UBS: The crowdedness of A-share technology stocks is far from reaching historical highs.

``` A-share technology sector has strongly rebounded, with trading activity repeatedly hitting new highs, raising market concerns about overcrowding. However, the latest research report from UBS Securities offers a more reassuring assessment: Although both turnover and market capitalization share of the technology sector have reached historic highs, core indicators measuring institutional position concentration show that the current degree of crowding is still far below historic peaks, and the duration of this round of technology growth style has been less than two years. According to the latest UBS Securities report, as of Q1 2026, the overweight ratio of public funds in the technology sector (including electronics, communications, computers, and defense) is 9.9%, lower than 11.6% in Q3 2025 and significantly below the historic peak of 14.1% in Q4 2015; it is also far from the consumer sector's historic high overweight ratio of 18.7%. UBS points out that public fund overweight ratios move from cyclical lows to peaks typically over about three years. Since the policy shift in September 2024, the outperformance of the current technology growth style has lasted less than two years. Meanwhile, the profitability recovery in A-shares is accelerating, providing a more solid fundamental support for the market uptrend. UBS expects A-share profit growth to rise from 3.9% in 2025 to 11% in 2026. In Q1 2026, profits in non-financial sectors have increased 11.8% year-on-year, with gross margin and net margin both reaching their highest levels since 2023. Continuous inflow of funds, expanding industry-themed ETFs, and warming private fund issuance together form important micro-liquidity supports for the current market. In tactical allocation, UBS prefers growth and cyclical styles under its baseline "slow bull" scenario, favoring electronics, communications, electrical equipment, machinery, nonferrous metals, and chemicals at the sector level, maintaining buy ratings for multiple related stocks. Technology overweight still has room, current style duration remains short Trading heat and fund concentration in the technology sector have notably increased recently. According to UBS data, as of June 2, 2026, weekly turnover in the technology sector accounted for 45.5% of total A-shares, with market capitalization at 28.6%, both historically high. Since the US-Iran ceasefire and risk appetite recovery on April 8, the STAR 50 Index and ChiNext Index rose 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. UBS believes using trading heat and short-term gains to judge crowding has limitations; the public fund overweight ratio is the more core indicator for institutional position concentration. From this perspective, the current technology overweight ratio is not only below previous peaks, but also far behind the consumer sector during its historic peaks (22.8% in Q3 2010, 21.0% in Q3 2012). UBS reviewed the history of five major style shifts in A-shares since 2014: 2014-2015: Leveraged funds drove dramatic market fluctuations; 2017-2019: Overseas capital inflows boosted "blue-chip stock" rallies; 2019-2021: Public funds favored profit-compounding companies, creating positive feedback; 2022-2024 (pre-policy shift): Insurance funds and "national team" drove defensive sectors' outperformance; Post-2024 policy shift: Margin financing, ETFs, and private funds favored small-cap and growth styles. Research shows that each style typically lasts about three years from formation to transition—a single sector's high fundamental prosperity rarely persists beyond three years, and fund position concentration faces a natural cap. The narrowing of excess returns leads to redemption pressure, which transmits to stock prices and triggers trend reversals. However, some sub-sectors are signaling attention. The electronics sector overweight ratio has reached 6.6%, surpassing its previous peak (5.4% in Q3 2020); the communications sector overweight ratio has set new highs for three consecutive quarters since 2010, reaching 4.0%. UBS will continue tracking these indicators. Earnings recovery accelerates, solidifying the foundation for market gains UBS forecasts that A-share profit growth rate will rise to 11% in 2026, noting that both top-down and bottom-up indicators confirm the accelerating earnings improvement trend. From Q1 2026 financial reports, non-financial A-share profit growth jumped from 0.8% in 2025 to 11.8% year-on-year; excluding oil, petrochemicals, and basic chemicals, the growth rate reached 12.3%. The STAR Market's Q1 profit growth surged 204.7%, and the ChiNext reached 22.7%, both far ahead of the Main Board's 5.5%. Gross and net margins respectively increased by 0.6 and 0.3 percentage points year-on-year, both at the highest levels since 2023, showing downstream companies’ profit pressure remains manageable despite high oil prices. At the macro level, April's PPI increased 2.8% year-on-year, CPI rose 1.2%, with UBS expecting inflation to further climb in the coming months. Since non-financial A-share revenue growth correlates strongly with nominal GDP and PPI, inflation rebound will directly drive revenue expansion. Bottom-up data also confirms the upward profit trend. In the first four months of this year, profits of large industrial enterprises grew 18.2% year-on-year. Profits in computer, communications, and electronics manufacturing soared 107.7% year-on-year; profits from nonferrous metal mining, mining, and coal washing industries increased by 94.9%, 26.0%, and 21.0%, respectively. Earnings expectations for IT, raw materials, real estate, and energy sectors have all been revised up by over 20 percentage points in the past six months, showing a revision trajectory highly similar to upcycles in 2017, 2019, and 2021. From a mid-term perspective, a rising share of overseas revenue is a key driver for margin expansion. The overseas revenue share of non-financial A-shares has steadily increased from 9.5% in 2010 to 18.7% in 2025, with overseas business margins consistently higher than domestic, and the gap further widened in 2025. UBS believes continued "anti-involution" policies and supportive measures will drive further industry profit margin recovery in the mid-term. Tactical allocation: growth and cycles combined, six key sectors overweighted In terms of style allocation, UBS favors growth under its baseline "slow bull" scenario; cyclical styles are supported by a rebound in PPI and industrial profits; sustained liquidity and high turnover favor small-cap styles. However, the expansion of thematic ETFs is providing extra fund support to leading companies, with UBS expecting a more balanced performance between large-cap and small-cap styles in the second half of the year compared to 2025. At the sector level, UBS overweighted six areas: electronics (benefiting from semiconductor inventory upturn and AI innovation), communications (AI computing demand and broad industrial internet adoption driving sub-sector leaders' profits), machinery (automation equipment and industrial robots benefiting from domestic capex recovery and import substitution), nonferrous metals (copper and aluminum price rises, lithium demand recovery), chemicals (anti-involution reforms and accelerated overseas capacity exits forming a bottom), and electrical equipment (policy support and AI data centers’ electricity demand boosting energy storage growth). ~~~~~~~~~~~~~~~~~~~~~~~~ The above content comes from "Chasing Wind Trading Desk". For more detailed interpretation, including real-time analysis and frontline research, please join [Chasing Wind Trading Desk Annual Membership]. Risk Disclosure and Disclaimer The market has risks, investment should be cautious. This article does not constitute individual investment advice and does not take into account individual users' specific investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article suit their particular situation. Invest accordingly at your own risk. ```