Global capital markets have experienced violent swings recently. After a round of repositioning in technology stocks, foreign brokerages are once again anchoring market direction. UBS Securities China equity strategist Meng Lei has made it clear that technology and artificial intelligence will remain the core market theme for the second half of 2026, while highlighting three derivative investment themes: AI capex spillover plays, earnings recovery sectors, and the theme of Chinese companies going global.
Meng analyzed that as overcrowding in the tech sector has eased somewhat, the flushing out of speculative positions has actually created a healthier entry environment for long-term capital. He emphasized that, based on historical patterns, it typically takes about three years for mutual funds’ overweight position in a specific sector to climb from a previous trough to a regional peak—a timeframe that coincides with the cycle of overall market style formation and rotation. This implies that the phenomenon of capital “clustering” in tech stocks still has further potential to develop, both in terms of time and scale.
AI Spillover Effects: Capital Flows from Core to Derivative Sectors
Meng observed that some investors have taken profits amid elevated tech valuations and are beginning to seek opportunities to rebalance their portfolios. However, this does not mean capital will exit the technology space entirely; rather, a phenomenon of “narrow AI capital spillover” may emerge. He recommends investors closely monitor derivative sectors linked to AI capital expenditure in the second half, as these areas are well-positioned to absorb liquidity overflowing from pure-play AI concept stocks.
Specific targets include:
Data Centers: As the infrastructure backbone for AI computing power, demand continues to climb
Power Equipment: Such as gas turbines, addressing the enormous electricity demand driven by data centers and AI computation
Physical AI: Such as robotics applications, moving from virtual algorithms into the physical world
Commercial Aerospace: Viewed as the next frontier battlefield for technological innovation
Hidden Bright Spots in Earnings Recovery
While the entire market’s attention is focused on AI, Meng cautioned that most traditional sectors are quietly undergoing earnings recovery, and the investment value in these areas should not be overlooked. He pointed out that fundamentals in industries such as lithium batteries, chemicals, brokerages, insurance, and innovative pharmaceuticals are gradually improving. If the AI theme were to experience sustained weakening in the future, some capital chasing marginal earnings growth momentum could choose to rotate into these sectors that are currently in an earnings upcycle.
Among these, innovative pharmaceuticals and lithium batteries are viewed as the most elastic targets—the former benefiting from policy support and R&D breakthroughs, the latter from the global energy transition megatrend.
Chinese Companies Going Global: Overseas Profit Margins Significantly Outperform Domestic
The third theme worth watching is the globalization push by Chinese enterprises. Meng analyzed that the overseas revenue share of A-share companies is steadily rising, and more critically, profit margins from overseas operations are already significantly higher than those from domestic operations. This reflects the increasing competitiveness of Chinese companies in international markets and provides investors with a pathway to hedge against the risk of a domestic economic slowdown.
When Will the Consumer Sector Take the Baton?
Addressing the question of when the market might rotate from tech stocks to the consumer sector, Meng offered a cautiously optimistic assessment. He believes that the weakness in China’s real estate market and the slowdown in household income growth over the past few years have been the primary bottlenecks constraining a consumer recovery. However, housing prices in some top-tier Chinese cities have recently shown signs of stabilization or even modest rebounds—a leading indicator of a consumer turnaround.
UBS forecasts that if A-share non-financial corporate earnings growth can achieve the baseline expectation of 11% in 2026, it is likely to gradually drive improvements in per capita compensation and sales expense growth, thereby fueling a consumer recovery and creating marginal tailwinds for related consumer sectors. However, Meng also acknowledged that the sustainability of income growth, the repair of household balance sheets, and the full stabilization of the real estate market still require time to verify.
Three Reasons Supporting the Tech Theme
Meng’s firm bullishness on the performance of technology and AI in the second half is based on three key pillars:
1. Strong Earnings Growth Momentum
Benefiting from rapid global AI development and strong domestic policy support in China, the tech sector is expected to maintain robust earnings growth momentum, with fundamentals remaining solid.
2. Sustained Marginal Net Capital Inflows
Various sources of capital—including sector and thematic ETFs, tech-focused active mutual funds, margin financing, and private equity funds—are expected to continue seeing marginal net inflows into the tech sector, providing support for stock prices.
3. Capital Clustering Still Has Room to Run
Based on historical patterns, it typically takes about three years for mutual funds’ overweight position in a specific sector to rise from a trough to a phase peak, matching the timeframe for market style shifts. This suggests that the capital-driven rally in tech stocks has not yet run its course.
Overall, UBS has painted an investment blueprint for the A-share market in the second half characterized by “technology as the spear, earnings recovery as the shield, and going global as the auxiliary.” With the AI theme remaining intact, the capital spillover effect, earnings cycle inflection points, and globalization strategies will constitute the three core considerations for investors’ asset allocation in the second half of the year.