Private equity makes a big move in March!

What should private equity do with its March repositioning in response to Iran-U.S. conflict risk?

21st Century Business Herald reporter Yang Nana, Shanghai

Just past March, global capital markets underwent a collective “stress test” as the Iran-U.S. conflict suddenly escalated. Passage through the Strait of Hormuz was disrupted, international oil prices surged, global inflation expectations reignited, and major global stock markets generally fell.

A-shares and Hong Kong stocks weakened across the board. The Shanghai Composite Index fell 6.51%, the Shenzhen Component Index dropped 7.02%, the ChiNext Index fell 3.79%, the Hang Seng Index fell 6.92%, and the Hang Seng Tech Index fell 9.5%. Among Shenwan’s first-level sectors, only banking, utilities, and coal posted slight positive returns. Most other sectors declined, with sectors showing the largest declines including non-ferrous metals, defense and military industry, steel, media, and others.

The Shanghai Composite Index and the Shenzhen Component Index posted their largest monthly declines since February 2022 and February 2024 respectively, but their declines were relatively smaller than those of major global stock markets. In March, Korea’s KOSPI index cumulatively plunged nearly 20%, leading the declines among major global equity indices. Japan’s Nikkei 225 index and Germany’s DAX index also cumulatively fell by more than 10% in March. As Wu Weizhi of China Europe Rebo said, “Chinese assets are relatively more resilient in terms of drawdowns.”

Amid the turmoil, private equity research and repositioning actions remained intensive. According to Private Equity Data Platform data, in March, private equity firms significantly increased their research frequency, conducting more than 2,700 research visits across over 800 private equity firms. Among them, actions by multi-billion-RMB private equity firms were especially frequent. Fifty-four multi-billion-RMB private equity firms completed more than 350 research visits in total, with electronics and biomedicine becoming key focus areas.

After reviewing product monthly reports and monthly outlooks from several private equity firms, it was found that, with the escalation of the Middle East conflict in March serving as the dividing line, many private equity institutions displayed a relatively consistent adjustment logic across three dimensions: position management, sector allocation, and outlook for the market ahead. Specifically, they reduced positions in AI hardware and some non-ferrous metals, increased allocations to energy resources and defensive assets, and formed a consensus on the second-quarter main theme of “resource commodities + AI structural opportunities.”

Position management: actively trimming positions, without losing confidence

The severe market volatility caused by external shocks in March prompted many private equity firms to quickly launch risk-control mechanisms.

Data from CITIC Securities’ channel research shows that, as of March 27, the positions of active private equity funds had decreased from 82.9% at the end of February to 78.4%, down from the January peak of 84.3%. CITIC Securities’ Research Department pointed out that when market volatility was amplified recently, the size of margin calls repeatedly rose in a “pulse-like” pattern. “This is usually due to investors reducing their holdings. The ratio of market margin to circulating market value also reached high levels, which to some extent reflects investors’ attitude of keeping low positions and staying on the sidelines holding cash. From another angle, these funds have not left the market but have become potential buying power that has been settled.”

Of course, private equity position management is not “one-size-fits-all” trimming, but shows different response paths.

First, actively lower positions while adjusting the structure to hedge risks. Liu Xiaolong of Juming Investment revealed that during March the firm “moderately reduced its positions.” Structurally, it concentrated on AI assets, cut back on non-ferrous metals, and increased holdings in coal chemical industries. He said that fuel oil shortages had appeared in Southeast Asia and Australia, and that oil and gas chemical industry in East Asia and Southeast Asia generally reduced production. “Intuitively, this doesn’t seem like it will end well. So while reducing our positions, we increased coal chemical assets for hedging.”

