Overseas institutions are expressing confidence in China's hard tech enterprises, with numerous international financial firms issuing positive outlooks on the Chinese economy and accelerating their investment deployments within the country.

Historically, foreign capital focused on China's vast market and internet economy. Now, "hard tech" has become a new buzzword. From AI computing power and optical communication to advanced manufacturing, China's core technology companies are emerging as a new focal point for sustained investment from international investors.

A-Shares Market Experiences Extreme Divergence: AI Sector Overcrowded, Energy and Agriculture Sectors See Accelerated Outflows

The A-shares market displayed a highly divergent performance in May. On one hand, the technology and growth sectors exhibited a strong "siphon effect." On the other, traditional cyclical sectors like energy and agriculture experienced accelerated capital outflows.

In May, the AI industry chain continued its strong performance, leading the ChiNext and STAR Market indices to outperform the broader A-share market. According to Wind statistics, the STAR 50 Index and the ChiNext Index rose by 11.47% and 9.81% respectively in May, while the Shanghai Composite Index fell by 1.06%.

The performance of different A-share sectors diverged significantly. Among style indices, the CITIC Growth and Stability indices performed relatively well, gaining 6.26% and 2.6% respectively. In contrast, the consumption, cyclical, and financial indices declined by 6.3%, 5.67%, and 4.31% respectively.

The disparity between industry sectors was even more pronounced. Among CITIC primary industry indices, only five sectors posted gains in May: communications, electronics, electric power and utilities, building materials, and machinery. The communications and electronics sectors led with gains of 20.61% and 17.25%, respectively, making them the best-performing CITIC primary industry indices for the period.

Sectors with the largest declines in May included petroleum and petrochemicals, agriculture, forestry, animal husbandry and fishing, comprehensive finance, and steel, all falling by over 10%.

Jindalai, a strategy researcher at the equity research department of Golden Eagle Fund, noted that capital in May concentrated on high-growth technology industry chains, with AI computing power, semiconductors, CPO, PCB, and memory leading the gains, driven by overseas AI capital expenditure expansion, rising sentiment in domestic innovative sectors, and earnings realization.

Yang Chao, Chief Strategy Analyst at China Galaxy Securities, explained that the outperformance of the utilities and building materials sectors was primarily driven by policy support for infrastructure investment. The machinery sector benefited mainly from the diffusion effect of the AI industry chain into hardware.

At a deeper level, the current technology rally is primarily driven by the high-growth logic of accelerating iterations in AI industry technology.

The asset allocation research team at China Merchants Securities pointed out that market style divergence has been widening over the past three months, with the core reason stemming from differences in industry growth momentum.

The strategy research team at Sinolink Securities stated that in this AI capital expenditure-driven market, changes at the company level are the core factor determining market rotation. Taking the electronics sector, which better reflects the current hardware trend, as an example: despite its transaction concentration reaching historically high levels over the past quarter, its profit share of the total A-share market has also returned to a historical high, contributing a marginal 15% to the profit growth of the entire A-share market for the first quarter of 2026.

Institutional Views Diverge

However, as trading concentration in the AI sector continues to climb, signs have emerged since late May of capital rotating between high-flying tech stocks and lower-valued, defensive sectors.

Looking ahead to June, institutions hold differing views on the direction of the A-share market.

The research team at BOC International (China) believes the market may see a phase of style rebalancing over the next month, with large-cap, low-profitability, and low-valuation stocks potentially becoming the dominant style. "However, short-term style rebalancing does not imply a shift in the dominant trend; the year's main direction of high profitability and high valuation remains unchanged," the team stated.

In the view of Han Lin, Fund Manager of Great Wall Digital Economy Fund, the market in June may not simply repeat May's singular AI hardware beta rally. It is more likely to shift from "communications and electronics leading the gains" to "continued differentiation within the AI hardware theme, while spreading to areas like domestic computing power, data center power equipment, advanced manufacturing, and undervalued recovery assets."

Chen Gang, Chief Strategy Analyst at Soochow Securities Research Institute, indicated that supported by strong industry trends, the previous market leaders are unlikely to experience a one-sided rapid correction. Instead, they are more likely to form complex topping patterns through repeated fluctuations and multiple rounds of博弈. The current market may be in the early stages of a style shift, making a smooth, one-way upward trend for the tech sector difficult to sustain. Against a backdrop of marginally tightening liquidity, overall sector volatility will amplify, rotation will accelerate, and the difficulty of achieving excess returns in the market will increase significantly.

"But it must be clear that the high-growth trend of the AI industry is not over. The technology sector will remain the main theme going forward, with the market gradually entering a phase of narrowing focus and concentrating on core holdings," Chen Gang pointed out. He cautioned that the market's simple linear extrapolation of macro logic may deviate from the actual path of macro factor evolution.

Additionally, the team led by Wu Kaida at TF Securities reminded that although technology, as the main theme of this industry-driven market, has become a consensus focus for capital, the sustainability of short-term market strength in specific directions remains limited. This can be described as a "rotation effect," reflecting the speed of industry轮动. Periods of strong "rotation effect" often precede market consolidation.

The team analyzed that capital flows determine whether the outcome of accelerated industry rotation is a switch, a focus, or a diffusion. For instance, declining turnover coupled with rising margin debt leads to a "rotation effect" under internal卷 within existing leveraged positions. Rising turnover and rising margin debt suggest that with incremental capital pushing the market, the rally first diffuses and then focuses. Declining turnover and declining margin debt may indicate capital is focusing on defensive directions.

Balanced Allocation

From an allocation perspective, "balance" has become a key term for institutions navigating changes in the A-share market.

China Galaxy Securities' Yang Chao believes that within the technology and growth sectors, leading companies with earnings support are likely to continue benefiting. He suggests focusing on preliminary mid-year earnings forecasts, noting that purely概念炒作 stocks face adjustment pressure. On the other hand, defensive sectors related to energy security, traditional energy sectors like coal, banking, and utilities, as well as cyclical and resource sectors like chemicals and non-ferrous metals that possess defensive attributes, can be allocated as part of a defensive strategy.

Jindalai anticipates that A-share market volatility may narrow in the short term, with subsequent capital potentially seeking undervalued品种 with growth弹性. She recommends adopting a barbell strategy to manage short-term fluctuations. On the defensive end, attention can be paid to assets like coal and electric power that combine industry growth and dividend attributes, while the consumer sector may offer opportunities for阶段性超跌修复.

On the offensive side, for the AI computing power chain, the focus should shift from "diffusion trading" to "contraction and筛选," de-emphasizing pure thematic plays and high-volatility博弈, and concentrating on competitive advantages like pricing power and market share.

Furthermore, from the perspectives of demand and supply, Chen Liangdong, Fund Manager of Great Wall Industry Selection Fund, is primarily optimistic about two directions: First, sectors with relatively fast demand growth, where investment opportunities can be挖掘 in various细分 directions that have become景气 due to AI drivers. Second, as real estate's impact on the macroeconomy gradually diminishes, and guided by national "anti-internal卷" policies, some industries with favorable supply-demand dynamics are有望 to迎来 a景气度拐点, potentially offering attractive risk-reward investment opportunities.

StarRock Investment, a私募 with assets under management exceeding ten billion, stated that it will maintain a balanced allocation going forward, focusing on two main themes: first, industrial investments driven by high-growth trends propelled by the technology wave; second, traditional core assets with valuations at low levels that benefit from macroeconomic stabilization.

The fund investment advisory team at China Merchants Securities also recommends that investors maintain a balanced allocation, avoiding concentrated bets on单一热门 sectors, which would exacerbate portfolio risk.