A recent analysis of the second quarter of 2026 for China's A-share market has been published. The market experienced significant volatility during the period, with the Shanghai Composite Index ultimately gaining 5.2%. Growth-oriented technology stocks were standout performers, with the STAR 50 and ChiNext indices surging 75.7% and 36.4%, respectively. Among major holdings, the concentration in leading companies increased substantially. The electronics and communications sectors saw the largest increases in fund allocations, while the power equipment, pharmaceuticals, and food and beverage sectors experienced notable reductions. The total assets of public mutual fund ETFs declined to 5.8 trillion yuan, with equity ETF assets edging slightly lower. Looking ahead, the analysis suggests that factors behind the recent A-share adjustment are mostly short-term and have been largely digested. The market currently possesses several favorable conditions. The report recommends focusing on two main investment themes: high-growth sectors, particularly AI infrastructure and innovative pharmaceuticals; and cyclical improvement sectors, including power grid equipment, petrochemicals, engineering machinery, and non-bank financials. The outlook for purely domestic demand-driven industries remains under observation.
Key Shifts in Q2 Mutual Fund Portfolios
Overall equity allocations by mutual funds increased during the quarter, driven by a rise in A-share exposure, while allocations to Hong Kong stocks continued to decline. The A-share market saw wide fluctuations in Q2 2026. Investor risk appetite improved in April as concerns over geopolitical tensions eased and strong first-quarter earnings reports were released. By mid-May, after reaching a yearly high, the Shanghai index entered a period of consolidation, though the technology sector remained strong. The market recovered somewhat in early June following the signing of a U.S.-Iran memorandum of understanding and supportive domestic policy signals for the tech industry. However, by month's end, negative industry narratives, external market influences, and high crowding contributed to a pullback in tech stocks, dragging the broader market lower. For the quarter, the Shanghai Composite Index rose 5.2%. Performance was highly divergent, with technology and growth styles shining. The STAR 50 and ChiNext indices soared 75.7% and 36.4%, respectively. The mid- and small-cap focused CSI 1000 and CSI 2000 indices gained 15.6% and 7.8%. The large-cap blue-chip CSI 300 and SSE 50 indices advanced 11.9% and 5.8%, while the CSI Dividend Index fell 12.3%. Against this backdrop, the median return for actively managed equity-oriented mutual funds was 11.2%, a significant improvement from the -1.2% recorded in the previous quarter.
The total assets under management for public funds resumed expansion, increasing from 39.3 trillion yuan in Q1 to 41.4 trillion yuan in Q2. Within this, equity asset values rose from approximately 8.1 trillion yuan to 8.8 trillion yuan. The proportion of equity assets to total AUM increased by 0.8 percentage points to 21.4%. The proportion of bond assets declined by 2.1 percentage points to 51.6%. The cash allocation ratio rose by 0.8 percentage points, marking the sixth consecutive quarterly increase. For actively managed equity-oriented funds, total AUM increased by 0.8 trillion yuan to 3.8 trillion yuan. Equity assets within these funds rose by 0.6 trillion yuan to 3.2 trillion yuan, with the overall equity allocation ratio edging up 0.1 percentage points to 86.2%. Specifically, the allocation to A-shares jumped significantly from 73.9% last quarter to 78%. On the fund flow side, estimates based on fund share and net asset value data indicate net redemptions for actively managed equity funds expanded to approximately 209.4 billion yuan in Q2. Regarding new fund issuance, 85.72 billion units of new actively managed equity funds were launched, down from the prior quarter. New equity ETF issuance amounted to 31.59 billion units, an increase of 22.2% quarter-over-quarter. In Hong Kong, where the Hang Seng Index and Hang Seng Tech Index fell 7.7% and 3.8%, respectively, in Q2, the Hong Kong allocation ratio for funds permitted to invest there dropped noticeably by 6.3 percentage points to 13.3%.
Characteristics of Top Holdings
Concentration in leading companies rose sharply, and allocations were increased to communications and electronics while being reduced for power equipment, pharmaceuticals, and food and beverage. First, the concentration of holdings in top companies increased substantially. The combined weighting of the top 100 holdings in actively managed equity funds' portfolios rose from 55.4% to 68.2%, while the top 50's weighting increased from 42.8% to 55.2%. Analyzing changes in major holdings, Zhongji Innolight (300308.SZ), Eoptolink Technology Inc., Ltd. (300502.SZ), and Cambricon Technologies Corporation Limited (688256.SH) saw significant increases in fund ownership. In contrast, Contemporary Amperex Technology Co., Limited (300750.SZ) and Kweichow Moutai Co., Ltd. (600519.SH) experienced notable reductions. Among Hong Kong-listed stocks, Semiconductor Manufacturing International Corporation (00981) saw increased allocation, while Alibaba Group Holding Limited (09988) and CNOOC Limited (00883) saw reductions.
