effectively withstood external risks due to their stable cash flows and defensive attributes. This 'rise-then-fall, style-switching' trend reflected the market's attempt to balance 'trading on tech futures' with 'hedging current geopolitics.'

In the US, the economy in the first quarter demonstrated unexpected resilience. Despite a prolonged high-interest-rate environment, the labor market remained tight, and consumer spending, as a pillar of the economy, did not experience substantial collapse. However, this strength also brought side effects – the process of inflation easing became exceptionally challenging due to energy price spikes caused by escalating tensions in the Middle East.

The US stock market exhibited distinct 'AI-driven' characteristics in the first quarter. The commercial application of artificial intelligence technology entered the profit realization phase, with earnings explosions from relevant giants supporting repeated new highs for Nasdaq and the S&P 500 during the quarter. The market was once immersed in the optimistic sentiment that 'technological progress enhances total factor productivity,' believing AI could offset the negative impact of high interest rates on the economy.

However, the US-Iran situation at the end of the quarter hit the pause button on this optimism. The potential threat of war to global supply chains, coupled with a resurgence in inflation expectations, placed the Federal Reserve's monetary policy in an extremely passive position. The market began reassessing the possibility of 'higher interest rates for longer,' with rising bond yields significantly pressuring tech stock valuations. Overall, the US market underwent a psychological shift from 'pure optimism about technological change' to 'vigilance against the return of geopolitical inflation' in the first quarter.

In contrast to the relative strength of the US and China, the European economy remained on the edge of stagnation in the first quarter of 2026. Eurozone manufacturing confidence, plagued by energy cost instability, continued to show persistent weakness. However, European stock markets demonstrated robustness seemingly disconnected from macroeconomic data.

The main logic behind the European market lies in 'rate cut expectations.' With eurozone inflation control relatively ahead of the US, the European Central Bank sent out clearer easing signals during the quarter, attracting some risk-averse capital into European leading companies with relatively low valuations. Especially in pharmaceuticals, luxury goods, and essential consumer products sectors, European multinational corporations leveraged their global revenue structures to hedge against domestic economic weakness.

Geopolitical factors have also impacted Europe. The escalation of the US-Iran situation directly threatened Europe’s energy security red line, and fluctuations in European energy prices at the end of the quarter caused market sentiment to quickly turn defensive. Although Europe has made progress in energy substitution, the market remains wary of energy cost crises triggered by extreme geopolitical events, with capital flows clearly aggregating towards traditional defensive sectors with risk-hedging attributes.

2. Review of the First Quarter Investment Market

In the first quarter, the Hang Seng Index fell by 3.29%, closing at 24,788 points; the China Enterprises Index dropped by 6.05%, closing at 8,374 points. In the first quarter, the financial sector contributed the most to the Hang Seng Index, while the communications services sector weighed the most on its performance.

In the first quarter, southbound capital recorded net inflows, with a single-quarter net inflow amounting to approximately HKD 220.9 billion.

3. Short-term Investment Outlook

The market is focused on the latest developments in the US-Iran-Israel negotiations, with concerns over whether the parties involved can reach a lasting ceasefire agreement impacting global investor sentiment. Additionally, significant volatility has been observed in sectors related to artificial intelligence and semiconductors. On one hand, attention is directed towards the potential creative destruction AI may bring to various industries, while on the other hand, there are concerns about the nearly endless capital expenditure and electricity demands required by lofty ambitions. We have noted fluctuations in these sectors within the US stock market, which may experience substantial turbulence going forward.

On the macroeconomic front, aside from export data being a bright spot, other economic indicators have not shown noticeable improvement. The market is closely watching the implementation of announced monetary and fiscal policies, particularly whether the real estate market will recover. Furthermore, global trade protectionism and other geopolitical factors could also cause market disruptions. Multiple possibilities and uncertainties lie ahead, potentially leading to a cautious approach from investors in the short term.

Domestically, the recovery of our economy seems weaker than expected. However, there is sufficient room for policy adjustment to address downside risks, with clear policy support for economic growth providing some positive momentum to the market. The sustainability of this momentum depends on whether policy measures can effectively counterbalance economic headwinds. Although there are concerns about demand, under the support of multi-pronged macroeconomic policies, the economy is still expected to recover gradually, with scope for improvement in corporate profitability.

In the US, inflation remains above the 2% target. Considering ongoing conflicts in the Middle East along with mixed signals from employment and inflation data, further interest rate cuts remain uncertain. The market is expected to experience high volatility alongside frequent shifts in investment themes. Additionally, we remain highly concerned about risks in property developers’ funding chains, domestic industry policy developments, and the potential uncertainties in US-China relations. With no significant change in US policy towards China, we anticipate underlying tensions between the two nations may persist, and investors should monitor developments to adjust their strategies accordingly.

In summary, in the short term, the market is concerned about geopolitical and macroeconomic issues but is also keeping an eye on new highlights within the technology sector (such as artificial intelligence, semiconductors, robotics, engines, and cooling-related stocks). The real economy remains weak, although the government has introduced several fiscal, monetary, and real estate policies; their effectiveness needs further observation. In the medium term, we believe domestic and foreign capital will refocus on the fundamentals of sectors and companies, supporting valuations of high-quality firms with strong fundamentals.

(Source: Ping An Asset Management (Hong Kong) Limited)

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