How to Price Uncertainty: Decoding the "Variables" and "Invariables" of Private Equity Strategies

Recently, geopolitical tensions have continued to intensify, causing fluctuations in global markets. Notably, the sharp rise in oil prices has sparked concerns about stagflation, leading to a rapid decline in risk appetite. In this wave of volatility driven by external shocks, where is the A-share market headed? Are the structural main themes changing? A consensus among frontline private equity firms interviewed by China Securities Journal is that this market adjustment is primarily a risk appetite shock rather than a fundamental reversal, and technological growth remains the core theme to navigate through the volatility.

Pricing Uncertainty

Regarding the nature of this stock market volatility, most private equity firms interviewed tend to define it as an emotional shock triggered by geopolitical conflicts, rather than a trend reversal due to deteriorating fundamentals.

A mid-sized stock private equity fund manager in Shanghai stated that this adjustment is “essentially a risk appetite shock caused by sudden geopolitical events.” He believes that there is significant uncertainty in how the geopolitical situation will evolve, but the likelihood of a resolution through mutual compromise is high, and the risk of a comprehensive energy crisis is relatively low. He said, “Once signs of easing appear, the emotional impact driven by panic will quickly dissipate. Short-term adjustments do not alter the long-term fundamental logic of the market and instead create opportunities for low-cost buying.”

Fang Lei, Deputy General Manager of XingShi Investment, shares a similar view. He believes that recent A-share performance aligns with overseas risk assets, and the market is still pricing in the ongoing geopolitical conflict. “Currently, high-valuation sectors are experiencing greater volatility, and short-term micro-level trading impacts on the stock market will temporarily increase. Market volatility’s uncertainty may lead to herd behavior among funds.”

Meanwhile, the interviewed private equity firms have differing views on the duration and impact of the geopolitical conflict. Yongjin Investment adopts a more cautious stance, believing that the trajectory of the conflict requires close monitoring. If the situation remains unresolved, the inflationary pressure from rising energy prices could continue to suppress the global economy. “We tend to believe that it’s more important not to make overly optimistic assumptions but to prepare for all scenarios so that we can act quickly when clarity emerges.”

Differences in institutional forecasts are precisely the core of the current market game—investors are pricing in geopolitical uncertainty, and the strategies of various institutions essentially revolve around betting on the contraction or expansion of this “geopolitical premium.”

Focusing on “Mispriced Structural Opportunities”

Looking ahead to the second quarter, can the main factors driving market adjustments ease? Where is the support for the A-shares?

The aforementioned mid-sized stock private equity fund manager believes that as investors gradually digest geopolitical risks, signs of easing could weaken the market’s downward pressure. On the support side, he notes that A-shares have a relatively thick valuation safety margin. Domestic industry benefits such as large model applications, AI agents, and rising storage prices will provide strong support. “After the previous adjustment, A-shares’ valuations have a high safety margin. Experience shows that once risk appetite shocks subside, smart capital will quickly rebalance into the most solid and certain core assets.”

Fang Lei states that as the market’s pricing of geopolitical risks becomes more comprehensive, the stability and sustainability of China’s economy and policies will provide clearer support for A-shares. “Compared to overseas policies and economic uncertainties, China’s economy has relative advantages. There’s no need to worry about medium-term adjustments in A-shares. In the valuation compression caused by declining global risk appetite, many mispriced structural opportunities exist within A-shares.”

Zhu Liang, fund manager at Danyi Investment, offers a more specific outlook. He believes the market may show a sideways bottoming pattern in the short term, with the core fluctuation range between 3,900 and 4,100 points on the Shanghai Composite Index, with strong support around 3,850 points and a low probability of breaking below. In the latter half of Q2, if external risks gradually ease, the market is expected to resume a sideways upward trajectory, supported by valuation and earnings recovery.

Yongjin Investment highlights that we are currently in a critical liquidity observation window. The Federal Reserve’s dot plot suggests only one rate cut in 2026, and its hawkish stance has recently been a key factor suppressing risk assets. High oil prices could backfire on the economy, potentially forcing the Fed to reassess its policy path, which may lead to policy expectation adjustments in the second quarter.

Dafei, founder of Heyu Fund, believes that regardless of how external situations evolve, China’s industrialization capacity demonstrates resilience amid supply chain fluctuations. China’s manufacturing sector is expected to further enhance its position in the global supply chain.

Focusing on “Change” and “Stability”

Although short-term market volatility has intensified, there is a high consensus among interviewed private equity firms that the core theme remains unchanged: technological growth continues to be the main line, and this direction will not be fundamentally shaken by external shocks.

The aforementioned mid-sized stock private equity fund manager believes that despite short-term style rotations caused by market fluctuations, the logic of the tech sector, especially with the hot AI trend and domestic application breakthroughs, remains intact and may even become more attractive after adjustments. “Short-term declines will not alter the fundamentals of the market, especially in booming industries, and create opportunities for low-cost entry.”

Zhu Liang thinks that in the short term, market styles may tilt toward defensive sectors, with high-valuation growth stocks under continued pressure. Funds tend to favor undervalued, high-dividend, and performance-stable defensive assets. In the medium term, once sentiment recovers, style rotation from defense to growth and cyclicals is expected.

On strategy, most institutions believe that in the short term, a balance between defense and rotation is necessary. Fang Lei states that due to market concerns about uncertainty, value sectors with stable expectations and low valuations may be more resilient, while growth and cyclicals will experience larger fluctuations, with sector rotation accelerating. However, he emphasizes that the core driver of the stock market in 2026 will be corporate earnings, and earnings realization will be a key indicator of future opportunities. The main investment focuses are high-growth industries and cost-effective core assets.

Dafei notes, “The main themes during geopolitical conflicts and after crises are different. Currently, during the escalation, the market favors oil and gas; after the crisis, it may shift to AI.” Regardless of whether conflicts end, energy security remains a relatively certain direction, with investment opportunities in power equipment, photovoltaics, and energy storage sectors. Additionally, investors should continue to watch for signals of China’s economic stabilization and recovery, especially sectors where PPI and CPI growth turn positive.

Overall, in the face of geopolitical uncertainties, top private equity firms are responding with a strategy of “long-term focus on technology, short-term tactical flexibility.” On one hand, short-term market fluctuations do not alter the long-term trends in certain industries; on the other hand, genuine investment opportunities will continue to emerge amid divergence and volatility.