East Capital China

In Q1 2026, China’s equity market faced a challenging macroeconomic backdrop, with heightened external uncertainties and a complex domestic adjustment phase. Escalating geopolitical tensions in the Middle East caused persistent disruption, while shifting expectations regarding the Fed’s interest rate cuts added volatility. Domestically, uneven earnings recovery and delayed policy implementation affected sentiment. Investor risk appetite weakened in phases, resulting in faster sector rotation and lower conviction. As a result, market performance remained subdued, with heightened volatility and limited near-term visibility across sectors.

The MSCI China All-Shares Index fell by 7.1% in USD terms during the quarter, while our China fund declined 10%, representing an underperformance of 2.9% alpha. We maintained an active allocation of around 70%, reflecting high conviction in our core holdings. Our strategy remained anchored in a value-growth framework, emphasising quality leaders with strong fundamentals and durable growth. During the quarter, we selectively adjusted our exposures, reducing our positions in sectors with high valuations and geopolitical sensitivity. In parallel, we increased our allocation to segments with clearer earnings visibility and stronger structural growth drivers to reinforce portfolio resilience.

On the policy front, domestic priorities focused on the National Two Sessions and the initial planning of the 15th Five-Year Plan (2026–2030). The focus of policy remained on stabilising growth, expanding domestic demand and fostering “new quality productive forces.” Technological innovation and industrial upgrading remained key priorities. Fiscal and monetary policy remained broadly supportive, with incremental measures aimed at boosting consumption and liquidity. Meanwhile, the Five-Year Plan framework strengthened the visibility of long-term policies for strategic emerging industries, underscoring continued efforts to deepen capital market reforms and improve overall market efficiency.

Externally, global volatility was primarily driven by the conflict in the Middle East and evolving expectations for US monetary policy. Rising energy supply risks pushed up crude oil prices and lifted global inflation expectations. Stronger-than-expected US inflation data caused markets to reprice the anticipated pace of interest rate cuts, supporting a stronger US dollar. This, in turn, triggered capital outflows from emerging markets. Against this backdrop, northbound flows into China remained volatile, reflecting cautious foreign participation. Ongoing uncertainty surrounding China–US relations further dampened sentiment and limited valuation growth across key sectors.

Among our holdings, Dajin Heavy Industry was the largest positive contributor during the quarter. Its share price rose 33%, contributing 86 bps to the performance of the portfolio. The company benefited from strong industry tailwinds, including robust global demand for offshore wind and supportive policy dynamics. Overseas order growth accelerated significantly, while global capacity expansion progressed as planned. At the same time, improved operational efficiency supported margin expansion. The company’s Q1 earnings exceeded expectations, thereby reinforcing confidence in its execution. Given its strong order backlog and clear long-term growth trajectory, we continue to hold it as a core portfolio position.

From a portfolio perspective, we have remained disciplined in navigating elevated volatility. We increased our exposure to globally competitive leaders in advanced manufacturing and high-end equipment, particularly within the new energy value chain, where demand and visibility remain strong. At the same time, we reduced positions in discretionary consumption and other cyclical sectors that are more vulnerable to external shocks. We also avoided high-valuation names with weak earnings performance and limited downside protection. This balanced positioning helped to contain drawdowns while preserving the flexibility to deploy capital as market conditions stabilise and more attractive opportunities arise.

Looking ahead, we expect market performance for the remainder of 2026 to be driven by four key factors: the implementation of detailed policies under the 15th Five-Year Plan; the recovery trajectory of corporate earnings; the path of the Fed’s policy; and geopolitical developments. Domestic policy support should underpin a gradual recovery, with full-year earnings growth for Chinese corporations projected at 15–20%. Chinese equities remain under-owned globally and continue to offer compelling valuations. However, there are still risks, including further geopolitical escalation, shifts in US monetary policy, weaker domestic demand, and ongoing China–US tensions.

Overall, despite a volatile start to the year, the core fundamentals of China’s equity market remain intact. Policy support continues to strengthen, and long-term industrial trends, particularly in innovation-driven sectors, remain clear. We remain committed to our value-growth framework, focusing on high-conviction ideas while maintaining strict risk discipline. Through active positioning and selective allocation, we aim to capture structural alpha opportunities. We expect returns to become more differentiated, increasingly driven by earnings delivery and sector fundamentals, while we remain focused on delivering sustainable long-term performance.

Performance in USD net of fees.

The information in this document should not be considered investment advice and should not be used as the sole basis for an investment decision. Please read the Prospectus and the KID, which are available on the fund page. This publication is not directed at you if we are prohibited by any law in any jurisdiction from making this information available to you and is not intended for any use that would be contrary to local laws or regulations. Every effort has been made to ensure the accuracy of the information, but it may be based on unaudited or unverified figures or sources.