Second, maintain positions but manage risks with professional methods. In a recent interview with 21st Century Business Herald, China Europe Rebo investment stated that, for the market’s temporary pullback caused by geopolitical conflicts, its main approach to managing exposure was to hedge via short positions in stock index futures, while also adjusting the position structure appropriately, reducing Beta-type products, and rebalancing to energy-resource sectors. “Once the geopolitical conflict’s impact on the stock market has come to an end, we will unwind the short positions and restore a more aggressive risk posture.” Wu Weizhi of China Europe Rebo said that the firm is currently “balanced to slightly aggressive in its position strategy,” and the structure places greater emphasis on the possibility that the conflict may last longer.

Third, maintain positions and wait for clearer signals for adding exposure. Hezheng Capital clearly stated that, currently, it “maintains positions at the appropriate level, does not add exposure lightly amid uncertainty, and waits for clearer signals to emerge. The benefit of doing so is that it avoids missing out entirely when the market rebounds, while also leaving enough room for maneuver.” Why not reduce positions further? They explained, “Many assets are already cheap enough. Even if the conflict escalates further, it only makes them cheaper, not worthless.” Wang Zheng Asset similarly stated in March that it is maintaining a relatively high position level.

Behind these three paths lies the shared judgment of private equity regarding the medium-term market: this adjustment is a structural pullback within an up-cycle, not a systemic risk turning into a bear market. XingShi Investment pointed out that, based on historical experience with geopolitical conflicts since 2000, after risk appetite declines and markets undergo drawdown adjustments, there may be oversold opportunities within the market.

Liang Shuang, a fund manager at Hexie Hui Yi Asset, also said in a monthly outlook that the current market pricing remains in a “chaotic” state, requiring waiting for clarity on the Iran-U.S. conflict’s direction, and that April would be the key point. “We will be more proactive in research, gradually buying into mispriced oversold names, and remain very optimistic about the second half of the year.”

Overall, the proactive trimming of private equity positions in March does not represent a pessimistic exit from the market. Instead, it is risk management amid uncertainty. According to the data from CITIC Securities’ Research Department, as of March 27, the sample of active private equity funds still held positions slightly above the historical median of 76.2%. In addition, some firms have already re-evaluated the window for adding exposure at the beginning of April.

Industry shift: leaving AI, embracing heavy assets

Looking back at changes since the Spring Festival, especially since March, private equity firms have shown some commonality: reducing holdings in AI hardware and some non-ferrous metals, while increasing allocations to “heavy asset” areas such as chemicals, power equipment, express delivery, and others.

Personnel from Fusheng Asset disclosed in recent communications that in February the firm reduced its gaming-sector position from about 20% to about 2%. The core logic was that tools such as AI Coding (fully automated intelligent programming) are overturning traditional R&D models and organizational structures in the internet and gaming industries. At the same time, the competitive landscape among domestic internet giants has deteriorated, and in the short term it is difficult to see clear profit conversion resulting from AI-related components; uncertainty is extremely high.

Meanwhile, Fusheng Asset is also monitoring how new technologies impact and change business models. “Previously, we had doubts about whether the incremental demand brought by new technology could be sustained. As the maturity of the technology increases, we are strengthening our understanding and confidence in the technology direction.”

Yuan Lesheng Asset also reduced its holdings in the non-ferrous metals sector around the Spring Festival. It said, “At the time, we believed that after some categories experienced a sharp rise in commodity prices, there would not be much room for further upside. We did not consider that a conflict would occur, but we did avoid those related assets’ severe declines in March.” However, Yuan Lesheng Asset also pointed out that, at the current level, “as long as the conflict is not a prolonged war (lasting more than half a year), some resource commodity categories gradually begin to regain investment value—returning to our target ‘sniping’ entry points.”

Beibei Investment also candidly acknowledged in its latest monthly outlook that “the portfolio losses were not small, with relatively larger damage in metals and Hong Kong stocks,” and admitted that in the early phase of the conflict, its response “did not have enough intensity.”

While trimming positions, many private equity firms moved funds into traditional industries that benefit from rising oil prices and the ‘anti-involution’ policy.