Second, allocations to the ChiNext and STAR boards continued to rise, while the allocation to the main board declined. The main board's weighting in top holdings fell from 57.7% last quarter to 43.6% in Q2, representing an underweight of approximately 19.1 percentage points. Growth-style allocations increased markedly. Weightings for the ChiNext and STAR boards rose by 4.4 and 9.8 percentage points to 29.6% and 26.7%, respectively, representing overweights of about 7.2 and 12.3 percentage points. The allocation to the Beijing Stock Exchange declined slightly by about 0.1 percentage points.
Third, technology sectors like electronics and communications received increased allocations, while power equipment, pharmaceuticals, and food and beverage saw reductions. On the buying side, the ongoing AI industry trend led to further capital concentration in AI hardware, computing power infrastructure, and upstream AI materials benefiting from price increases. The electronics sector received the largest increase, with its allocation rising by 21.3 percentage points. The communications sector continued its upward allocation trend, adding 3.9 percentage points. Increased demand from downstream sectors like AI computing drove price increases for materials like fiberglass, leading to a 1 percentage point increase in the building materials allocation. The machinery and equipment sector also saw a 1 percentage point increase.
On the selling side, the new energy and major consumer sectors saw significant reductions this quarter. Allocations to power equipment, pharmaceuticals & biotechnology, food & beverage, and household appliances fell by 5.5, 3.3, 3.2, and 0.9 percentage points, respectively. As geopolitical tensions eased, allocations to upstream resource industries also declined. The non-ferrous metals allocation fell by another 3 percentage points this quarter. The basic chemicals, petrochemicals, and coal sectors, which saw increases last quarter, were reduced by 1.9, 0.6, and 0.3 percentage points this quarter. The automotive sector, facing profit margin pressure, saw a 2.3 percentage point reduction. Within finance, the banking and non-bank financial sectors saw reductions of 0.9 and 0.4 percentage points.
Fourth, regarding specific themes, communications equipment saw significant buying, while consumer electronics saw substantial selling. An analysis covering approximately 400 listed companies across themes like semiconductors, consumer electronics, communications equipment, robotics, innovative drugs, batteries, defense, and liquor showed a clear quarter-over-quarter recovery in the proportion of public fund top holdings. Among these, allocations to semiconductors, consumer electronics, and communications equipment rose by 12.4, 8.8, and 4.4 percentage points, respectively. Allocations to the new energy vehicle industry chain, batteries, liquor, innovative drugs, photovoltaics & wind power, defense, and robotics fell by 3.9, 3.7, 2.8, 1.6, 1.1, 0.8, and 0.3 percentage points, respectively.
Public ETF Funds
The total assets of public ETF funds continued to contract, declining from 6.1 trillion yuan last quarter to 5.8 trillion yuan. The equity portion of these assets fell from 59.3% to 56.4%. The total assets of equity ETFs stood at 2.7 trillion yuan, down 0.2 trillion yuan from the previous quarter. Within this, broad-based index ETF assets totaled 1.0 trillion yuan, a decrease of 0.4 trillion yuan. Themed index ETF assets grew to 1.1 trillion yuan, up 0.1 trillion yuan, with notable inflows into themes like communications equipment and semiconductor materials & equipment.
Outlook and Recommendations
The analysis posits that the A-share market is approaching another favorable entry point within the year. Based on public fund holdings, the proportion of stock allocations and A-share exposure increased, while Hong Kong stock exposure continued to decline; bond allocations decreased. Structurally, capital further converged on key segments of the AI industry chain, with the electronics and communications sectors seeing clear increases. The new energy and consumer sectors saw significant reductions. Since late June, the A-share market has corrected noticeably due to a combination of internal and external factors. The view is that the factors triggering this A-share adjustment are mostly short-term and transitional, and have been largely digested. The A-share market currently possesses numerous favorable conditions, appears attractive both in cross-market and historical comparisons, and positive factors regarding short-term liquidity are accumulating. Therefore, a pessimistic outlook for A-shares is not warranted.
Regarding portfolio configuration, it is suggested to focus on two main themes in light of the recent rapid adjustment. First, selective growth in high-prosperity sectors remains crucial. In an environment of external macroeconomic uncertainty, industries with sufficiently high growth can use strong fundamental growth to offset headwinds from the discount rate. As AI gradually achieves a closed business model and delivers earnings growth, related AI infrastructure segments such as optical communications and PCBs are expected to maintain a high state of prosperity this year. For companies in semiconductors, computing power, and other areas, the alignment between fundamentals and valuation remains a key focus. After significant adjustments, the technology growth sector may exhibit divergent performance. For innovative pharmaceuticals, following a wave of business development deals last year, many companies are entering a phase of clinical data validation this year, warranting bottom-up attention.
Second, cyclical improvement is evident. Fundamentals are recovering from cyclical lows in an increasing number of sectors. It is recommended to consider both geopolitical dynamics and the stage of the capacity cycle, focusing on areas with improving earnings and supply-demand dynamics. These include power grid equipment, petrochemicals, engineering machinery, and non-bank financials benefiting from a positive capital market environment. The precious metals sector, after considerable adjustment, is also worth watching. The pace of fundamental recovery for purely domestic demand-driven industries remains relatively slow and requires further observation.
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