Daiwa: Market preference shifts from AI to cyclical industries, expected to gradually turn towards stimulus policy-related sectors after the Lunar New Year

Daiwa published a strategy report on the Chinese market, noting that interest from mutual funds in the Hong Kong market slightly cooled in the fourth quarter of last year, while the metals and financial sectors saw strong capital inflows in the previous quarter. The firm indicated that by the end of 2025, the stock and mixed mutual funds would diversify their holding structures. The top 50 heavily weighted stocks accounted for 25.8% of total stock investments, down from 25.1%. Although the proportion of the top ten heavily weighted stocks increased from 12.4% to 12.9%, the firm believes this was mainly due to rising stock prices rather than fund increases. In fact, fund managers reduced their holdings in some "hot stocks" over the past three months, such as Contemporary Amperex Technology Co., Limited (300750.SZ), Zhongji Xuchuang (300308.SZ), and Luxshare Precision Industry Co., Ltd. (002475.SZ).

Daiwa stated that in the past three quarterly reviews, it had pointed out an increase in funds' interest in Hong Kong stocks, but this trend has temporarily reversed in recent months. The proportion of Hong Kong stocks among heavily weighted stocks in mutual funds fell from a peak of 17.8% to 16.3%. Among the top ten heavily weighted stocks in the fund, Tencent (00700.HK) and Alibaba (09988.HK) ranked 6th and 9th respectively in the fourth quarter of last year, down from 5th and 6th in the third quarter of 2025.

Driven by global metal market trends, Chinese mutual funds significantly increased their positions in non-ferrous metal stocks in the fourth quarter of last year (up 1.7 percentage points quarter-on-quarter), mainly buying Yunnan Aluminum Co., Ltd. (000807.SZ), Tibet Mining (000408.SZ), and Zhongkuang Resources (002738.SZ). As market preferences shifted from AI to cyclical industries, fund managers also favored banks (+0.7 percentage points) and diversified financials (+0.8 percentage points), with Industrial Bank Co., Ltd. (601166.SH) and Industrial and Commercial Bank of China (601398.SH) receiving strong capital inflows during the period. To support these increases, funds significantly reduced their holdings in pharmaceutical and biotechnology stocks (-1.7 percentage points), electrical equipment stocks (-0.9 percentage points), and retail stocks (-0.6 percentage points) in the previous quarter.

Looking ahead to the first quarter of 2026, Daiwa indicated that as the seasonal profit-taking ends, mutual funds are expected to have a greater risk appetite in the first quarter of 2026. Artificial intelligence (such as applications in memory) and metals will remain key investment themes in the short term, but the firm believes that investor interest may gradually shift towards sectors related to stimulus policies after the Lunar New Year holiday. Year-to-date, southbound capital flows have accelerated, but the scale in January is still far below that of October or November 2025