Wang Zheng Asset increased holdings in sectors such as power equipment and communications, while reducing exposure to areas such as electronics and non-bank financials. Personnel from Fusheng Asset said that, currently, it is de-emphasizing traditional dividend assets and instead focusing on three major themes centered on “moderate inflation and heavy assets.” First is chemicals and coal chemicals (such as methanol and ethanol), which directly benefit from higher oil prices, and with the penetration rate of new energy vehicles exceeding 50%, demand for upstream chemical raw materials is driven upward. Second is non-ferrous metals and upstream materials for AI. Third is public transport and especially the express delivery segment, which benefits from moderate domestic inflation and the industry’s “anti-involution” environment; leading companies have high earnings certainty and continue shareholder buybacks.

In its February product report, fund manager Cui Ying at Qincheng Asset also emphasized that “AI remains the core focus for 2026 investment. Power equipment companies are the intersection of hard assets and AI; they are very promising HALO assets in 2026, and also one of the core assets for China’s future participation in global AI.”

In terms of Hong Kong stocks, although March saw even deeper declines, many private equity firms believe there are oversold opportunities.

Han Dong, an investment manager for the Far Vision series at Hexie Hui Yi Asset, pointed out, “Chinese companies and the Chinese market have maintained operational resilience through multiple shocks since the trade war and the pandemic. For global capital allocation, they have ‘safe-haven’ attributes and should have a certainty premium.”

From the perspective of capital flows, Southbound Trading made a large net purchase in March against the trend. Early this year, new-economy companies listed in Hong Kong such as Beirui Technology and Zhipu attracted top private equity firms—including Hillhouse Capital and Gaoyi Asset—as cornerstone investors.

A team led by analyst Yang Chao from Galaxy Securities believes that Hong Kong stocks in the short term are dominated by “sentiment shocks.” However, advantages from valuation troughs, high dividend characteristics, and support from Southbound Trading provide it with relatively stronger resilience among non-U.S. assets. Jiang Yuting, head of Snowball Finance’s product research and development, pointed out from the timing of allocation that market sentiment has shifted to panic, and the share of declining stocks has entered an extreme percentile. “This often becomes a good time to establish positions for long-term, high-quality discretionary long-only products. It is recommended to pay attention to valuation-attractive value sectors and Hong Kong stock opportunities.”

Q2 main theme: continued resource price rises, with AI shifting from “hard” to “soft”

Since April, although external uncertainty still exists, many private equity firms believe that the most fearful phase in the market has already passed.

Tan Wei of Chongyang Investment said, “A ‘fast bear’ temporarily appears in the short term, but it actually makes me even more confident in the long-term ‘slow bull’ view. After the adjustment, the market has even greater upside space.” Xiangju Capital was even more direct: “When the market falls to a sufficiently deep level such that it cannot fall further, it naturally becomes optimistic again about the future—and that future is likely to be better than today.”

Based on the consensus that the “most panic moment has passed,” private equity firms formed three layers of judgment regarding their investment focus for Q2.

Consensus One: the rising trend in energy and resource commodities has not ended

Many institutions believe that regardless of how the Middle East conflict evolves, it is already a foregone conclusion that the oil price center will shift upward. Zhuang Da of Chongyang Investment judged that even if the parties participate in negotiations, the Strait of Hormuz will be difficult to fully restore to pre-war passage conditions, and the world needs to prepare for a higher oil price center. Liang Shuang of Hexie Hui Yi Asset also raised its oil price forecast from 60–65 dollars per barrel at the beginning of the year to above 80 dollars per barrel.

Under this consensus, private equity firms chose different paths for exposure to benefiting directions. One is direct exposure to traditional energy and chemical products that benefit from higher oil prices. Xia Junjie of Rujiao Asset said, “Relying on our most complete and comprehensive manufacturing production system and supply chain, once the conflict causes supply-side problems among the various parties, China’s capacity may become the most direct beneficiary.”

Second is the accelerated transformation of new energy industries. XingShi Investment believes that the energy security issues revealed by the Middle East conflict will prompt the world to accelerate the transition of its energy system, and China’s leading position in the new energy field will further boost overseas demand.

