Article by Xu Chao

Source: Wall Street Journal

China’s A-share technology sector has staged a strong rebound, with trading volumes hitting new highs, raising concerns about overcrowding in the market. However, a recent report from UBS Securities offers a more reassuring perspective: although trading volume and market capitalization share of the large tech sector have surpassed historical peaks, key indicators measuring institutional positioning concentration show that current overcrowding remains far below historical highs, and this cycle of technology growth leadership has lasted less than two years.

According to the latest report from UBS Securities, as of the first quarter of 2026, mutual funds’ overweight allocation to the large technology sector (including electronics, communications, computers, and defense) was 9.9%, down from 11.6% in the third quarter of 2025 and significantly lower than the historical peak of 14.1% in the fourth quarter of 2015; this is also much lower than the historical high overweight allocation of 18.7% for the consumer sector.

UBS notes that the typical duration for public fund allocation to move from a cyclical low to a peak is approximately three years, whereas the current outperformance of technology and growth styles has lasted less than two years since the policy shift in September 2024.

Meanwhile, the recovery in A-share earnings is accelerating, providing stronger fundamental support for market upside.

UBS expects the full-year A-share earnings growth rate to rise from 3.9% in 2025 to 11% in 2026. In the first quarter of 2026, non-financial sector earnings grew by 11.8% year-over-year, with both gross and net profit margins reaching their highest levels since 2023. Continuous inflows of capital from multiple sources, sustained expansion of industry-themed ETFs, and a recovery in private fund issuance collectively provide significant support to current market micro-liquidity.

In terms of tactical allocation, under UBS’s baseline “slow bull” scenario, the focus is on growth and cyclical styles, with particular emphasis on the electronics, telecommunications, electrical equipment, machinery, non-ferrous metals, and chemicals sectors, while maintaining buy ratings on multiple related securities.

There is still room for further overweighting in technology, and this round of market style has been relatively short-lived.

Trading activity and capital concentration in the technology sector have significantly increased recently.

According to UBS data, as of June 2, 2026, the weekly trading volume of the large technology sector accounted for 45.5% of all A-shares, while its market capitalization represented 28.6% of the total market—both metrics at historical highs. Since the U.S.-Iran ceasefire on April 8 and the subsequent recovery in risk appetite, the Sci-Tech Innovation 50 Index and the ChiNext Index have risen by 35.5% and 30.4%, respectively, significantly outperforming the Wind All-A Index’s 11.0% and the CSI 300 Index’s 9.8% gains over the same period.

However, UBS believes that assessing congestion based on trading volume and short-term price gains has limitations; the overweight allocation ratio of public mutual funds is a more core metric for measuring institutional position concentration. From this perspective, the current overweight allocation ratio in the large technology sector is not only below its own historical peak but also significantly lower than the historical highs of the consumer sector, such as 22.8% in Q3 2010 and 21.0% in Q3 2012.

UBS has analyzed the historical patterns of five major style shifts in A-shares since 2014:

From 2014 to 2015, leveraged funds drove dramatic market fluctuations;From 2017 to 2019, foreign capital inflows boosted the performance of blue-chip stocks;From 2019 to 2021, public mutual funds favored companies with profitable compounding, creating a positive feedback loop;From 2022 to 2024, prior to the policy shift, insurance capital and the “national team” drove defensive sectors to outperform;After the policy shift in 2024, financing positions, ETFs, and private capital drove outperformance of small-cap and growth styles.

Research shows that each style cycle typically lasts about three years from formation to transition—high fundamental momentum in a single sector rarely lasts more than three years, and fund positioning has a natural upper limit; after excess returns narrow, redemption pressures are transmitted to stock prices, triggering a trend reversal.

However, allocation signals in certain subsectors are already worth noting. The overweight ratio for the electronics sector has reached 6.6%, surpassing the previous high of 5.4% in the third quarter of 2020; the overweight ratio for the communications sector has increased for three consecutive quarters to a new high since 2010, reaching 4.0%. UBS stated it will continue to monitor changes in these indicators.

Profit recovery is accelerating, strengthening the foundation for market gains.

UBS expects the full-year A-share earnings growth rate to rise to 11% by 2026, noting that multiple top-down and bottom-up indicators confirm that the trend of earnings improvement is accelerating.

Based on the Q1 2026 financial data, the year-over-year profit growth rate for non-financial A-share companies rose sharply from 0.8% in 2025 to 11.8%; excluding oil, petrochemicals, and basic chemicals, the growth rate reached 12.3%. The Q1 year-over-year profit growth rate for the STAR Market soared to 204.7%, while the ChiNext reached 22.7%, both significantly outperforming the main board’s 5.5%. Gross margin and net margin increased by 0.6 and 0.3 percentage points year-over-year, respectively, reaching the highest levels since 2023, indicating that downstream companies’ profit margins remain manageable despite high oil prices.

On a macro level, the PPI rose 2.8% year-over-year in April, and the CPI increased by 1.2%. UBS expects inflation to rise further over the coming months. Since the revenue growth of non-financial A-shares is highly correlated with nominal GDP and PPI trends, the rebound in inflation will directly drive faster revenue expansion.

Bottom-up data also confirms the upward earnings trend.

In the first four months of this year, profits of industrial enterprises above designated size increased by 18.2% year-over-year, with profits in the computer, communication, and electronic equipment manufacturing sector surging by 107.7% year-over-year; profits in nonferrous metal mining, mining, and coal washing and selection industries rose by 94.9%, 26.0%, and 21.0% year-over-year, respectively. Regarding earnings expectations, the projected earnings growth rates for the IT, raw materials, real estate, and energy sectors have all been raised by more than 20 percentage points over the past six months, a trajectory closely resembling historical earnings upcycles in 2017, 2019, and 2021.

From a medium-term perspective, the increasing share of overseas business is another key driver of margin expansion. The proportion of overseas revenue for non-financial A-share companies has steadily risen from 9.5% in 2010 to 18.7% in 2025, and the gross margin of overseas operations has consistently remained higher than that of domestic operations, with the gap widening further in 2025. UBS believes that the continued implementation of policies to reduce domestic overcompetition and the rollout of supportive measures will also contribute to further margin recovery in the medium term.

Tactical Allocation: Balancing Growth and Cyclical Sectors; Six Sectors Overweighted

At the style allocation level, under UBS’s baseline “slow bull” scenario, growth style is favored; the backdrop of rising PPI and industrial profits supports cyclical style; and sustained ample liquidity along with high market turnover benefits small-cap style.

However, the continued expansion of industry-themed ETFs is providing additional capital support to leading companies, and UBS expects the relative performance of large-cap and small-cap styles in the second half of the year to be more balanced than in 2025.

At the sector level, UBS is overweight on six areas: Electronics (benefiting from the recovery in semiconductor inventory cycles and AI-driven innovation), Communications (driven by AI computing demand and widespread adoption of industrial internet, boosting profitability of industry leaders), Machinery (advantaged by domestic capital expenditure recovery and domestic substitution, benefiting from automation equipment and industrial robots), Nonferrous Metals (supported by rising copper and aluminum prices and recovering demand in the lithium sector), Chemicals (accelerating bottom formation due to reduced domestic overcompetition and faster exit of overseas capacity), and Electrical Equipment (driven by policy support and rising electricity demand from AI data centers, boosting energy storage development).