A-share technology stocks have experienced significant recent turbulence, but the latest research from UBS indicates this correction stems from profit-taking, reduced overcrowding, and deleveraging pressures, rather than a deterioration of fundamentals. Meanwhile, mutual fund allocations to the tech sector reached an all-time high in the second quarter of 2026, with multiple positive signals now converging.
According to a China equity strategy report released by UBS on July 23, analyst calculations show that mutual funds' holding ratio and overweight ratio for the mega-tech sector rose to 57.3% and 18.5% respectively in Q2, both setting new historical records and far exceeding the previous peak of 43.7% for the consumer sector. Concurrently, regulators, state-owned capital operating companies, and insurance institutions have successively pledged to maintain market stability, leading to large-scale net inflows into ETFs tracking the CSI 300, ChiNext, and STAR 50 indices.
UBS believes that A-share margin debt has rapidly retreated from its peak, with financing for the tech sector contracting significantly. However, its leverage ratio is roughly in line with the overall market, suggesting the current deleveraging phase may be near its end. At the same time, A-share earnings fundamentals continue to improve, with earnings forecasts for the ChiNext and STAR boards being revised upward consecutively, and policy support for AI development providing a long-term tailwind.
Mutual Fund Tech Allocations Hit Record High
According to the UBS report, mutual funds significantly increased their holdings in the electronics, telecommunications, and machinery sectors in the second quarter of 2026, with holding ratios rising by 20.2 percentage points, 4.4 percentage points, and 0.8 percentage points quarter-on-quarter, respectively. Notably, the holding and overweight ratios for the electronics and telecommunications sectors both reached their highest levels ever. The global AI wave continues to drive robust capital expenditure growth among major tech companies, providing strong support for the fundamentals of tech hardware. In the machinery sector, the humanoid robot industry chain is growing rapidly, and growth in overseas engineering machinery business has also seen a recovery.
Simultaneously, mutual funds significantly increased their allocations to the STAR Board and ChiNext, with their holding ratios rising by 9.9 percentage points and 3.5 percentage points quarter-on-quarter, respectively, both setting new records. The proportion of actively managed tech-themed fund assets under management relative to all actively managed mutual funds also climbed to a historical high of 27.5%. UBS notes that this ratio has now clearly surpassed the scale of passive funds tracking tech-related indices, indicating that active funds are increasingly recognizing the value of the tech sector.
Northbound Capital Shifts to Significant Net Inflow
UBS estimates that northbound capital achieved a net inflow of RMB 223 billion in the second quarter of 2026, a significant reversal from a net outflow of RMB 13 billion in the first quarter. UBS attributes this primarily to the continuously improving appeal of A-share hard-tech stocks. By sector, the industrial and information technology sectors attracted the most capital, recording northbound net inflows of RMB 128.5 billion and RMB 67.2 billion, respectively. In contrast, the consumer staples and telecom sectors were the only two to experience net outflows, at RMB 9.7 billion and RMB 3.1 billion, respectively.
Deleveraging Nears End, Correction Could Be Entry Window
UBS explicitly states in the report that the recent heightened volatility in global tech stocks and the sharp correction in A-share tech stocks are primarily due to profit-taking, reduced overcrowding, and deleveraging pressures, not a substantive deterioration in fundamentals. Regarding the deleveraging process, total A-share market margin debt has rapidly declined from its peak, and the scale of tech sector margin financing has shrunk substantially, yet its leverage ratio remains broadly in line with the overall market level. UBS believes these signs indicate that the current deleveraging phase may be nearing its end.
On the earnings front, UBS projects that aggregate A-share net profit growth will increase from 3.9% in 2025 to 11% in 2026. Since the start of the second quarter of 2026, industrial enterprise profit growth has accelerated, and earnings expectations for the ChiNext and STAR boards have been revised upward continuously. Policy support also provides a buffer. During periods of significant market fluctuation, regulators, state-owned capital operating companies, and insurance institutions have successively pledged to maintain market stability. On the evening of July 19, China Reform Holdings Corporation and China Chengtong both issued statements expressing a "firm belief in the development prospects of China's capital market" and announced they would continue to increase holdings in central enterprise stocks and tech-related assets. On July 20, three major insurance institutions—Ping An Insurance (Group) Company of China, China Pacific Insurance (Group) Co., Ltd., and New China Life Insurance Co., Ltd.—subsequently released announcements regarding their "firm support for capital market development and enhancement of shareholder returns/active return to investors," sending positive signals to the market.
According to reports, on the morning of July 20, Wu Qing, Chairman of the China Securities Regulatory Commission, conducted research at a securities brokerage in Beijing and chaired an investor symposium. He engaged in face-to-face discussions with eight investor representatives, including various types of retail and institutional investors, to solicit opinions and suggestions on promoting the stable and healthy development of the capital market. Trading volumes for CSI 300, ChiNext, and STAR 50 ETFs have increased markedly, recording large-scale net inflows. UBS believes that policy support for AI development constitutes a long-term structural tailwind, making it difficult for the tech sector's core theme status to be shaken in the short term.
The continuous exodus of funds from traditional sectors stands in stark contrast to the historical overweight in the tech sector. Mutual funds' allocations to several traditional sectors continue to decline. In the second quarter, the electrical equipment, non-ferrous metals, and food and beverage sectors were notably reduced, while holdings in chemicals, national defense and military, automobiles, banking, and non-bank finance also decreased to varying degrees. Holdings related to state-owned enterprises saw a significant contraction in Q2. The holding and overweight ratios for the healthcare sector both declined, and holdings in home appliances fell further. The holding ratios for coal, oil, and petrochemical sectors also retreated. These structural changes in capital flows indicate that against the backdrop of the ongoing global AI theme, institutional investors are accelerating the concentration of their bets on the tech track, while their interest in cyclical and defensive sectors continues to wane.