Some institutions' "preferences" have changed, focusing on innovative drugs and sectors related to domestic demand.

Recently, exploring new directions has become a consensus among some institutional investors. For the popular themes of oil and gas and AI, institutions are experiencing some “aesthetic fatigue.”

Responding institutions stated that innovative drugs with policy support, valuation, and growth potential are now in the “hitting zone.” At the same time, there are many structural opportunities in domestic consumption, such as agriculture and express delivery. “Positioning some promising niche areas on the left side can not only stabilize portfolio volatility but also wait for the main trend to become clearer before entering,” said a senior fund manager at a large fund company in Shanghai.

Innovative Drugs Outperform Against the Trend, Focused Attention from Institutions

Currently, the escalation of Middle East tensions has not only driven up oil prices but also reversed the market’s previous single-minded “technology faith.” Some fund managers are choosing to participate in short-term inflation trades, while others are shifting their focus elsewhere. Among them, the innovative drug sector, which is outperforming against the trend, has attracted attention from multiple institutions.

Data from Tongyuan shows that as of March 19, the average one-year return of innovative drug themed funds was less than 12%, ranking lower among market theme sectors. However, during recent market adjustments, the activity level in the innovative drug sector exceeded expectations. In response, Xu Bo, a manager of the PuYin Ansheng Medical Innovation Hybrid Fund, said that the renewed market attention on innovative drugs is mainly due to three reasons: first, high valuation-to-value ratio; second, improved policy positioning; third, approaching industry catalysts.

“From the perspective of capital and the market, the previous adjustments in the innovative drug sector were partly influenced by weak liquidity in Hong Kong stocks. Meanwhile, significant industry catalysts from the ground up take time to fully reflect in stock prices. Currently, there is a clear divergence between the sector’s stock prices and its strong fundamentals. Considering that the valuations of high-quality leading companies have entered a reasonable range, we believe that once the trend reverses, the sector’s upward elasticity will be quite substantial,” Xu Bo said.

HuaXia Fund believes that 2026 may be the year when Chinese innovative drug companies realize their performance. “On one hand, revenue from Chinese innovative drug companies is converging. Based on typical cycles of new drug R&D and approval, 2025 to 2026 will be a critical period for the first batch of star products from domestic innovative drug companies to submit overseas listing applications. Several payments have already been received, which will be reflected in the company’s current earnings. On the other hand, the ‘high cost-performance’ R&D capabilities demonstrated by Chinese innovative drug companies have become an irreplaceable part of the global pharmaceutical industry chain. When these forces converge, the effects will be directly reflected in the companies’ financial statements,” HuaXia Fund stated.

Domestic Consumption and Niche Directions Gaining Favor

Structural highlights in domestic consumption sectors such as agriculture and express delivery are also entering institutional focus. Moreover, stocks listed in Hong Kong that have performed poorly this year are gradually gaining favor among institutions.

“Agriculture and raw milk industries are expected to see a supply-demand balance turning point this year, with the cycle beginning to reverse upward,” said a fund manager at a mid-sized fund company in Shanghai. Due to losses in 2023-2024, the number of breeding cows has decreased by over 40%, with some regions experiencing declines of more than 90%. Physiologically, the recovery time for beef cattle capacity is very long. With deep capacity optimization, beef prices are expected to break historical highs by 2027. Signs of recovery are already emerging in the current fundamentals.

Interest in the express delivery sector has also increased. Some institutions believe that thanks to the steady promotion of policies against “involution,” the express delivery industry has “come out of the woods.” Market share of leading companies continues to rise, and with the confirmed trend of freight rate increases this year, the fundamentals may be stronger than expected. Additionally, express delivery is a purely domestic demand industry, unaffected by global situations, making it worth close attention.

Regarding the poor performance of Hong Kong stocks this year, a research director at a large fund company in Shanghai said that the recent logic for increasing allocations to Hong Kong stocks is very simple: cost-effectiveness. “The Hong Kong market has many high-quality assets, such as internet giants, which are severely undervalued. When the industry truly recovers, these undervalued high-quality assets will eventually regain their value,” he said.

(Article source: Shanghai Securities News)