Consensus Two: AI remains the main theme, but the logic shifts from ‘hard’ to ‘soft’

Many private equity firms believe the long-term trend of the AI industry has not changed, but the investment logic is undergoing a qualitative shift. Yuan Lesheng Asset explicitly stated that, to date, it remains committed to AI-related investment opportunities. The firm’s analysis pointed out that the just-concluded Nvidia GTC conference and recent revenue data from several major large-model companies show that AI progress in both China and the U.S. has been very rapid, and it has already formed a positive revenue feedback loop. “This is also the reason why the conflict pushed up oil prices, but AI-related stocks did not have large volatility.”

However, regarding structural choices within AI, Han Dong of Hexie Hui Yi Asset believes that the key elements for the AI industry’s development are switching from “hard” to “soft.” He explained that marginal changes at the software application layer are increasing continuously. In competition among application companies, key elements are no longer just hardcore parameters and technologies, but rather soft creativity and product design.

Consensus Three: China’s economy demonstrates a ‘certainty premium’

This may be the biggest consensus that most multi-billion-RMB private equity firms reached amid March’s turbulence. Xia Junjie of Rujiao Asset stated clearly, “The Middle East conflict is not the core contradiction for China’s assets. Looking ahead, although the conflict process remains convoluted, we firmly believe that China’s assets will gradually become resilient, and there is hope for the first opportunity for a turnaround.”

XingShi Investment provided supporting logic from an inflation perspective: “Compared with the relatively high inflation levels in Europe and the U.S. currently, China’s inflation remains in a relatively low range, so the constraints of imported inflation on domestic policy are smaller than for overseas economies. This leaves ample space for policies to continue to exert effort in stabilizing growth.” The firm further pointed out that after years of deep adjustment, the competitive landscape in some consumer industries has been clearly optimized, and the competitiveness of leading companies is continuously strengthening.

In addition, many institutions were surprised by gold’s performance in March. Liang Shuang of Hexie Hui Yi Asset said candidly, “Our initial view was that gold would be weak in the short term and strong in the long term, but we truly didn’t expect the ‘short’ decline to be so powerful.” He analyzed that first, the conflict turned rate-cut expectations into rate-hike expectations and reversed the outlook from a weak dollar to a strong dollar, causing a massive change in the core drivers of gold’s rise; second, liquidity risks turned gold, which had gained significantly earlier, into a sellable asset. However, he believes that in the medium to long term, the logic of gold as a safe haven and an inflation hedge has not changed. Current valuations of gold stocks are within reasonable levels, even in undervalued territory.

Looking ahead to Q2, although uncertainty in the Middle East still exists, many institutions believe that the underlying logic for A-shares has not changed. Kou Zhiwei of Chongyang Investment said that the overall “slow bull” pattern for A-shares has not changed. “The adjustment since March has been very healthy, even beneficial. After experiencing an adjustment of this magnitude, the market’s inherent stability tends to strengthen. The most fearful time for the A-share market should already be over, and the ‘slow bull’ trend is expected to continue.” He also warned, “When trading volume is insufficient to support a quantitative scale, the concentrated positions in quant strategy portfolios will face significant risks.”

Tan Wei of Chongyang Investment further demonstrated that the “slow bull” logic has not been broken from three dimensions. First is that the trend of China’s economic transformation and upgrading remains unchanged, and the stability and industrial-chain resilience displayed by China amid turmoil is further highlighted globally. Second is that the “asset shortage” pattern under China’s low interest-rate environment continues, and after the adjustment, stock assets become even more attractive to long-term capital. Third, the logic of the whole society directing funds toward equity-asset allocation will not change.

As Xiangju Capital said in its April outlook, “The conflict itself will not cause the stock market to sink forever. The factors that truly determine the long-term direction are fundamental elements such as industry trends, corporate earnings, and valuation levels.”