The robust rebound in the A-share technology sector and repeated record-high trading activity have heightened market concerns about crowding. However, the latest research report from UBS Securities offers a more reassuring assessment: although the trading volume and market cap share of the large technology sector have surpassed historical highs, core metrics measuring the concentration of institutional holdings indicate the current crowding level remains significantly lower than past peaks, and the duration of this growth-oriented tech style has not yet reached two years.
According to the latest UBS report, as of Q1 2026, the active over-weight position by public funds in the large technology sector (including electronics, communications, computers, and defense) stands at 9.9%, lower than the 11.6% in Q3 2025 and notably below the historical peak of 14.1% from Q4 2015. It also remains far below the historical peak over-weight ratio of 18.7% seen in the consumer sector.
UBS points out that it typically takes about three years for public fund over-weight ratios to cycle from a low point to a peak. Since the policy pivot in September 2024, the current phase of tech growth outperformance has lasted less than two years so far.
Concurrently, the profit recovery in A-shares is accelerating, providing a more solid fundamental foundation for the market's upward trajectory.
UBS forecasts the profit growth rate for all A-shares will rise from 3.9% in 2025 to 11% in 2026. In Q1 2026, profits for the non-financial sector already grew 11.8% year-on-year, with both gross and net profit margins reaching their highest levels since 2023. Sustained capital inflows from multiple channels, the continued expansion of industry and thematic ETF assets, and a recovery in private fund issuance collectively form a crucial pillar of support for current market micro-liquidity.
Initial Assessment: Tech Over-weighting Still Has Room to Run
Trading enthusiasm and capital concentration in the technology sector have notably intensified recently.
UBS data shows that as of June 2, 2026, the weekly trading volume of the large technology sector accounted for 45.5% of all A-share turnover, while its market capitalization represented 28.6% of the total market. Both metrics are at historically elevated levels. Since the risk appetite rebound following the US-Iran ceasefire on April 8, the STAR 50 and ChiNext indices have surged 35.5% and 30.4% respectively, significantly outperforming the Wind All-A Index gain of 11.0% and the CSI 300 Index gain of 9.8% over the same period.
However, UBS believes judging crowding solely based on trading heat and short-term gains has limitations. The over-weight ratio of public funds is a more core indicator for measuring institutional positioning concentration. From this perspective, the current over-weight ratio for the large tech sector is not only below its own historical peak but also lags far behind levels seen during historical peaks in the consumer sector, such as 22.8% in Q3 2010 and 21.0% in Q3 2012.
Examining Historical Market Style Shifts
UBS analyzed the historical patterns of five major style shifts in A-shares since 2014:
From 2014 to 2015, leveraged capital drove dramatic market swings.
From 2017 to 2019, foreign capital inflows propelled the "blue-chip stock" rally.
From 2019 to 2021, public funds chased companies with compounding earnings, creating a positive feedback loop.
From 2022 until the policy pivot in 2024, insurance capital and "national team" funds drove outperformance in defensive sectors.
After the policy pivot in 2024, margin financing, ETFs, and private capital have fueled the outperformance of small-cap and growth styles.
The research finds that each style cycle from formation to shift typically lasts about three years. It is difficult for the high-growth fundamentals of a single sector to sustain beyond three years, and there is a natural ceiling to fund positioning concentration. Pressure from redemptions following a narrowing of excess returns transmits to stock prices and triggers a trend reversal.
Nevertheless, positioning signals in some sub-sectors are already noteworthy. The over-weight ratio for the electronics sector has reached 6.6%, surpassing the previous high of 5.4% from Q3 2020. The over-weight ratio for the communications sector has refreshed its post-2010 high for three consecutive quarters, reaching 4.0%. UBS stated it will continue to monitor changes in these indicators.
Profit Recovery Gains Momentum, Strengthening Market Foundation
UBS expects 2026 A-share profit growth to accelerate to 11% and notes that multiple top-down and bottom-up indicators confirm the profit improvement trend is picking up speed.
Based on Q1 2026 earnings data, the year-on-year profit growth rate for non-financial A-shares surged sharply from 0.8% in 2025 to 11.8%. Excluding oil, petrochemicals, and basic chemicals, the growth rate reached 12.3%. Profit growth for the STAR Market in Q1 was as high as 204.7% year-on-year, while the ChiNext board grew 22.7%, both significantly outperforming the main board's 5.5%. Gross and net profit margins increased by 0.6 and 0.3 percentage points year-on-year respectively, both hitting their highest levels since 2023. This indicates that despite high oil prices, margin pressure on downstream companies remains manageable.
On a macro level, April PPI rose 2.8% year-on-year, while CPI increased 1.2%. UBS expects inflation to rise further in the coming months. Since the revenue growth of non-financial A-shares is highly correlated with nominal GDP and PPI trends, rising inflation will directly drive faster expansion on the revenue side.
Bottom-up data also confirms the upward profit trend. In the first four months of this year, profits for industrial enterprises above a designated size grew 18.2% year-on-year. Within this, profits for the computer, communication, and electronic equipment manufacturing sector skyrocketed 107.7%. Profits for non-ferrous metals mining, mining, and coal washing/sorting sectors grew 94.9%, 26.0%, and 21.0% year-on-year respectively. Regarding profit expectations, earnings growth forecasts for the IT, raw materials, real estate, and energy sectors over the past six months have all been revised upwards by more than 20 percentage points. This upward revision trajectory closely resembles patterns seen during previous profit upcycle years like 2017, 2019, and 2021.
From a medium-term perspective, the rising proportion of overseas business is another important support for margin expansion. The share of overseas revenue for non-financial A-shares has steadily increased from 9.5% in 2010 to 18.7% in 2025. Furthermore, the gross profit margin for overseas business has consistently been higher than for domestic business, with the gap widening further in 2025. UBS believes the continued advancement of "anti-involution" policies and the implementation of supportive measures will also drive further industry margin recovery over the medium term.
Tactical Positioning: Favoring Growth and Cyclical Sectors
Regarding style allocation, under its baseline "slow bull" scenario, UBS favors the growth style. The backdrop of rising PPI and industrial profits supports the cyclical style. Sustained ample liquidity and high market turnover favor the small-cap style.
However, the continued expansion of industry and thematic ETF assets is providing additional funding support for leading companies. UBS expects the relative performance between large-cap and small-cap styles to be more balanced in the second half of 2026 compared to 2025.
At the sector level, UBS maintains an over-weight stance on six areas: Electronics (benefiting from the semiconductor inventory cycle recovery and AI innovation drivers), Communications (driven by AI computing demand and the widespread adoption of industrial internet boosting profits for sub-sector leaders), Machinery (with automation equipment and industrial robots benefiting from domestic capital expenditure recovery and import substitution), Non-ferrous Metals (due to rising copper and aluminum prices and lithium demand recovery), Chemicals (where "anti-involution" policies and overseas capacity exits are accelerating a bottoming process), and Electrical Equipment (supported by policies and AI data center power demand driving energy storage development).
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