While the China technology story hasn’t changed enough to warrant major changes to portfolios, local stock investors are now being encouraged to take a more conservative turn as they gear up for the second half. “We caution against a potential volatility surge in the next month or two,” a team led by Morgan Stanley’s chief China equity strategist Laura Wang said in a report Thursday. The analysts noted that sentiment toward mainland Chinese stocks, known as “A Shares,” dropped in the past week as Chinese policymakers have so far failed to bolster growth, nor are they expected to in a Politburo meeting later this month. In addition, the deadline for U.S. trade deals with most countries looms on July 9, with the 90-day tariff truce with China set to expire in mid-August. Mainland China stocks rose slightly last week, while more globally connected and tech-dominated Hong Kong stocks fell. Dividend plays While continuing to endorse some AI names, Morgan Stanley’s Wang on Thursday also recommended “maintaining some exposure to dividend yield plays.” One of Morgan Stanley’s favored picks for the near term is Hong Kong-listed Chinese insurer PICC P & C , which analyst Rick Zhao highlighted in June as offering a dividend yield of 4.5% and the potential to benefit from growth in auto insurance. The Wall Street investment bank swapped PICC for Pop Mart , the maker of Labubu toys, on its China-Hong Kong Focus List in mid-June. Other local Chinese analysts are also highlighting high dividend plays in their outlooks for the second half of the year. “Amid uncertainties, our focus is diving into fund flow structure and market style,” UBS Securities China equity strategist Lei Meng said in a report last Monday. He noted that medium- and longer-term investors favor high-dividend stocks and banks, which are also supported by increased state-backed stock buying. For the second half of the year, Meng expects inflows into tech-related sectors to slow after strong allocations in the first six months. Foreign and domestic investor sentiment toward tech stocks improved earlier this year on the back of renewed optimism toward Chinese artificial intelligence , while the outlook for China’s broader economic growth was more muted. Varied performance The contrast played out in the performance of individual stocks and leading market indexes. Hong Kong’s Hang Seng Index, dominated by tech stocks like Alibaba Group and Tencent Holdings , gained about 20% in the first half of the year, while mainland China’s Shanghai Composite — containing more state-owned financial and industrial companies — rose by less than 3%. Also driving interest in high-yielding Chinese stocks is mainland China investors looking for higher returns than generally available domestically, a team led by J.P. Morgan’s Wendy Liu said in a late June report. Their preferred high-yielding stocks include PetroChina , with a 7.3% dividend yield, and CR Power, with a 6.1% yield. Both are listed in Hong Kong. Increased interest from mainland Chinese investors comes at the same time as they face more restrictions in reaching the U.S. and other markets. In contrast, global institutional investors still largely see U.S. stocks as the lowest risk, and can look to Europe, China or emerging markets when they need to diversify, said Liqian Ren, head of quantitative investment at WisdomTree. For “investors outside China, the unglamorous stocks [such as utilities], it’s not going to be where they park their cash,” she said. Ren also noted that several leading Chinese AI companies, such as ByteDance, are not publicly traded. —CNBC’s Michael Bloom contributed to this report.